Formally benchmarking your medical practice

By Joan M. Roediger, J.D., LLM

Benchmarking is the process of analyzing the indicators of business success and applying that information to achieve business growth and improvement. For medical practices, it is a way of taking a critical look or “snapshot” of your practice’s health. It provides you with an objective way to measure your practice’s performance. Throughout most of the business world, benchmarking is a key element to strategic planning, a vital necessity to all medical practices. Benchmarking of medical practices helps determine which practices are leaders and members of the “Best of Class.”

Historically, physicians have not formally benchmarked their practices. However, most physicians who are owners or co-owners of practices have, knowingly or unknowingly, applied elementary benchmarking techniques. For example, many physicians routinely calculate their practice expenses and compare their own figures against national averages, as an effort to manage their practices by controlling expenses to improve the bottom line.

Formal benchmarking techniques offer a more structured approach to the establishment of business parameters and the review of financial progress against baseline values. It creates more reliable and useful information for you to use to improve your practice.

Before you can effectively benchmark your practice, you need to understand the different standards available. These include internal and external standards. Internal standards are the easiest to determine and apply. They include your income statements, financial statements, balance sheets, productivity and accounts receivable information. In applying internal standards, you need to make sure that the information you are using is consistently reported. If you change your practice’s accounting procedures, it may be difficult to accurately benchmark based on this information. Internal standards can be compared against themselves by “trending” information or by comparing the internal standards of your practice against external standards.

External standards are benchmarking tools or information obtained from sources outside of your practice. The type of benchmarking activity you seek to undertake will be determined by the external benchmarking indicators available. Such sources may be available from your individual specialty society, the American Medical Association, Medical Economics, The American Medical Association, The Society of Medical-Dental Consultants, The Health Care Group and The Medical Group Management Association. In addition, some medical societies, such as The American Society of Internal Medicine-American College of Physicians have benchmarking services available.

Before you apply any external standards to your benchmarking effort, determine how the benchmarking data was compiled and if the data is comparative to your practice. For instance, if the data you use will compare your practice against “average” or “median” benchmark indicators, you will actually be determining whether your practice is mediocre and not “Best of Class” (BOC).

To compete successfully in today’s increasingly hostile economic environment, physicians and medical practices must aim higher than “average.” That means comparing your practice’s values against those better performing groups to determine:

• How your practice varies from those standards.

• Whether it does so in a positive or negative way.

• What to do to correct problems, foster growth and improve your bottom line.

BOC benchmarking compares the subject practice’s indicators against those established by the most successful practices in the subject practice’s class.

Before you begin your actual analysis, determine what makes your practice unique. If your practice is different from the “average,” find out why. Use the answers to determine which benchmarks apply to your practice and which do not. Practices may have many things in common, but every practice, throughout medicine, is unique in at least some respects. Therefore, the relevant indicators will vary, often substantially, from one practice to the next.

Consider two hypothetical practices that have the same the number of general physicians, the same number and type of specialists, and the same number of staff members, in virtually identical positions. They have the same physician and non-physician salary and other compensation, benefits and perquisites. They also have the same number of self-pay patients and plan enrollees.

But their gross revenues differ drastically. This may occur for a variety of reasons. One reason could be that the pathology intensity may be different. To compare this indicator, you need to compare the number of inpatients in the hospital per doctor per day, or the number of encounters per procedure.

Perhaps these practices differ so greatly due to one practice maintaining an effective triage system. If so, you would compare the number of patient calls made to the nurses per day. The revenues in these hypothetical practices may also vary due to differences in ancillary services performed within the practice. In such case, you would benchmark the ancillary revenue of each practice against the gross revenue of the practice

These are just a few examples of types of benchmarking. Look for the impact that geography, age and style of practice have on the way your practice is run. These factors will, in turn, give you insight into which benchmarks to focus on in your analysis.

To benchmark your practice, you need to perform a baseline analysis to acquire a “snapshot” of your practice’s business health. Elements of this financial picture, frozen in time, are the business indicators that apply to your unique practice, sampled at the time of the initial analysis.

Use this snapshot to compare your practice against a hypothetical “average” practice of a similar type, a hypothetical BOC practice of a similar type; and against future analyses.

First determine what to benchmark. Then, locate, generate and apply the appropriate internal and external benchmark data.

Any practice assessment worth the time, effort and cost, will include an analysis of the following basic practice business health indicators:

• Financial Soundness (gross charges, net collections, accounts receivable, debt to equity ratios and current assets to current liabilities).

• Overhead Expenses (staff, equipment and supplies, occupancy costs, and benefits).

• Managed Care Factors (capitation rates and quality assurance/utilization management factors).

• Patient Encounters (new patients and encounters per doctor/FTE).

• Services (costs of services offered determined through activity-based costing or another acceptable method, subcontracted/subcapitated services or carve-outs, ancillary services and outsourcing).

• Production (revenues per hour, encounters per hour, encounters per procedure, revenues per FTE and payor mix).

• Client satisfaction (patients segregated by type of insurance if possible, turnover rates of patients and referring physicians).

Recognize that every medical practice is unique. There may be other factors your practice should consider, as well.

Ideally, your benchmarking effort will show that your practice is in the best of class. However, it may show areas in which your practice’s bottom line could benefit from practice adjustment.

After you have collected the data you need, use those numbers to determine your practice’s strengths and weaknesses, improve your practice and market it. Establish benchmark mileposts and incorporate them into your pracice’s strategic plan.

Benchmarking is an excellent tool for assessing practice business health and detecting existing problems and potential problems as early as possible. Compare your practice’s business success indicators against BOC benchmarks to establish higher goals for your practice, then work to achieve that higher level of business success.

Benchmarking should be performed at least once a year or more frequently, if possible. The time you spend benchmarking your practice will be a valuable investment in your practice.

Joan M. Roediger, J.D., LLM, is a consultant with The Health Care Group, Inc., and an attorney with Health Care Law Associates, P.C., based in Plymouth Meeting, Pa.