Welcome everyone to the practice finance module of our series Essential Skills for CV Program Management. My name is Joel Sauer. I'm the Executive Vice President for Consulting for MedAxiom. Here you see my disclosures. And I'll jump right in. There are basically three main financial statements for a physician practice enterprise. Those being the balance sheet, the P&L or profit and loss statement, and then the statement of cash flows. The balance sheet is a moment in time accounting tool. And it reports the company's assets, liabilities, and then the owner's equity. Depending on the type of corporation or tax entity a practice is, that balance sheet may at the bottom include a statement of the owner's equity including retained earnings. The retained earnings is an expression of the ongoing or long term financial performance as reported on the P&L or profit and loss statement. And in many cases for a physician enterprise, especially one that is owned by the physicians, may be a negative number. I am not an accountant and I don't pretend to be. But the reason for that is that any distributions out of a physician enterprise to the individual physician owners will be taxed as ordinary income. Or I should say are often taxed as ordinary income because of the legal organization of those entities. Therefore, in order to avoid double taxation, double indemnity, many physicians will attempt to end each year of their existence with the company at a breakeven or zero income operation. Because that's hard, most organizations, because you're trying to guess on a lot of things at the end of the year, most organizations will actually end with a slight net loss just to be safe in case accounting has to reverse anything. And then suddenly you're left with an income that is taxed at the corporate rate as well. So that's why you will see at the end of many balance sheets for physician enterprises that that retained earnings is actually a negative number. Over on the profit and loss statement or commonly referred to as the P&L, this is where you see kind of the financial performance of operations in the physician groups. It is an expression of revenue, expenses, and then net income or loss. And then the statement of cash flow, which is very, very important because revenue does not necessarily translate into cash. We need to keep an eye on our cash flows and make sure we have enough in the bank and in our liquid states that we can continue to operate. So that's the amount of net revenue that comes in, which is cash that we can spend and looks at what is going to go out the door in terms of our expenses. And those are then that statement of cash flow. It is often a overlooked statement, but is critically important. So I will emphasize that we want to make sure that we're maintaining a robust statement of cash flows so we can keep our eye on the ability to keep the doors open and operate if there are changes in our revenue or expenses that are unforeseen. On the P&L now, I'm going to focus a little deeper on that one statement. As I said earlier, this is an extension or a expression of our financial performance. So profit in this case is equal to revenue minus the cost of the things that we're providing. And there are two kind of profits. There's the first operating profit, which looks mostly or often at just direct expenses. And then you have net profit when you take not only those direct costs of the goods that you are providing, in this case physician services and ancillary services, but it takes into consideration all costs, including what's normally referred to as administrative in general. So for instance, an example of an A&G or administrative in general cost would be the administrator of the practice, sometimes a chief executive officer. That is not a direct cost of providing an exam room visit, for instance, but it is a cost that is for the practice as a whole. That would be considered general overhead and would be calculated in that net profit. Whereas if we go back to the operating profit, that would be, for instance, in an example of providing an echo, cardiac echo. The echo machine would be expressed in operating expenses or direct expenses as depreciation. And the sonographer would be expressed as a staff expense. So in this case, we would have revenue from that echo, and I'm going to get into the details of how that revenue comes in a little bit later. You have that revenue minus the cost of the echo depreciation staff supplies equals an operating profit or sometimes expressed as EBIT earnings before income taxes and depreciation. And then EBITDA, which includes amortization, depreciation, and some other expenses. The value of a company, this is somewhat of an aside, but the value of a company is often expressed in multiples of that EBITDA margin. Because most companies who would acquire another company have their own administrative in general. So they look at what a company is worth through that EBITDA margin. And then in my example, again, now to get down to that net profit, we're adding those administrative and general costs. For instance, the billing office, it's hard to tag it to a particular department because it bills on behalf of all areas of the organization. It is often included in that administrative and general category. So here is an example of a P&L. You see on the top is the revenue comes in from different categories. For instance, patient services, ancillary services would be those types of imaging like echo, nuclear spec, maybe pet CT. Maybe we have some pharmacy, other areas that would be considered ancillary. We may receive some money in incentives from our large commercial payers or from our hospital through co-management arrangements and the like. Then we have our expenses. Almost always in a physician enterprise, the largest category of expenses are going to be the staff. And then you can see some other main categories of expenses in a physician enterprise that would come into play. That gets us to that operating margin or EBITDA. And then we have to subtract out the general and administrative expenses like depreciation, interest, and