In the context of practice management information, we live in the best of times and the worst of times. With automated data reporting coming from EHRs, practice management systems, accounting reports, telecommunications devices, patient experience surveys and more, today’s medical groups are awash in data but lacking true business intelligence.
With this flood of data, how can a practice executive separate what is important from the mundane? The problem of data overload is not unique to healthcare, and businesses worldwide have adopted a methodology that identifies the key performance indicators (KPIs) to describe how an organization is performing. By identifying and monitoring the metrics that are relevant to the success of their organizations, executives can devote their time to managing and not reading reports.
Since only a few metrics are involved, identifying the right KPI is critical. KPIs need to reflect the organization’s goals and should vary by organization. An example would be a not-for-profit community health center that focuses on its patient care mission with KPIs measuring total patients and patient experience scores, or a physician-owned private practice that measures success as the compensation and benefits of the practice’s shareholders.
The easiest way to identify the KPIs for your practice is to identify what is important and then identify the metrics available from your EHR, financial, patient accounting or medical information systems. Since economic security is fundamental to continued operation, KPIs that measure a practice’s profitability and its ability to collect payments and manage expenses are universal. Just nine well-selected KPIs allow a manager to understand:
- The revenue cycle of recording, billing and collecting for services
- The bottom line, expressed in the basic formula of total revenue minus operating expense and provider costs
Figure 1 displays these nine KPIs with benchmark metrics for physician- and hospital-owned multispecialty groups with primary and specialty care. Along with Figure 2, the metrics demonstrate how healthcare is a multivariate environment and that hospital systems are very different from independent practices and have different external benchmarks. The different performance metrics reflect that hospital-owned practices have a different expense environment and payer mix compared to physician-owned practices.
Hospital-owned practices function as part of a larger health system that subsidizes some functions (i.e., human resources, marketing, information technology) while consolidating imaging, laboratory and other ancillaries outside the practice with corresponding differences in total medical revenue and operating expenses. The data also show that hospital systems pay their physicians a competitive, “market-based” compensation since median physician compensation and benefits per full-time-equivalent (FTE) physician is almost the same as physician-owned practices.
Examining the metrics in Figure 1 reveals how just nine KPIs provide a comprehensive overview of practice operations.
The four financial KPIs measure overall practice profitability and the organization’s ability to recruit and retain physician staff.
- Total medical revenue per FTE physician evaluates the total volume of revenue produced by the practice.
- Total operating cost per FTE physician measures the level of operating costs that were consumed in creating revenue.
- Total medical revenue after operating cost and nonphysician provider cost per FTE physician reflects the practice’s net bottom line before physician compensation.
- Total physician compensation and benefit cost per FTE physician is the bottom line for independent practices and confirms the ability to match market standards for hospital-owned practices.
By monitoring just these metrics, a practice leader can track overall financial performance and, more importantly, concentrate attention on what is critical to the practice’s financial success.
The efficiency KPI functions similarly, summarizing how well a practice converts investments in capital equipment, facilities, human resources, consumable supplies and technology into revenue.
- Total operating cost as a percent of total medical revenue describes the relationship of total operating costs (all costs not directly related to physician or nonphysician compensation or benefits) and the revenue. Its inverse describes the operating margin for the practice.
Since a medical practice lives and sometimes dies by its revenue cycle, it is critical to monitor how the inflow of cash from collecting accounts receivable (A/R) fuels the practice’s financial engine. Four KPIs based on data from the practice management system allow you to assess the most critical functions of the entire revenue cycle: the outstanding amount that needs to be collected, how much of A/R is in danger of being too old to collect, how fast it is collected and how much of what the practice is owed is collected.
- Total A/R per FTE physician provides the volume of A/R that needs to be collected.
- A/R over 120 days describes how much A/R is old and more difficult to collect.
- Days of gross charges in A/R describes how A/R relates to total volume of revenue.
- Adjusted fee-for-service collection percent tells how well the practice collects billed charges.
The process of evaluating practice performance, as described in Benchmarking Success: The Essential Guide for Medical Practice Managers, 2nd Edition, is simply, “If you measure it, you can manage it.” However, as practice systems produce an overwhelming amount of data, it is important to first identify what to measure.
A KPI approach resolves the problem of data overload with metrics that highlight both potential problems and opportunities and encourage an evidence-based management approach to making decisions. Perhaps best of all, a KPI-based system makes the difficult task of practice management easier.