benchmarking for medical practices - business valuation resources

Benchmarking Medical Practice Performance

© 2013 Business Valuation Resources, LLC

Page 0 July 30, 2013

Prepared for BVR 2013 Online Symposium on Healthcare Valuation Part 7

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Benchmarking for Medical Practices

Lori A. Foley, CMA, PHR, CMM

Tynan Olechny, MBA/MPH, AVA


July 30, 2013


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What is Benchmarking?

• Process of measuring and comparing an

organization’s performance to national, and

regional, or industry averages

– Provides quantitative data to support informed

decision-making

• Internal vs. External



July 30, 2013


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Why Benchmark?

• Insight into:

– How business is operating compared to peers

• net income/overhead

– How individuals/entities are producing compared

to peers

• production, compensation

– How efficiently staff or processes are working

• A/R days, collection rates, A/R aging



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Benchmarking Applications

• Routine daily management

• Situational analysis

• Self evaluation in contemplation of a sale

• External evaluation in contemplation of a purchase

• By appraiser to understand and normalize the business





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What Can Be Benchmarked?

• Production

– Procedures - Patients - RVUs

– Cases - Medical records - wRVUs

– Visits - Hours worked

• Compensation/Benefits

– Compensation per wRVU

– Compensation to collections ratio

• Overhead

– Numerous expense categories



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What Can Be Benchmarked?

• Staffing Complement

• Efficiency Ratios

– Days in A/R

– Gross/Adjusted Collection %

• Collections

– Collections per wRVU

• Payor Mix





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Benchmarking Resources

• Financial Surveys

– Medical Group Management Association, American

Medical Group Association, Sullivan Cotter & Associates,

Towers Watson, etc.

• E/M Bell Curve Data Book

• Specialty Medical Associations

– NERVES Socio-Economic Survey

• Entity itself (trending)

• Proprietary Internal Databases



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Financial Surveys

• Medical Group Management Association • Physician Compensation & Production Survey

• Management Compensation Survey

• Cost Survey

• Individual Specialty Surveys (i.e. Anesthesia, etc)

– Most comprehensive; largest sample of physicians

– Generally represents small, single specialty medical groups

– Shifting split between private practice and Hospital/IDS-owned





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Financial Surveys

• American Medical Group Association • Compensation & Financial Survey

– Generally mid to large multi-specialty medical groups

– Not as many expense category benchmarks available

• Sullivan, Cotter & Associates • Physician Compensation & Productivity Survey

• Physician On-Call Pay Survey

– Generally represents larger organizations, including hospital based systems and academic groups



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Undertaking the Task

Critical to understand:

- The data you have

- What the benchmarks measure

- How they are defined and calculated

- What they [might] mean



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Obtaining the Data

• Clearly understand what information you are

seeking

• Cooperate with entity to get what you need

– Discuss systems, capabilities and data inputs

– Any gaps/overlaps due to system conversions

– Provide detailed requests for information

– Communication, communication, communication!

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Working with the Data

• Understand what you received – is

normalization required?

– Any providers/services/locations added or

deleted?

– Significant changes to charge master/fee

schedule, reimbursement contracts, expenses?

– Double check report parameters and time periods

• Matching



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Working with the Data

• Understand what you received – is

annualization required?

– The more months included, the better

– Does the period reflect the norm?

– Are there alternatives to annualization?

• 12 months “moving”/TTM

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Remember:

• Data comes from a variety of sources

– Not always comparable

• Collection of data is often contingent on how systems are set up

– Varying levels of sophistication

– Close but not quite “there”

• Definitions may differ according to situation

• Varying degrees of “electronic” data

• Always subject to interpretation



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Using the Benchmark Resource

• Read the narrative – make sure you know

what is being measured and how

– Often includes disclaimers as to how it should or

should not be used

– May narrate differences from previous years’

benchmarks

– Identifies and discusses trends in the data

• Be as specific as possible to each situation

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• Review the formula to perform the calculation

• Differentiate between Median and Mean

• High percentiles – it’s not always good to be at the top of the chart!