taxes. And that would get us to an available net margin that can be paid out to the physician shareholders. And as I mentioned earlier, usually that entire amount would be distributed to the physicians in order to avoid taxation at the corporate level. But there's no way for the physicians to avoid taxes at their personal income perspective. Some companies will actually do a portion of the distributions to the physicians as K-1 distributions because they may organize as an LLC. But they typically have to have some level of W-2 wages in order to satisfy IRS requirements. That's way beyond the scope of what we want to accomplish with this module. But I thought I would share it because it's a common part of an administrator's duties or at least what they need to understand when they're working with their accounting team. So here you can see the operating profit and then that net profit after all items are deducted. Of note, most cardiology groups, particularly those with ancillary services such as NuclearSpect, ECHO, CT, etc. They're going to operate in the 55% to 65% overhead. In other words, out of $100 of revenue, $65 will be consumed by staff and other expenses. And that would leave about 45% for physician compensation, fringe benefits, and the like. That percentage is highly variable and depends on how large the group is, the efficiency of the group, what services they do and don't offer. Often, the more services that a group offers, the higher their overhead percentage. However, they may also have higher revenue and a higher net margin in order to pay the physicians, even when they have that higher overhead. No one wants to pay overhead. Everybody wants to find ways to reduce it. However, it is not unilaterally bad. Sometimes overhead is valuable to the group and sometimes it isn't. And that's one of the skill sets that a practice administrator would need to be able to decipher and determine which is good and which is bad. Gross versus net revenue. This is also an important consideration. When I send a bill out to a patient at that moment, it is gross revenue because I'm logging it in my books, depending on my accounting system or whether I'm cash or accrual based, which I'll get to next. But I can't spend it yet because the patient hasn't paid. In a physician enterprise, often that bill is going to go to the patient and it will also concurrently go to an insurance company, which may take 30 to 45 to even 60 days in order to adjudicate and pay. And then typically, the insurance company is only paying a portion and now we have to bill the patient for the balance of that. And they have another 30 to 45 to 60 days in order to pay that. So the difference is the bill is gross. The cash that comes in is net. There's also a very unique aspect to health care in that I provide services and I may send a bill to the patient or to the patient's insurance for $1,000. And we have a contract with that insurance company that says, yeah, your bill is $1,000, but we've agreed I'm going to pay you $300 for that particular service. So we have gross revenue of $1,000 in that example, but our net revenue maximum is $300. The difference between those as you see in the bottom right box on this slide is what we call a contractual adjustment. I have a contract with that particular insurance company that says for that $1,000 service, we've agreed on a $300 price. Therefore, $700 is going to be written off as a contractual adjustment. In addition to that, there's the concept of bad debt. So let's say in that example, that same example that I gave, out of that $300 that we agreed to with that particular insurance company for that particular service, $100 of that $300 is a patient out of pocket. We go to the patient for that $100 and the patient either won't or does not have the ability to pay and we never collect. That then is written off as a bad debt. So you can see how $1,000 in this example turned into $380 of net revenue. Therefore, as important as gross revenue is, we don't want to lose sight that it is gross and it may not turn into all of that. So we just have to be cognizant of that. Most physician organizations will prospectively set a bad debt allowance based on their historical non-collection rates. That way, we're always trying to account for it in our net revenue calculations looking forward. And as I mentioned, that would be part of our calculus of our cash flow analysis, one of the big three accounting statements that we would use. Cash versus accrual accounting. The vast majority of physician enterprises in the United States are cash-based, not accrual-based. Whereas if you flip over to the hospital and health system side, the vast majority of those organizations are accrual accounting. Cash accounting is like either using your debit card or your wallet. When you pull out your debit card to pay a bill, the expense is recognized. Whereas with accrual accounting, when the bill is received by the organization, we log that expense even though we haven't yet paid it. But it is on the books as an expense at the moment that we receive the bill. So think of your home accounting. You receive the bill from the electric company. If you were accrual-based, you would write in the books, I have an expense for $100 for electricity. Whereas on the cash accounting side, you would not log that expense in your books until that point where you paid it. Same with revenue. With revenue with a cash accounting, we may send that bill out to the insurance company for $1,000. We are not logging that revenue yet. We'll log it when we actually get a check from the insurance company. That's the moment when we'll put that in the books as bonafide revenue. Again, we're not trying to make you all accountants. If you are a practice administrator, you will get advice from both your legal and accounting resources on whether you should be one or the other. But as I mentioned, the vast majority of physician enterprises in the U.S. will follow a cash accounting system. So who pays the doctors? You can see the major sources that are identified here, those being patients, Medicare, Medicaid, commercial