Business

Doctors' costs going up faster than revenues

Two MGMA reports find that physicians' margin of profit is declining.

By Tyler Chin — Posted Nov. 21, 2005

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Physicians last year saw their margins -- what's left over after paying expenses -- shrink as costs continued to grow at a faster rate than revenue, according to two new reports released by the Medical Group Management Assn.

The MGMA's 2005 Cost Survey Reports for Single-Specialty Practices, based on 2004 data, found that total median revenue after operating costs declined between 1% and 6% per full-time family and internal medicine physician. Margins -- which MGMA refers to as median revenue after operating cost, but what others call net income or profit -- rose a slight 1.3% per full-time pediatrician, according to the report.

The margin for obstetrician-gynecologist practices was up 9.7%, but that's not necessarily as good as it looks, said Dan Stech, MGMA's director of survey operations. Cost-shifting from practices to individual physicians can raise the practice's margins while putting physicians themselves in a greater bind.

"With these numbers we kind of have to look behind the scenes [because] we heard some practices are having physicians buy professional liability insurance on their own instead of the practice buying it," Stech said.

A major reason why primary care physicians are seeing their margins shrink is that operating costs, including staffing, medical and surgical supplies, information technology and rent, are continuing to rise while revenue growth stagnates, Stech said.

For example, single-specialty primary care practices saw median total support staff costs per full-time equivalent physician grow 4.6% to $164,649. Median total operating cost per FTE doctor grew 5.7% to $329,395. The cost of liability premiums for single-specialty and multispecialty practices saw double-digit percentage growth again, up between 11% and 19% per FTE doctor in family medicine, internal medicine, ob-gyn and pediatrics.

On the opposite side of cost, adjustments to fee-for-service charges -- the discounts physicians give to insurers -- got deeper, taking a toll on the revenue side.

"What we've seen is that the dollar values of those adjustments continue to go up," Stech said. "Surprisingly the dollar value of [gross] charges, while it has gone up, has not gone up at the same rate as the dollar value of the adjustments."

Since 2000, for example, gross charges for family practices increased 22%. Fee-for-service adjustments rose 26%, Stech said.

Like primary care practices, multispecialty practices also saw their costs exceed revenue gains, Stech said. The median total operating cost for multispecialty practices grew 1.3% to $353,503 per FTE physician, while total medical revenue dropped 0.7%, according to MGMA's 2005 Cost Survey for Multi-Specialty Practices. The margin for multispecialty practices grew only 1.7% to $236,021 per FTE physician.

The lower margins practices are seeing suggest decreased pay for some physicians, Stech said. "If their increase in compensation levels is below the rate of increase in the general inflation rate, you can say that their effective take-home pay is probably already going down for some physicians," he said.

Down to the bone

To offset the potential decline in income, physicians essentially have only two options -- increasing productivity and cutting costs, Stech said.

Some practices said that they have been doing that already for the past several years and don't have much room left for further belt-tightening. For example, Dublin Primary Care, an eight-doctor group in Colorado Springs, Colo., implemented an electronic medical records system in 2002 that enabled it to reduce staffing by more than one FTE employee per physician, said Deborah D. Milburn, the group's administrator.

But the group now has the staffing it needs and can't make additional cuts without hurting its efficiency. "We're at the bone," Milburn said.

Still, the group is examining all its operations to see what it can do to improve efficiencies, because it expects its costs will grow while reimbursement revenue will remain flat or go up slightly.

"If the payers continue to ratchet us down enough, we'll go out of business, but we don't expect that to happen because ... they are going to have to step up at some point because otherwise we just can't function," Milburn said.

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ADDITIONAL INFORMATION

What's left over

Some private single-specialty and multispecialty practices saw margins (total medical revenue, after operating expenses, per full-time equivalent physician) fall in 2004 as costs rose and revenue stagnated, according to two reports from the Medical Group Management Assn. The data are based on responses from 917 single-specialty groups and 325 multispecialty practices.

Median margin
2003 2004 Change
Internal medicine $213,697 $201,896 - 5.5%
Family medicine $215,569 $214,377 - 0.6%
Pediatrics $218,851 $221,883 1.3%
Obstetrics and
gynecology
$321,946 $353,274 9.7%
Multispecialty
practices
$232,052 $236,021 1.7%

Note: Multispecialty practices Includes hospital-owned practices.

Sources: MGMA data from 2004 and 2005 cost surveys, based on 2003 and 2004 data

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