Practices lose financial ground as recession outpaces productivity

Doctors say there aren't enough hours in the day -- or patient demand -- to reverse the trend.

By Victoria Stagg Elliott — Posted Oct. 26, 2009

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When faced with payment cuts, physicians traditionally work longer hours or hire additional staff to help keep up revenue. But those strategies have reached their limit, a report from the Medical Group Management Assn. shows.

After hitting a peak in 2007, the median revenue a practice collected per full-time-equivalent physician took a 7.8% dive in 2008, according to the MGMA report on multispecialty practices, released in October. While the organization also surveys single-specialty practices, the association views multispecialty practices as a proxy for overall economic trends for outpatient health care.

The amount of gross revenue taken in by multispecialty practices per full-time physician steadily increased from $463,637 in 1998 to $690,032 in 2007, as annual productivity gains that often ran into the double digits helped lift revenues, mostly by single-digit percentages.

But gross revenue dipped to $637,677 in 2008.

"These data demonstrate the trickle-down effect that a tough economy can have on a collection of businesses that are already stressed by crushing administrative burdens," said William Jessee, MD, MGMA's president and CEO.

The decline in revenues reflects the effect of the economic recession. But the MGMA and some physicians said it also reflects how physicians no longer are able to extend their days to make up for reduced payments with more volume.

"We're working 12- and 13-hour days, and we get told we should work more and see more patients. We cannot. There is only so much you can do in a day," said W. Jeff Terry, MD, a urologist in Mobile, Ala.

And there are only so many patients to see.

The number of patients seen dropped 11.3% and outpatient procedures dropped 9.9% in 2008, according to the MGMA survey, which covered 383 practices in 43 states.

"Some people who do not have health insurance are just not going to come in," said Steve Furr, MD, a family physician in Jackson, Ala.

And more of those who do come in are paying out of pocket. Physicians say they continue to see regular patients who have lost coverage, which has helped contribute to a 13% increase in bad debt carried by medical practices.

"Patients don't have the money, but you're not going to turn them away," Dr. Terry said.

Adding to the decline is insurance companies paying a decreasing percentage of physician fees. In 1998, physicians collected an average of 68.4% of their stated charges after fees were discounted by insurers and other third-party payers. Collection amounts declined to 59.5% in 2008, according to the MGMA survey.

"We're doing more and more of [insurers'] paperwork for less reimbursement," said Nancy Church, MD, an ob-gyn in solo practice in Chicago.

Many practices already are cutting their budgets. The MGMA survey reflected a nearly 3% slide in operating costs per full-time-equivalent physician. Still, operating costs as a percentage of revenue jumped two points to 63.3%, the highest total ever recorded in the survey's 10-year history.

Expenses related to practicing medicine have long outpaced any growth in practice income, squeezing margins further. Total revenue grew by 46% over the past decade, but operating costs increased 54%. This is primarily a result of the increasing costs associated with staffing, particularly costs of employee health insurance, the MGMA found.

"Practice expenses continue to go up. Our rent is going up. We're paying more for our own medical insurance," said Bob Dannenhoffer, MD, a pediatrician in a two-doctor practice in Roseburg, Ore. "But we're not looking for people to lay off. We're just hanging in there as best we can."

Physicians say, however, that seeing more patients to compensate for decreases in reimbursement and other economic pressures is no longer possible. They are taking other action, such as scrutinizing all expenses. Investments in new equipment are being delayed, and calls are being made to negotiate better deals for everything from rent to liability insurance.

For example, when Dr. Furr was looking at the various outlays made by his five-physician practice, he decided to ask the company providing the group's liability insurance if there was anything they could do to cut costs. He was told the group's premiums would be lowered by 20% for each physician completing 12 hours of continuing medical education, saving the practice $25,000 a year.

Some physicians are merging with other groups or asking hospitals to buy their practices. For instance, Dr. Terry merged his group of eight urologists with a two-physician radiation oncology practice.

"We did it because of what we were seeing," Dr. Terry said. "Our incomes were going down. Our rent was going up. We merged to help with the overhead and be able to hire a full-time office manager. It helps the bottom line."

Some physicians said that although medical practices are taking economic hits, the health system is still doing better than most sectors of the economy.

"We as physicians are still far better off than most of our patients," Dr. Dannenhoffer said. "Our revenue is a little lower than it was last year, but there are a lot of patients whose incomes are so much lower than last year."

Still, "we don't think we have seen the bottom yet," Dr. Furr said. "It's scary. Most of us have never lived through a time like this before."

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Physicians collecting less

Medical practice revenues are decreasing, in part because the average percentage of fee-for-service collections has mostly gone down over the last 10 years. The percentages, which saw a slight uptick in 2008, represent the annual average for fee-for-service collections.

2008 59.5%
2007 59.1%
2006 60.3%
2005 60.6%
2004 62.6%
2003 62.8%
2002 65.0%
2001 66.0%
2000 65.2%
1999 67.7%
1998 68.4%

Source: "Cost Survey for Multispecialty Practices, 2009 Report Based on 2008 Data," Medical Group Management Assn.

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Practice revenues drop

The average gross revenue for multispecialty practices has started to decline. Numbers represent the median total annual revenue for a full-time-equivalent physician position.

2008 $637,677
2007 $690,032
2006 $654,123
2005 $642,299
2004 $582,307
2003 $586,381
2002 $569,518
2001 $538,934
2000 $492,648
1999 $479,657
1998 $463,637

Source: "Cost Survey for Multispecialty Practices, 2009 Report Based on 2008 Data," Medical Group Management Assn.

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Operating costs increase

Practice expenses are consuming an ever-larger proportion of revenues -- with a particularly big jump in 2008. The percentages represent the annual median total operating cost for multispecialty practices as a percentage of total revenue.

2008 63.3%
2007 61.2%
2006 61.6%
2005 60.5%
2004 59.6%
2003 60.3%
2002 60.2%
2001 60.0%
2000 59.9%
1999 58.2%
1998 58.8%

Source: "Cost Survey for Multispecialty Practices, 2009 Report Based on 2008 Data," Medical Group Management Assn.

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