– Example – 90th percentile in collections vs. 90th percentile in expenses

• Understand the metric definition – total compensation in one survey may not equal total compensation in another survey

• Consider the number of survey respondents



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• Data results from one benchmark metric do

not always correlate to data results from

another benchmark metric

– Example – Collections vs. Charges:

2013 MGMA Physician Compensation & Production Survey

Description Data Points 25th

Percentile Median Mean 75th

Percentile 90th

Percentile

Family Medicine - Total Collections

2,136 $ 325,241 $ 418,763 $ 433,343 $ 524,404 $ 637,880

Family Medicine - Gross Charges

2,378 $ 515,475 $ 656,422 $ 708,798 $ 841,652 $ 1,072,879

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Understanding the Benchmark

• Result of the calculation seldom tells the

entire story – dig deeper!

– Surrounding circumstances and other factors

should be considered

• Creates a starting point for additional

questions, analysis and understanding

– Double check: Does the result of the calculation

make sense in light of the other information?



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Benchmarking Charges

– Better internal measure (e.g. year over year for

the same entity) than external

– Establishment of charges is subjective for the

entity

– Important to understand if calculating gross

collection rate (GCR) [payments/charges]

– Often benchmarked as a percent of the Medicare

fee schedule

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Benchmarking Charges

• Example

– Practice A sets charges at 200% of the Medicare

allowable and has GCR of 62.5%

– Practice B sets fees at 400% of the Medicare

allowable and has GCR of 31.25%

– Benchmark is 66%



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Benchmarking Payments

• More objective measure than charges

• Remember - not all payment types may be

included in the benchmarks

– Read the benchmark to understand what to

include for comparison

– Understand the data to ensure that only

applicable amounts are included

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Benchmarking Payments

• Payment considerations:

– Is A/R high?

– Are billing and collection processes routine and

operating as they should be?

– Are new providers credentialed so that claims

can be processed?

• An adjustment may be warranted to paint a

more complete picture for decision making



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Benchmarking Compensation

• Not all types of compensation are included in the

benchmarks

– Read the benchmark to understand what to include

for comparison

– Understand the data to ensure that only applicable

amounts are included

• Influenced by a variety of factors – ownership,

net income, contract, compensation formula,

sources of compensation

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Benchmarking Compensation

• Compensation considerations:

– Does the provider have a contracted salary or ownership interest?

– Is compensation allocation tied to production?

– Is provider in a start-up or wind-down situation? Buying in?

– Does the physician receive compensation for call coverage, medical directorship, etc.?

– Is compensation being taken in the form of rent, personal expenses, etc.?



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Benchmarking Operating Overhead

• Can benchmark actual dollars or expense as a percent of net patient revenue – both may be relevant

– Again, beware of benchmark definitions!

• Personal and discretionary expenses are typically excluded

– Often requires a significant amount of normalization

• Non-recurring/extraordinary items are often excluded or normalized

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• Operating overhead considerations:

– Keep in mind a function of both collections and

expenditures – “reasonable” expenses in terms of

$$ but low collections yield high percentages

– If you are analyzing part of a larger whole, are all

expenses fully captured?

• If not, how should they be accounted for?

