5 Strategies to Get Out of the Red

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How to return your practice to financial success

By Matt Slimming, PT, DPT

As profit margins erode in outpatient physical therapy, we are seeing that more practice owners find themselves not making a consistent profit. It is not uncommon for clinics to operate at a loss.

Every owner has the occasional month when they make a net loss. This can even happen in very healthy clinics. Factors that can contribute to this include: months with three payroll cycles; seasonal changes in insurance payment behavior and also rare events, such as weather that prevents the clinic from being open for prolonged periods. However, when losses continue month after month, it is a very uncomfortable situation.

How do you know if you are operating in the red? Every owner should complete an income statement each month.

If expenses are greater than your income for a period, then you are in the red for that period. As mentioned above, it is not uncommon to have the occasional month in the red. But two consecutive months running at a loss is a sign that action needs to be taken very quickly.

If you find yourself in this situation, here are five strategies that can help get back in the black.

1. TAKE A LONG, HARD LOOK AT YOUR EXPENSES

Review every single expense item for the last quarter. Sometimes a recurring expense can be added because it seemed like a good idea at the time, but then it becomes apparent that it is no longer justified. Cut out every expense that isn’t essential to the operation of the clinic.

Also start to track the percentage of income that each expense category represents. There are general guidelines for the percentage breakdown of expense categories, however they can vary dramatically between regions and type of practice. Some very general guidelines are that all costs related to payroll should be around 45%-60%. Marketing should be around 5%-8% depending on the age and goals of the practice. Facility costs should be under 10%.

See if you can find more locally specific information on expense ratios from your state association. If you are significantly out of line in any of these categories, consider making significant changes to reduce that expense category.

2. LOOK AT THE PERFORMANCE OF YOUR BILLING COMPANY OR BILLING DEPARTMENT (ENTITY)

The process of physical therapy billing is extremely complex and to collect everything you are owed requires rigorous processes. One of the first places that owners look to understand why revenue is low is their Billing Entity.

If your Billing Entity is not taking the steps necessary to get you paid according to your payor agreements, that can easily be the difference between making a profit and being in the red. It is essential that you work with a Billing Entity that performs their responsibilities with excellence.

Make sure that your Billing Entity never writes off anything without getting your approval. If they do, that will compromise the analysis below.

There are some simple analyses that can tell you how your Billing Entity is performing.

i) Accounts Receivable Conversion (ARC) Ratio ARC represents how fast you are paid. This should be less than 1.0, indicating you are paid in less than one month.

The calculation: [Total A/R (not including auto and attorney accounts)] divided by [Average charges over most recent three months (not including auto and attorney)]

ii) Each month track your A/R by bucket (0-30, 31-60, 61-90, 91-120, 121+). When you start with a new billing company that will increase for the first few months, then it should remain approximately the same (or possibly decrease).

iii) 120+ A/R

The percentage of A/R that is over 120 days should be less than 10% (depending on your patient balance policies). If your Billing Entity isn’t progressively moving you toward that number, then perhaps they aren’t effectively working your old A/R, which is so important.

3. GENERATE MORE NEW PATIENTS

For a clinic to run profitably, it needs to see a certain percentage of the maximum capacity visit number that the clinic can support. If you are operating under 80% of the capacity of your clinic or staff, you may want to look into gaining more new patients.

There are four main ways to achieve this:

  • Determine which potential referral sources in your community would refer to you (e.g. if they are employed by a health system this may be difficult for them). Then start the process of developing relationships with those referral sources. This can take some time to bear fruit. It is important to track the results of these efforts by referral source to see which ones are responding to your efforts.
  • Provide easy ways for your existing patients to refer their friends and family to you. This can include: referral cards, invitations to workshops, invitations to other special celebrations, and QR codes they can share by text.
  • Reactivate past patients. A simple way to do this is to send a monthly email campaign to all your past patients. These emails should be related to different types of conditions and treatments and should all include a “call to action,” such as a Free Consultation.
  • Online Marketing. This can range from just a few Facebook posts, to a comprehensive website overhaul, SEO program and marketing funnels. It is recommended to start small and inexpensive and track the return on investment (ROI) of all your marketing efforts. If your small efforts achieve a positive ROI, then reinvest some of the profit in expanding your marketing efforts.

4. LOOK AT YOUR TIMED UNITS PER VISIT

It is astounding how often we encounter physical therapists that bill a very low number of timed units per visit. It is worth starting to calculate how many timed units each physical therapist bills for Federal payors (who follow the 8-minute rule) and for those commercial payors that follow the American Medical Association’s rule of 8s.

Clinics will vary in how many units they want to capture for each of these types of payors. For example, a clinic that schedules patients every 45 minutes would ideally be capturing three timed units per visit for their Federal patients. However, they may aim to reach four or five timed units for commercial plans. Those clinics that see patients for 60 minutes will want to capture a higher number of timed units.

If your physical therapists are consistently billing less timed codes than they could, given the time spent with the patients, it becomes quite difficult to make a profit.

5. EXAMINE YOUR PAYOR CONTRACTS AND PAID AMOUNTS

It goes without saying that many payors have reduced their reimbursement over the last few years. In addition, they also employ sneaky tactics to pay you less than you agreed to (e.g., check fees, credit card fees, MPPR, unfair denials, etc).

Understand how much it costs you to see a patient. One simple way to do this is to divide your overall costs at 80% capacity by the number of visits at 80% capacity. That is the number that your average payment per visit must exceed.

Now look at all payments that are posted for a period of time (possibly one week, depending on the size of your practice). For each payor, if the paid amount is less than your cost per visit, determine if you are optimizing revenue by charging optimally. If you are charging optimally but still earning less than your costs for that insurance, then it may be worth going out of network with them.

In that way, all of your visits will be paid above your cost per visit. Just make sure that your clinic is busy enough to keep your cost per visit from creeping up if you stop seeing patients with that insurance.

These five strategies aren’t for everybody, and not every challenged clinic will need to implement all five. It is recommended to start by choosing the one strategy that you feel could make the greatest difference to your bottom line. After reading the five strategies, you probably already have a strong sense of which one you need to work on first. So, make a plan and dive in! 

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Matt Slimming, PT, DPT

Matt Slimming, PT, DPT, is the founder of seven physical therapy clinics in Louisiana and is also CEO of PT Pilot Billing + RCM, a Medical Billing Company that services only physical therapy practices.

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