How do you know that the overall business is healthy? How do you know that the business processes you perform are working properly? Now, how would others in your practice know? Metrics are important for a number of reasons. For starters, if you don’t know how well you are doing, how do you know what to keep doing and what to change? Words without verifiable numbers are just opinions because what gets measured, gets done. While metrics come in many flavors, they all have one thing in common…metrics tell the world what you think is important.
A metric is a verifiable measure stated in either quantitative terms (e.g. financial ratios) or qualitative terms (e.g. patient satisfaction surveys). Metrics provide control over processes, equipment, and employee performance, and they provide reporting of actual performance relative to expectations. Communication of what constitutes value and key success factors is accomplished through metrics. Metrics provide opportunities for improvement by showing gaps in performance and they provide expectations to a host of people (i.e. staff, patients, and referring physicians).
There are pre-defined metrics (as I will be outlining below), but some practices may devise custom metrics that are tailored to the specific needs of their practice. Regardless of the metric used, however, each should have certain characteristics in order to be a good form of measurement. The metric should be: objective/quantifiable (everyone knows how to calculate it), non-conflicting and relevant (important to doing a good job), achievable and verifiable (motivational in nature), monitored frequently/timely (feedback on recent actions), visible (accessible to all who can make an impact), comprehensible (everyone knows what it means), and actionable (information to know what to do now).
All practice owners want to know how much of the revenue it takes to keep their doors open. Most benchmark measures uniformly exclude physician compensation from the expense ratio calculation. But that consistency disappears when discussing non-physician practitioners. Some organizations consider nurse midwives, PAs, and similar clinical extenders as support staff and include them with practice overhead. Others exclude non-physician practitioner salaries from the overhead calculation because they’re “providers” of direct healthcare services. I prefer viewing non-physician practitioners as employee staff who free physicians for greater productivity. Following that logic, include their salaries in the overhead calculation. Whichever way you choose, make sure you calculate your practice ratio according to the same method used by any benchmark. Doing so permits a direct comparison of your data to the national statistics.
Make sure you handle non-physician practitioners consistently when calculating this ratio. As previously mentioned, I prefer considering such physician extenders as employees, making them part of the numerator for this ratio.
Individual category expense ratio
Lumping all expenses together often camouflages where a practice overspends. This ratio isolates how much you spend on individual expenses. You must fully understand the impact of such individual expenses as personnel, office facilities, and lab and clinical supplies.
Laboratory expense ratio
If you incorporate laboratory or other ancillary services into your practice, track whether such ancillaries continue to prove worthwhile. Use a similar ratio for all “add-on” services.
Average cost per patient
As with all expense ratios, make sure you consistently handle how you account for physician and non-physician practitioners.
Payor mix ratio
Not all insurers are of equal value to your practice. Calculating this ratio for each contract shows how the individual plan or company contributes to your overall financial success. If one or two companies dominate this statistic, make sure you develop the best possible working relationship with them. At the other end of the spectrum, decide whether you want to put up with a particularly hard-to-work-with plan if you don’t generate much revenue from it. You could also calculate similar payor ratios replacing receipts with adjusted charges. That ratio would tell what you should receive from various payors. If what you actually collect differs greatly from what you should collect, investigate problems with your collection activity and/or the payor.
Metrics drive behavior in a number of ways. They help define the practice’s business model because concrete goals are tied to precise measurements and the focus on these measurements can increase the precision of the value proposition. They help communicate strategy by documenting performance targets and creating buy-in to the metric-setting process. They, of course, help track performance and give timely and relevant feedback to those involved. They help increase accountability through practice-wide, team-specific, or individual measurements. And, they help align precise objectives, departmental functional goals, and practice-wide strategic activities as a whole.
Remember, measure what matters. Find out the key essentials to your practice, not just what others in your specialty are measuring. And by all means, keep it simple…simple to operate, simple to understand, and simple to action.
In my next post, I will go over the financial performance management of medical practices.
Nick Hernandez, MBA, FACHE
Nick Hernandez, MBA, FACHE is the CEO and founder of ABISA, a consultancy specializing in strategic healthcare initiatives.
Since founding ABISA in 2007, his emphasis has been on developing and maintaining a strong relationship with physicians and identifying areas for business opportunity and support. The company’s client list includes physician groups, hospital systems, healthcare IT organizations, venture capitalists, private equity firms, and hedge fund managers.
Nick is a graduate of the United States Naval Academy and a former Captain in the U.S. Marine Corps. He holds MBA degrees in both Operations Management and Information Technology & E-Business Management from Wake Forest University. He is Board Certified in Healthcare Management and has been named a Fellow of the American College of Healthcare Executives.
He is a frequent guest lecturer and is often quoted in the national media. He has consulted with clients in multiple countries and has over 20 years of leadership and operations experience. Nick is a Subject Matter Expert in business strategy, practice management, telemedicine, health IT, and oncology.