The story inside the numbers: Analyzing and acting on your practice's financial performance

Insight Article - March 21, 2018


Billing & Collections

Dale L. Gentz MBA, PCMH-CCE

The numbers in an income statement tell a story. What story are your numbers telling you?

To demystify your practice’s financial performance, start by understanding what your profit and loss statement says about your practice’s performance.

Start by clarifying terminology. “Income statement,” “practice financials” and “profit and loss statement” (sometimes just “P&L”) are commonly used, as well as “financial statement” and “statement of income and expense.”

But the easiest way to refer to this document is an “income statement,” and all income statements report one very important line item: income minus expenses equals profit (or loss). Specifically, it should include net revenue for income and net income (loss) for profit/loss. The equation then becomes as simple as net revenue minus expenses equals net income (loss).

Most of us don’t read the end of a book before the beginning, but that is how I read an income statement: I want to see the net income or loss first. Think of it as the outer layer of an onion: You must peel back each layer to find out how good or bad it truly is.

Most medical practice income statements are based on managerial accounting principles and contain much more detail than Figure 1 — details that allow a practice manager to reach conclusions about financial performance and to develop corrective action when needed.

Some statements show the budget, while others show a comparison to the same period last year or each month of the fiscal year. Most also show year-to-date performance. They break down income into payer classes. They display contractual adjustments — reductions in charges made by the insurance company when charges exceed the fee schedule — by payer classes. Expenses are not just one total number; they are grouped into categories such as labor, supplies, building occupancy, etc. These comparisons are valuable in helping to understand how expenses affect overall practice performance.

This detail, however, also seems to be what confounds those who struggle to understand the numbers and answer the various “why” questions: Why were the results what they were? Why do they vary from the budget? Why are they better (or worse) than last year (or last month)?

Look again at the end of Figure 1: The practice had a net income of $16,579 for the month. Is that good or bad? Without more information, you won’t know how it compares to budget (if one exists), to the same month last year, to last month or to the average of the first nine months of the year.

Figure 2 shows the practice’s budget for the month, revealing an expected profit of $25,704 and that the practice fell short by more than $9,100.

This is the starting point for analysis. Was the practice volume down? No — assuming no change in prices, charges were better than budget by $2,738. Then why? Net revenue (line 3) is $6,806 short of budget, despite billing more than the budget. Part of what is happening is that there are more contractual adjustments than budgeted. That $2,738 billed more than budget was offset by $9,544 more in write-offs than budgeted ($48,424 versus $38,880). Why? More than likely, the practice’s payer mix changed and not for the better. It saw more patients who were insured by payers with lower fee schedules.

What should be done next? Ask why, of course. Have you contracted with a new payer with a low fee schedule? Are you seeing more charity patients? Are you seeing more Medicaid patients? As you peel back these layers, keep asking why. The answers to these questions will help you work toward a clear set of action steps you will need to take to alter your revenue course.

Don’t stop there. Total expenses were $2,319 more than budget. All of this (and more) came in labor costs. To produce $2,738 more charges than budgeted, you spent $2,572 more on salaries and benefits ($69,833 versus $67,261) than budgeted. It’s time again to ask why.

If your income statement includes enough detail, you will see where the problem lies — with physician salaries, clerical salaries or clinical salaries, for example.

In Figure 3, the data show that physicians and their benefits are right on budget, clerical staff salary is over budget by $953 (as are their benefits, which is common since they tend to be linked to salary changes) and clinical staff salary is over budget by $1,105, as are their benefits.

Once again, you need to ask why? Has the practice hired more staff than planned? Is overtime being paid? Have there been recent market pay adjustments? Those answers will point you toward identifying action steps to take to get back on track with expenses.

In Figure 4, you will see additional detail in the categories of supplies and building occupancy. The variances in those numbers tell their own stories. For example, the practice had an increase in rent, from $5,250 to $5,400, which was budgeted. Note there is another important addition in this figure — same month last year (Column D). This information helps us understand the direction in which the practice is moving. Is revenue going up or down?

Why? Are expenses growing faster than revenue? Why?

This analysis identified variances from budget and prior period, emphasizing the need to understand the variances. To achieve the budget goal, use this information to develop action plans to correct the barriers identified. When the numbers are sufficiently analyzed to explain the revenue and expense variances, you will be able to create an action plan. This will allow you to monitor whether your corrective actions are improving performance month to month.

This approach becomes all the more meaningful when looking at year-to-date results. A single month’s results may be an outlier and not an indicator of how you’re doing financially. Results over time are more likely to give an accurate portrayal of your practice’s financial picture.

About the Author

Dale L. Gentz
Dale L. Gentz MBA, PCMH-CCE
Network Executive Halley Consulting Group Inc.

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