Establishing a Practice Budget in 2014

Declining reimbursements and the uncertainty of the Affordable Care Act has medical practices entering 2014 on more uneven economic footing than ever before. With the economic rollercoaster sure to continue — at least for the near term — one very practical and effective tactic entering the New Year is to establish a budget.

Unfortunately, that simple strategy often gets overlooked, says Irv Barnett, senior manager with Moss Adams LLP, one of the 15 largest public accounting firms in the U.S.

“[Overlooking the importance of a budget] happens not only during uncertain times, but the uncertainties tend to get people to put it off even more,” Barnett says. “They don’t have the confidence they need to do some specific budgeting.”

But Barnett says that today in health care, any effort towards budgeting will enable physicians to better understand what level of workload, and what level of business acumen is going to be necessary to help the practice reach its year-end goals.

“Without any forecasting, it’s pretty hard to determine if they’re busy enough, or if they need to adjust their workload one way or the other to be able to get what they need out of the practice personally, if we take it down to the very smallest level,” Barnett says. “And every organization needs to be able to predict a bottom line — whether they’re part of a larger organization or not.”

Starting point

Barnett says it’s always best to budget based on a business plan. However, where uncertainty exists — as it does in today’s economy — he recommends physicians rely more on historical information. He also encourages them to do a shorter forecast of their business plan in order to base the plan on as much knowledge of industry changes as possible.

“The starting point for most physician owners is something, I think, that they can identify with,” Barnett explains. “We try and look at workload, and identify based on the technology and the tools that they have in their practice, what their daily workload can be, what it has been, and what their capacity may be to increase that workload. So, if I can focus the physician owners on what their workload capability is and they agree that the workload and parameters work for their practice, we can take their historical performance and translate that into revenue and expenses based on their own practice data.”

Barnett explains that a medical practice budget becomes a tool that enables physicians and practice staff to look at benchmarks that have been established and determine whether or not they’re being met. According to Barnett, people usually want to hit those established goals, especially if they were involved and set the goal themselves.

The key ingredients

According to Barnett, there are many elements that encompass a medical practice budget, including identifying payers, determining incoming revenue, examining contracts, analyzing fee schedules, and the practice’s patient scheduling. Those are the dynamics both physicians and their staff live with every day, and the potential to optimize practice performance is based on those dynamics.

“More important than the fee schedule is to look at the contracting opportunities and the payer mix that each practice experiences and determine if the practice is optimizing its opportunities,” he says. “Payer contracts change.”

And because change is constant, it’s important to monitor budgets frequently, typically on a monthly basis, to determine if the practice is on course or some mid-term course corrections are necessary, Barnett explains.

There’s nothing simple about budgeting, but, thankfully, medical practices have a lot of fixed costs in most cases.

“So while there may be some unexpected expenses, if there are variations, most likely we’re talking about revenue,” Barnett says. “And revenue turns into workload and the ability to fill the schedule with the kind of patients that were forecast in the beginning to establish the revenue benchmark.”

More important than ever

Barnett believes that, from an economic forecasting perspective, 2014 is as unknown as the health care industry has seen in a long time. As such, he’s bullish on establishing a medical practice budget.

“The only way to be able to measure the impact or the potential impact on any given practice is to look at the attributes, which are revenue and expenses, and try and identify as best we can what impact may happen to any given practice during the next year,” he says.