insurance, and then self-funded employers. So employers who are large enough where they will pay their own insurance as opposed to going out and getting what's called indemnity coverage through a large Aetna, Cigna, United, etc. Patients typically pay from their pocket or direct payments. So as I expressed earlier in the example of the $1,000 service, the patient was receiving a bill for $100 because that was their out-of-pocket expense after insurance payments. In some cases, you would be seeking the entire $1,000 from the patient if they don't have insurance or if they are self-funding themselves. Then you have the government pay sources, Medicare and Medicaid. Medicare is for those Americans who are typically, it's not exactly this, but typically 65 and older and qualified or they are permanently disabled. And then Medicaid is the federal and state-managed program that is intended to cover low-income Americans. They have very complicated formulas for determining how they pay us. And in most cases, not entirely, but particularly in the cardiology space, Medicare is a better and easier payer to deal with than Medicaid. Then you have your commercial insurance. They generally follow Medicare rates, not that they pay the same, but they follow the same procedures for paying physicians as Medicare. And I'm going to get into that here in a little bit. However, there is room for negotiation. In most markets, not all, but in most markets in the US, commercial insurance pays more than Medicare and is a very desirable payer in the market. Physician groups would love to have most of their patients coming from commercial insurers. In cardiology, that's not how it works. 60 plus percent of our patients come from Medicare because cardiology tends to, or cardiovascular disease tends to hit our population at the older years or the more senior years. But commercial insurance generally is a better payer than Medicare and certainly Medicaid. And then you have those self-funded employers. These can also be negotiated. And this is an opportunity for what's called direct contracting. So you cut out the middlemen and the delay that comes with the middlemen, such as commercial insurance. But these tend to be one-offs and they are hard to aggregate because it takes a lot of time and effort in order to get each contract signed. The Medicare and Medicaid is complicated. You can just see a few of the details that go behind all of this. And I'm going to go into it a little bit, but trust me, we're not going to try to make you experts in how Medicare determined rates. But typically, and these are general statements, physician payments from third parties are billed through what are called CPT codes or current procedural terminology. basically everything a physician does has a CPT code assigned to it, which is maintained by the American Medical Association on behalf of Medicare, the CMS, the Center for Medicare and Medicaid Services. And it is complicated to say the least. So everything we do has a CPT code. So that echo I talked about has a CPT code. A physician office visit has five CPT codes. And they go up in terms of the complexity of the patient, the length of the visit, et cetera, et cetera. And in physician groups, the more you do, the more you get paid. So revenue is determined by your productivity or how many of the CPT codes that you bill. In another module, we'll talk about hospital side, which is very different than this physician CPT coding. Coding is very important. And coding is kind of our speak for documenting, writing down and making sure we're telling the right story for our patients. So the very first step in that story is what is their diagnosis? Why are they here? What is their general problem? And they may have more than one. And in fact, in cardiology, they almost always have more than one. And that is determined by an ICD-10 code. That number has been going up over time and it changes year to year. There are literally tens of thousands of ICD codes for everything. Some of them would actually make you laugh, like getting bit by a lion may have an ICD-10 code. But those are the basis. Everything drives off that ICD-10 code. So now let's say I come in and I have heart failure as my diagnosis. Now my physician is seeing me in the office. They will then say, well, Joel's heart failure is advanced and it's complicated. So I'm looking at my five choices for office visits in the CPT code 99212 through five. And I'm gonna bill a level five because I spent a lot of time with Joel. I did all the right things in order to check the boxes to bill that. And he had a lot going on and needed a lot of help from me. So that's the CPT code. Then that CPT code will determine both the work relative value unit, or RVU that I receive, which drives the reimbursement from both Medicare and commercial carriers. If you wanna see how that gets created, here is the formula. And you can see there is a work component to the CPT code, the work RVU or relative value unit, the practice expense, which is for the example of the echo, that echo machine costs tens of thousands of dollars and is part of the factor or the calculus for determining how much I should get reimbursed for that particular service. Whereas in the exam room, I don't have that kind of expensive equipment. And so that PE or practice expense will be less. Then there's the liability component. How likely are you going to be sued for providing that service? Doing a routine office visit, your opportunity or chances of being sued are very, very low. Doing an open heart procedure in an operating room, significantly higher. So that PLI or practice liability insurance component for a heart surgery would be significantly higher than that for an office visit. And then you have what we all finally call the GYPSI or the geographic practice cost index. The GYPSI is a realization that expenses in San Francisco, California are significantly higher than they are here in Fort Wayne, Indiana. And we need to recognize that. So those differences in costs based on where you are in the country are also factored in. I will note that