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    The financial pinch of higher expenses is as painful today as it has been during the post-pandemic era of inflation.

    A June 25, 2024, MGMA Stat poll found that 92% of medical group leaders report their operating expenses in 2024 have increased compared to 2023, while only 5% report their expenses stayed the same relative to last year and another 4% saw their expenses decrease. The poll had 371 applicable responses.

    This latest poll finds that an even greater share of provider organizations are struggling with ballooning costs compared to last July, when 89% of medical groups reported higher operating costs than in 2022.

    Observers looking for positive signs in the economy may have to settle for the Labor Department’s latest Consumer Price Index report, which saw consumer price growth slow from 3.4% in April to 3.3% in May, along with prices remaining stable for the first time since July 2022. That silver lining, however, doesn’t mean that medical groups should expect the financial storms they’ve weathered in recent years to dramatically change. “Everything has increased except our rent,” says one practice manager. “All wages, supplies, utilities, etc., have increased.”

    Ways to save

    Finding new ways to adhere to tightened budget restraints after multiple years of sizably increasing expenses can be a challenge for any practice leader, especially those who already took proactive steps to renegotiate contracts and switch vendors to find savings — especially for many arrangements in which automatic increases kick in annually. In some instances, respondents told MGMA they found ways to combine multiple offices into a single location to reduce facility costs.

    Counting the costs

    Rising salaries and wages were the most common response from practice leaders who told MGMA the main source of their rising expenses. In addition to annual cost-of-living and merit increases for employed staff, several respondents noted that labor expenses were fueled by continued reliance on locum tenens and contracted providers. The trend of continued reliance on temporary workers and/or locums is expected to continue: A Jan. 30, 2024, MGMA Stat poll found that six in 10 medical groups expect to use the same level of contract and locums work in 2024 as they did in 2023, and another 16% expect to use more.

    These labor expense pains are especially true for practices in California that opted to update wages ahead of a state-mandated minimum wage increase originally set to take effect July 1. [That mandate was recently delayed until this fall, per Becker’s.]

    But labor certainly wasn’t the only factor in increased spending:

    • Medical supplies and service/maintenance agreements are frequently cited as being major contributors to practice expenses this year.
    • Several respondents noted they had stepped up spending around cybersecurity, or they are seeing increases for licensing and fees related to their EHR(s).
    • The natural growth of many medical groups leads to increased spending on rent and utilities.

    Leverage MGMA’s industry-leading data sets

    Caught between the rock of set payments and the hard place of increased costs

    (The following is adapted from David N. Gans’ October 2023 Data Mine article.)

    Consumers are not the only players bearing witness to the cost of essential commodities rising at a pace that outpaces wages. While many mega-corporations have had the ability to record profits from substantially raised prices, smaller businesses feel the pain acutely as their prices paid for materials and supplies increase with their labor costs.

    These trends are not confined to a particular sector; they cut across all industries. However, medical group leaders face unique difficulty as their organizations are caught between the rock of set payments and the hard place of increased costs, demonstrated by the latest MGMA DataDive Cost and Revenue reporting 2022 financial performance.

    Figures 1 and 2 provide a four-year overview of the financial situation for physician- and hospital-owned multispecialty groups with primary and specialty care. The graphs clearly illustrate how median total medical revenue per full-time-equivalent (FTE) physician decreased between 2019 and 2020 due to the COVID-19 pandemic’s restrictions on access and services. However, the graphs show a rebound in 2021 and 2022 as practices resumed normal operations.

    While revenues plummeted during the pandemic, physician-owned groups reported that median total operating cost per FTE physician increased substantially in 2020 and continued to surge, increasing 7.3% in 2021 and another 7.6% in 2022. The cumulative effect of operating costs increasing more rapidly than revenue is reflected in total provider cost per FTE physician [the sum of advanced practice provider (APP) and physician compensation and benefit costs], which decreased 1.1% in the past year from 2021 levels. Hospital-owned groups faced similar challenges, with median total operating cost per FTE physician surging by 15.8% in 2021 and another 19.9% in 2022.

    Most importantly, the “bottom line” — measured as median net income/loss, excluding financial support per FTE physician — was nearly zero for physician-owned practices. This is because these entities operate as closed financial systems, where net profits are distributed as income to the physician owners.  In contrast, hospital-owned practices reported a substantial loss to their parent health system. Figure 2 clearly shows this subsidy increased 39.7% in 2022 to $302,160 per FTE physician, demonstrating the cumulative effect of increased operating costs and static payments.

    Note: the information in the two graphs should not be directly compared, since hospital-owned practices are components of larger health systems and share many expenses with their parent organization. Additionally, substantial revenues that accrue in a private practice are not reflected on a hospital-owned practice’s financial statements, which is described in the April 2022 MGMA Connection article, “Is employing physicians a smart strategy or a financial bubble?”

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