– If forecasting, consider fixed versus variable



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A C D E G

Entity Financial

Statements 12/31/10

Allocable

Expenses ($) (3)Allocation Basis (4)

Allocation

Rate (9)Common Size

Revenues

1 Professional Fees 2,000,000 (500,000) 1,500,000 Professional 0 1

2 Professional Fees - Direct 500,000 500,000 Percent Technical Revenue (1) 86.3% 431,657 (11) 100.00% 2

3 Total Income 2,000,000 431,657 3

4 Non-Physician Expenses 4

5 Accounting Fees 15,000 15,000 Percent Revenue 21.58% 3,237 0.75% 5

6 Automobile Expense 7,000 (1,000) 6,000 Percent Revenue 21.58% 1,295 0.30% 6

7 Automobile Expense - Direct 1,000 1,000 Direct 100.00% 1,000

V 8 Bank Service Charges 5,000 5,000 Percent Revenue 21.58% 1,079 0.25% 8

V 9 Collection Costs 1,500 1,500 Percent Revenue 21.58% 324 0.08% 9

Ancillary Service

Revenue & Expense Allocations

B F

Direct Adjustments ($)

(2)

Allocated Ancillary

Income Statement ($)

(10)

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Benchmarking Production

• Important because it is a key driver of

revenue (along with reimbursement rates)

• In many of today’s affiliations, production is a

direct driver of provider compensation

• Measured in a myriad of ways



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Measure Issues to Consider

Office Visits Number of patients seen in an ambulatory (office) setting

Encounters Can mean ambulatory visits or procedures

Procedures Can mean every CPT submitted or the number of times a certain case is performed

Cases Often comprised of multiple CPT codes or procedures; assistant surgeon cases may be reflected

RVUs/wRVUs

Impact of modifiers, multiple procedure discounts

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• Production considerations:

– If the entity has non-physician practitioners (NPPs), understand how they are tracked in the reports

• Billing provider vs. rendering provider

– Are the results reasonable - can one provider see ___ patients per day?

– Are there any planned changes with regards to production?

• Retirement/slow down, loss of patient base or key referral source, etc.



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Benchmarking Staffing

• Often one of the Practice’s highest line item

expenses

• Certain levels of staffing needed to achieve

certain economic results

• Both under and overstaffing may yield less

net income; consider during normalization

process

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Benchmarking Staffing

• Staffing considerations:

– Must understand classifications and who is

included

• Some benchmarks exclude NPPs, others include



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Benchmarking Financial Indicators

• Reflect the results/efficiency of certain

processes, usually A/R related

– Days/months in accounts receivable

– % of A/R in each aging bucket

– Gross Collection Rate

– Adjusted Collection Rate

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A/R Benchmarking Considerations

• Accounts Receivable Indicators

– Understand the entity’s process for writing off bad

debt/uncollectible accounts

– Identify aging parameter – time of service, time of

filing, re-aging impact

– If entity changed billing systems during analyzed

period, make sure to account for related activity

in both



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GCR Benchmarking Considerations

• Gross Collection Rate =

Payments

Charges

• If fee schedule is set very low, GCR can be very high and vice versa – does not necessarily reflect efficiency of collections

• Material changes in fee schedule affect comparison from one period to the next

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ACR Benchmarking Considerations

• Adjusted Collection Rate =

Payments

[Charges – Mandated Adjustments]

• Effective calculation relies on how

sophisticated entity is in tracking adjustments

by category



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ACR Benchmarking Considerations

• Different benchmarks treat certain categories

differently

– Professional courtesy

• Can exceed 100% due to timing issues but

not for sustainable period of time

• Can be a measure of effectiveness of

collections

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Applying Benchmarks

• Once appropriate benchmarks are identified,

valuation experts should use this information

to guide their analysis, looking for areas in

the practice that may deviate from the

applicable benchmark data

– Identify areas requiring adjustments



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Applying Benchmarks

• What questions should you ask to better

understand what’s going on in the practice,

using benchmark data as an indicator of the

norm?

– Does this benchmark make sense in light of other

information? What other factors could be causing

this result? How can or should practice

performance be adjusted to get to the norm?

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Case Study 1: Physician Productivity

When comparing 2012 financials to those of

previous years, a valuation expert notices a

decrease in revenue. Valuation expert investigates

by looking at individual physician production.

-Physician A made $251,000 in 2012, and

generated 4,800 wRVUs.

-Physician B made $300,000 in 2012, and

generated 2,000 wRVUs.