is not a perfect science. I was in a densely populated urban area and the reimbursement on one side of main street was X, on the other side of main street, it was 80% of X because it was considered rural, whereas the North side of the street was considered urban. So we draw those lines somewhere and you have to, but they can often be far less than perfect and ideal. So those all go into what sets then our conversion factor, which for 2024 was $32 and 74 cents. That is the national rate. It's different by GYPSI or geography area. And note that it was higher in 2020. We have actually seen because of the Balanced Budget Act, which is federal legislation that was enacted more than a decade ago, that is still at play because Congress has failed to replace it even though they acknowledge it's broken. We're actually going backwards even though inflation is going up, which is a big part of everybody's conversation in the last couple of years. So it is a difficult, challenging financial time for physician practices because of that issue. So here you kind of see for a general middle of the road, 99213 office visit, the physician work. So the effort on behalf of the doctor, him or herself was assigned a 1.3 value that practice expense. So the things that went into it was 1.33. So that's your exam room, the medical assistant in a room, the patient, the nurse who may be on the phone, et cetera, et cetera. The paper for the exam table, that was 1.3. And then as I mentioned, malpractice, relatively low risk. So it's an only a 0.1. So you tally all that up, you take it and convert it with the 3274 conversion factor, that 99213 from Medicare would be reimbursed just under $90. Now for a commercial carrier for that same visit, you may get $150, depends on your market and your ability to negotiate rates. Larger groups tend to have more leverage than very small groups or individual physicians, but it all depends. So let's talk about payer contracting. The payers, you don't negotiate with Medicare. Medicare is federally managed and they tell you what they're gonna pay you. So your only negotiation with Medicare is whether I should participate or not. When you look at cardiology, where 60 plus percent of the patients are coming from Medicare, it's very difficult for cardiologists to say, no, thank you, I'm not going to participate. Maybe in some very select urban markets where you could provide concierge cardiology, that would be possible. But for most of the MedAxium membership, if not all, I'm not aware of any of our members who are not participating, they're going to be within Medicare. So now we're negotiating with either those employers or the commercial insurance. So these are just kind of what you need to know. You need to know who the major players are in your market. And if there are smaller players that could be used for leverage, how much leverage do you and your group have? If you are the dominant cardiology practice in a region, you may have more leverage than you are one of many in the market. And then part of what you are negotiating is, is this payer a friendly payer or are they a payment in the rear? If they are known for their very arduous prior authorization requirements, that they are a high denier, which is a tactic they often use just to slow down payment because that lets them keep their money longer. And then when you have a problem, is there anybody there at the other end of the line or not? All of those should factor into your negotiation and what rates you seek. You need to know what they pay and you are allowed to ask. That is a perfectly legitimate request. And most often we will compare it to Medicare. So we will look to say, what percent of Medicare are they? The nice thing about cardiology is you don't have to look at 10,000 CPT codes in order to get your fax. It's a much smaller number, but you do wanna know that. And I'm gonna talk about more specifics on the next slide. And then you have to look at the patient population for that particular insurance. Maybe for whatever reason, a commercial carrier has patients who don't pay their bills more than another. That would factor in to your conversations and your strategy for negotiation. And then on the right-hand side, this is critical. Same when you go and negotiate for a car, they always tell you never fall in love with the house or a car because once the person selling it knows you're in love, it's really hard for you to be objective in the analysis. And that translates into the ability to walk away. If it is the largest commercial carrier in a market, which is often the case, most of the United States has urban markets that are dominated by a single commercial payer, it's very difficult. For instance, in my market, Anthem Blue Cross is the largest. It is very hard for a physician group to say, no, thank you to Anthem. It has been done, but you would want to have your eyes wide open and know what you're getting into if you're gonna walk away. So be prepared. That was on that previous slide. Ask to see the fee schedule. And as I mentioned, it only takes 50 to maybe 75 codes to get you 90 plus percent of what you would ever bill in cardiology, so it's not that onerous of a analysis. And then know the impact. If we say no to this carrier, what can that do to us long-term? All right, switching gears now to the compliance side. Healthcare is heavily, heavily regulated. And so we have lots of compliance considerations. I'm gonna start this portion with a disclaimer. I am not an attorney. I don't even play one on TV. I don't wanna be one. You will want to go seek a legal opinion as the leader or administrator of a physician practice anytime you are in an area where you think compliance is or should be a concern. But when we're talking about a physician enterprise, there are three, the big three statutes that come into play, those being the Stark Law and a kickback statute, and then the False Claims Act. All three programs cover Medicare. So if you are in Medicare, and as I mentioned, nearly all of us are, these come into play. So the Stark Law, this is from a congressman from way back in the 