Knowledge Expansion

Physician practice losses: Using loss sourcing analysis to identify and quantify loss causes

Insight Article

Business Strategy

Benchmarking & Forecasting

Data Analytics & Reporting

Timothy Smith CPA, ABV
Series: Examining Losses in Health System Physician Practices
Article #11

The first step in addressing a health system’s practice losses is to identify the specific reasons why individual practices lose money. You cannot address the problem if you don’t know the sources of the problem. To fully evaluate the loss, you also need to quantify the amount of the loss stemming from each individual cause.

The approach of identifying and quantifying the causes of practice losses is called loss sourcing analysis. Under this approach, each contributing loss factor is identified and the amount of the loss from that source is quantified. The goal of loss sourcing analysis is to explain what factors caused the losses and how much each factor contributed to the total loss for the practice. Loss sourcing analysis can also be developed at the level of the physician enterprise.

It’s important to contrast loss sourcing analysis with merely creating a laundry list of potential causes and speculating on which ones seem to apply for an individual practice.

Loss sourcing analysis, by contrast, uses real world data and in-depth analysis to identify and quantify specific causes. It focuses on the particular facts and circumstances of the practice, rather than theorizing based on broad industry trends or popular talking points to explain the losses.

In this series, we’ve discussed many potential causes of practice losses, including:
  • Poor revenue cycle performance
  • Poorly negotiated commercial payer rates
  • Poor payer mix
  • Low volume clinic locations
  • High support staff salary and benefits costs
  • Corporate overhead allocations
  • Higher costs for corporate support services
  • Intercompany accounting practices that shift costs from hospital departments to physician practices
  • Conversion of ancillaries to HOPD
  • High physician compensation levels from misuse of survey data

This list provides a starting point for investigating multiple areas that can contribute to the losses for a health system’s physician enterprise.
 
The test of whether a potential factor actually contributes to practice losses is based on quantifying the amount of the contribution. If you can’t measure how much money is lost, you really can’t conclude something contributes. 

One way to measure the loss from a particular source is to prepare a proforma for the practice assuming a change in the particular factor. The financial results from this proforma can be compared to the practice’s actual results. Any difference would indicate the impact of that factor on practice losses.

This proforma approach can also be used to analyze multiple factors or variables in the aggregate. By changing the assumptions in the proforma model for those variables, the user can identify and quantify the amount of the loss stemming from multiple factors taken together.

Preparing a proforma analysis, however, requires inputs and assumptions to facilitate modeling of the various factors.  A critical task in developing the proforma, therefore, is to gather information that can be used for various inputs and assumptions.

For example, to determine the impact of allocations of corporate overhead or shared services on practice losses, you need data on reasonable and appropriate costs for the resources or services corporate provides to the practice.

Where are sources for such data? One source is simply obtaining market bids from third-party contractors who could provide the services. Another source is physician practice data reports like MGMA’s DataDive.

Another approach to loss sourcing is preparing an RBRVS analysis. RBRVS is Medicare’s Resource Based Relative Value Scale, which is used to determine Medicare reimbursement for services paid under the Physician Fee Schedule. Since most payers reimburse relative to Medicare, one can say RBRVS sets the scale for nearly all physician reimbursement. It’s the industry’s primary benchmark for revenues.

A key feature of RBRVS is that it indicates the amount of each dollar collected that should go towards either physician cost (i.e., compensation and benefits) or practice overhead:
  • The relative proportion of work relative value units (wRVUs) to total RVUs indicates the percentage of collections intended to cover the physician cost.
  • The proportion of practice expense and malpractice RVUs to total RVUs is the percentage of collections intended to cover practice overhead.
 
Using RBRVS, one can create a Dave Ramsey’s style practice budget: a portion of “every dollar has a job.” That job is either to pay for overhead or physician cost. RBRVS tells a practice what can be spent on physician costs and practice overhead in order to operate in the black in terms of clinical operations.
 
Certainly, normalizing adjustments can be made when using RBRVS, and RBRVS may only be the beginning of the analysis process and not necessarily the final say. Yet, RBRVS marks a powerful starting point for analyzing why a practice is losing money.

For our next installment in this article series, we’ll further discuss and explain how to use an RBRVS assessment as part of a loss sourcing analysis.

Click the following to read previous articles in the series:

Physician practice losses: A tale of two owners

Physician practice losses: Why physician-owned practices break even or make a profit

Physician practice losses: Why losses are typical in health system practices

Physician practice losses: Losses from revenue issues in health system practices

Physician practice losses: Losses from operating expense issues in health system practices

Physician practice losses: Intercompany accounting practices that result in hospital cost shifting
 
Physician practice losses: The impact of converting practice ancillaries to hospital outpatient depa

Physician practice losses: Red ink from the misuse and abuse of physician compensation survey data
 
Physician practice losses: Red ink as a red flag for regulatory/enforcement risk

Physician practice losses: How much red ink can a health system afford?

And you can listen to Tim Smith discussing physician practice losses in an MGMA insider podcast episode:

About the Author

Timothy Smith CPA, ABV
Principal TS Healthcare Consulting, LLC
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