I have a friend who is a meteorologist, and one day he explained to me all the factors that must be present for an F5 tornado or a category 5 hurricane. They are called “perfect storms” because of the number of things that must be present to create them.
I am an economist who has worked in various sectors of healthcare finance and delivery for the last 39 years. Lately I thought about the concept of a perfect storm in relation to what is going on right now in healthcare. It made me think about all the doctors who are just trying to survive the storm that is on the horizon.
Right now, the future for physician practices is extremely concerning. We have a combination of factors that will make the next few years challenging:
Reimbursement: Physician reimbursement continues to be a problem. Over the last 25 years Medicare reimbursement rates have gone down by 12%. During that same time, we have experienced general inflation of 81%, and the median price of a house has gone up by 250%. This disconnect between cost increases and Medicare reimbursement is putting enormous pressure on our healthcare delivery system and, specifically, physician practices.
Physician burnout: In recent surveys, less than 50% of practicing physician respondents indicated they would recommend medicine as a career for their children. Furthermore, less than half of physicians and nurses currently in training responded that they plan on going into direct patient care after graduation.
Physician shortage: More than 50% of practicing physicians are over the age of 55. This means we will lose more than half of our doctors to retirement in the next decade. There are not enough physicians currently in medical school to replace them. By 2037 there will be a projected shortage of over 180,000 physicians in this country.
In addition to these problems, we are now projecting large increases in the uninsured population because of changes in Medicaid and the Affordable Care Act exchange marketplace. It is projected that over the next several years more than 14 million people will lose their insurance coverage. This will put enormous stress on an already overburdened safety net system, because our hospitals and emergency departments will be stretched beyond capacity. The doctors who provide care in those environments also will be stretched.
All these factors put together create the conditions for an economic perfect storm in healthcare.
So, what should medical practices do? Well, just like when a hurricane is predicted, the best advice is to prepare and to do so before the storm arrives. Trying to board up windows in driving rain and high winds is much harder than doing it ahead of time. To prepare for the coming storm, medical practices should make plans and get ready now. Doing this will help you survive when that storm arrives.
The following sections present some things that every medical practice should be doing now to get ready for the next few years.
Know your Business
First, it’s important to understand your business and your environment. Medical practice, from a business perspective, is very much like the airline industry. You sell what economists call a perishable product. At the end of the day, any unused appointment slots can’t be resold the next day — they are perishable. Airlines operate in the same environment. Open seats can’t be sold once the plane leaves the terminal.
You also have a fixed and limited capacity. Just as there are only so many seats on an airplane, there are only so many patients you can see in a day. Unlike the airlines, the revenue side of medical practice is limited and, in many cases, declining. As we have seen with Medicare reimbursement, revenue increases are hard to achieve.
So, in this kind of environment the key to survival and success lies in controlling costs while maximizing revenue per patient or per visit. The following sections present some tactics that can help with both.
Patient Mix
Every practice should analyze and evaluate their revenue per patient or per visit by patient type and payer. Let’s say your practice gets $200 to see a commercial patient, $150 to see a Medicare patient, and $100 to see a Medicaid patient. If this is your reality, then the practice should take a serious look at how much Medicaid and Medicare you take. It’s fine to take Medicare and Medicaid to fill up your practice. Some reimbursement is better than no reimbursement. However, most practices do not have that kind of excess capacity. If you don’t have excess capacity, consider this. In the scenario just presented, if you converted just one Medicaid visit to a commercial visit every day for each doctor in a 10-physician practice, you would increase your revenue by almost $250,000 per year.
Payer Contracts
Payer contracts are another area for attention. You should evaluate each payer contract and the revenue per patient they produce. Where possible, you should negotiate annual increases in this reimbursement and, as in the example above, limit access or terminate the lowest-paying commercial payers.
Efficiency and Expense Reductions
Have you ever wondered why Southwest Airlines only flies one type of aircraft? Why are all their planes Boeing 727s? It’s because it lowers their cost. All their pilots are trained on that aircraft, as are all their mechanics. They have fewer spare parts to house and inventory. Expense reduction is also why Southwest uses Love Field in Dallas and Midway in Chicago. It costs less to fly out of those secondary airports. Southwest’s ability to be more efficient and lower the cost of each flight is one of the biggest reasons why they are the only major airline not to have filed bankruptcy at least once. For medical practices, the key is to look for ways to be more efficient and lower your costs. Technology, process control, and automation are all ways to reduce costs and help guarantee success.
Economies of Scale
In many industries, consolidation has taken place. When was the last time you flew Pan Am, US Airways, Northwest Airlines, TWA, or Continental? All these airlines are no longer flying because of consolidation. Why did this happen? Two primary reasons: economies of scale and market leverage. Economy of scale is an economic principle that states that larger organizations can produce a product at a lower per unit cost. By spreading things such as fixed administration costs over more production, you lower your average cost per unit. Think of it this way: if your group has a CEO or administrator, that salary can be spread over 10 doctors or 20 doctors. If you spread the salary over 20 doctors, the per-doctor overhead cost goes down.
Market Leverage
Size or consolidation has another advantage, and that is in market leverage. Market leverage helps in several areas, from supply costs contracts to ancillary services and, of course, payer contracts. Larger practices can negotiate better rates more effectively on everything from supplies to health insurance costs. Each of these helps lower the cost per visit. A small group may not be able to afford to own ancillaries such as imaging, whereas a larger group may have enough volume to make these services work and be profitable. Finally, larger groups have more market leverage in their payer negotiations, which can have a dramatic impact on revenue per patient.
Yes, the environment is hard and getting worse, but physicians do have some things working in their favor that we need to keep in mind and utilize. The demand for your services, training, and skill is not going away any time soon. The shortage of physicians will offer even more leverage and opportunity for existing practices. It is not easy to replace your services, and supply is not likely to catch up with demand any time in the next couple of decades.
Make Your Business Future Proof
Simply put, you are needed now and will be needed even more in the future. Unlike some other industries, your services are not “discretionary” and are not going to be replaced by AI or automation.
Doctors are the core of our healthcare delivery system. Without doctors, the rest of the system fails. A good friend and mentor once said something about hospitals that has stuck with me for many years: “Without doctors, hospitals are nothing more than expensive hotels with bad food.” The point is that hospitals and the other parts of our healthcare delivery system are necessary but also reliant on doctors.
Regardless of our politicians, who continue to undervalue and underappreciate doctors, and regardless of how insurance companies treat physicians, you are needed and will continue to be needed. The key to your success and survival is to operate intelligently and effectively in the current and future environment. Keep in mind that both Delta and United Airlines made over $3 billion dollars in net profits last year.