90s, Pete Stark, who was convinced that physicians were padding their pockets by ordering expensive tests. So this goes back a long way, and it prohibits the payment for the value or the volume of referrals. To be very blunt, if I am a physician and I'm a cardiologist, I cannot go to a primary care physician and say, Jackie, if you send me all your echoes, I will pay you 50 bucks each. That would be a no-no under the Stark prohibition because I'm paying for the value of those referrals. It only covers designated health services. It started very broad. Congress negotiated back to only DHS or designated health services. In cardiology, those are mainly your laboratory services, so the pathology lab, and then your imaging, echo, nuclear spec, CT, NMR. The violations don't have to be intentional. I cannot claim ignorance of the law or that I didn't even see the connection between my value of referrals. So that's not a get-out-of-jail-free card. And then the penalties can get really steep really quickly. Think of how many claims a cardiology office sends out to Medicare in any given year. It's not just the ones that had a referral in violation. It can be claimed on all of them that they were falsely submitted. And at $15,000 per, it really can go up and up and up. So Stark law is not to be trifled with. You don't wanna get in violation of it. The only good news with Stark is that there is no jail time. This one is not adjudicated through the Justice Department. It is a different area of the government, so it does not include jail time, or it cannot include jail time. However, the anti-kickback statute, which almost always comes into play if there is a Stark violation, puts you right back in jeopardy of jail time. So in a nutshell, the anti-kickback statute is a no quid pro quo. If you do this for me, I'll do that for you. So it may not even have anything to do with money, but maybe it is, if you refer to me, I'll give you free office space. That would be a quid pro quo or a kickback, and those are banned under the anti-kickback statute. And this one, unlike Stark, you can only be prosecuted if you knowingly did it, and they're able to prove that you did it and set this up intentionally. So I mentioned as an example, free office space, that would be a no-no, or free use of a nuclear camera, free use of an echo camera, call coverage. I will cover your weekends when you're on vacation, and I won't charge you for that, those types of things. This too can get ugly. In addition to the jail time jeopardy, you can also receive significant, significant financial penalties. Then there's the False Claims Act. It's kind of the kitchen sink. It covers everything. It's knowingly submitting false claims. These can have what are called key tam or whistleblowers. So disgruntled employees or a competitor who's saying, the reason I'm losing is because of illegal activity, that type of stuff. And it also could include things like upcoding. So we talked about those office visits. If I'm routinely saying my patients are so sick, they need level five office visits, but the notes don't support that, that could be a False Claims Act violation, or double billing, or split billing, where Medicare says, hey, these three things should be all billed once and under one global fee, but we seem to be getting from you broken out, so you get paid more, that would be a False Claim. And as you see on the penalties, these triple. So for every claim, if it was $50, the jeopardy in terms of your payback is 150, and you can go to jail. So as I mentioned earlier, I'm not a lawyer, but you certainly would want to engage one to make sure you are staying clear of any of these violations. And where that would come into play is in your physician compensation model, the three, in contracts with hospitals, or other physician groups, or other areas where there would be a referral, or a transfer of value perspective. And then here's another one, fair market. If everybody else in the world, or in the country, is paying $50 per click for some particular service, and I'm paying 150, maybe that's above fair market, and maybe there's a violating reason that it would be that high. So not only do we want to make sure that the relationships pass legal muster from an architectural perspective, we also have to make sure that the amounts are right. So I used an earlier, very extreme example of no rent, but let's say I am a cardiologist running from a primary care physician who owns a building, and rates in that community tend to be around $25 a square foot, and this physician is charging me $100 a square foot. Well, there better be a really good reason why that rate is, quote, fair in that market in order not to be a violation of these compliance problems. Let's say I have an arrangement with the hospital to cover some service, and I am paid on a work RBU basis. That MedAxium published compensation survey, cardiology payment from hospitals is around 60, $65 a work RBU. If we're at $105 an RBU, we probably want to look really, really closely at that to make sure we feel comfortable defending that if somebody said that's way above market, there's foul play here. What is fair and reasonable? Well, the way the Stark Law describes it, it must be a sensible, prudent business agreement from the perspective of the parties involved, and even in the absence of referrals. So yes, this makes perfect sense because there's a transfer of patients through referral. You can't do it that way. It has to be, yes, this makes sense even if you didn't have those referrals. So renting equipment is a big one. I have an echo machine. I want to rent it to another physician. We would want to make sure that our rates and the arrangement makes sense to prudent people, even if I were not sending patients to that physician who is using the echo machine for interpretations. And with that, I will close out and say thank you for your participation. And if you have any questions, you can email them to academyatmedaxiom.com.

financial statements

balance sheet

profit and loss

cash flow

Stark Law

payer contracting

coding accuracy

healthcare finance