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National Compensation Survey Data, Neurology



Percentile 90th

Percentile

2013 MGMA Physician Compensation and Production Survey 693 $ 221,076 $ 265,443 $ 298,599 $ 343,410 $ 470,966

2012 SullivanCotter Physician Compensation Productivity Survey 781 $ 201,991 $ 247,948 $ 253,185 $ 271,276 $ 347,365

2012 AMGA Medical Group Compensation and Financial Survey 1,062 $ 211,009 $ 249,250 $ 273,255 $ 301,540 $ 396,081

Average of Surveys, Rounded $ 211,359 $ 254,214 $ 275,013 $ 305,409 $ 404,804

wRVU Survey Data, Neurology



Percentile 90th

Percentile

2013 MGMA Physician Compensation and Production Survey 587 3,818 5,158 5,589 6,810 9,155

2012 SullivanCotter Physician Compensation Productivity Survey 432 3,655 4,454 4,977 5,844 7,627

2012 AMGA Medical Group Compensation and Financial Survey 846 3,643 4,717 5,185 6,158 8,058

Average of Surveys, Rounded 3,705 4,776 5,250 6,271 8,280

Physician A Physician B

Physician B Physician A

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• Physician A is compensated at the median level, and seems to be producing accordingly.

• Physician B is compensated near the 75th percentile, and is producing far below the 25th percentile.

– Physician B’s compensation and production levels do not align.

– Physician B historically produced at the 90th percentile.



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• Does this account for the decrease in revenue?

– It could. However, all possible factors that affect revenue should be explored.

• What next?

– The valuation expert should investigate Physician B’s compensation levels in previous years.

– Understand how compensation is calculated in the practice. Is a portion of revenue shared, e.g. Is there a direct correlation in the formula between production and compensation?

– The valuation expert should investigate other potential causes.

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• What other questions should the valuation expert

ask in this situation?

– Is the decrease in revenue a new trend, or has it been

ongoing? Is it expected to continue?

– Could the decrease in revenue be caused by factors other

than Physician B’s production?

• Are practice reimbursement rates normal? Are there problems

with collections? Has there been an increase in expenses? Have

there been any operational changes within the practice?



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• What would any willing Buyer adjust to get

revenue back on track?

– Which of these findings require normalization in

the valuation?

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Case Study 2: Operating Overhead

Valuation expert analyzes operating overhead

of a family medicine practice in comparison to

other similar practices. Currently, the practice

spends about 30% of its revenue on general

operating costs (excluding physician

compensation and benefits).



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• The practice’s operating overhead

approximates the MGMA 25th percentile.

What does this mean?

General Operating Cost as a Percentage of Revenue, Family Medicine

Description Data Points 25th Percentile Median Mean 75th Percentile 90th Percentile

2012 MGMA Cost Survey 372 29.19% 41.04% 50.77% 62.12% 90.19%

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• What questions should the valuation expert

ask in this situation?

– Expenses may be low, but are they appropriate?

Is the practice understaffed or undersupplied?

– Are collections much higher than the norm,

resulting in lower expenses as a percentage of

revenue?

– Are all expenses accounted for?



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Keys to Remember

• Benchmarks do not tell the whole story, but

instead offer insight.

• Not all benchmarks are relevant, and not

everything is worthy of comparison.

• Keep it in perspective!

– A benchmark with an n = 356 is probably more

reliable than one with an n = 28.

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Keys to Remember

• Finally, always step back and look at the

relationships of the analysis to see if they

make sense. If wRVUs and collections are

greater than the median and expenses are at

or below the median, why isn’t compensation

greater than the median? What is missing?



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Thank You

Lori A Foley, CMA, PHR, CMM

[email protected]

404.266.9876

www.pyagatesmoore.com

Tynan Olechny, MBA, MPH, AVA

[email protected]

404.266.9876

www.pyagatesmoore.com

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