How Management Accountants Make Physicians' Practices More Profitable; the Key to Profitability Is to Use Cost Analysis by Determining a Practice's Cost Structure and Using Those Costs to Evaluate Contracts, Allocate Bonuses Equitably, and Make Strategic Decisions about the Financial Future of the Practice Group

By Scheidt, Marsha; Thibadoux, Greg | Management Accounting Quarterly, Spring 2005 | Go to article overview

How Management Accountants Make Physicians' Practices More Profitable; the Key to Profitability Is to Use Cost Analysis by Determining a Practice's Cost Structure and Using Those Costs to Evaluate Contracts, Allocate Bonuses Equitably, and Make Strategic Decisions about the Financial Future of the Practice Group


Scheidt, Marsha, Thibadoux, Greg, Management Accounting Quarterly


This year the healthcare industry is expected to account for 15.6% of GDP, and expenditures for physician services are expected to be $347.9 billion. A large part of that goes to physician practices, and, because they are such a large part of the economy, they represent an opportunity for management accountants to assist physicians in evaluating contracts with third-party payers and providing financial information for strategic decisions. To do so, management accountants need to understand the unique revenue, cost, and contractual intricacies of physician practices.

While most businesses' sources of revenue are sales and fees, physician practices depend on the organizational structure of the healthcare revenue reimbursement relationships among provider, patient, and third-party insurer. Revenue reimbursements can come from indemnity, preferred provider organizations (PPOs), and/or healthcare maintenance organizations (HMOs). In particular, to advise a physician or evaluate profits, a management accountant must understand the relationships between a practice's revenues and its costs. Because these revenue reimbursements are contractually determined, controlling costs is critical to the survival of a physician's practice. A management accountant can help a physician calculate costs, select the appropriate cost structure to manage costs, and help make tough strategic decisions about the financial future of the practice. Once a management accountant understands the source of revenues and the cost constraints, he or she can then help a physician evaluate a revenue reimbursement contract. For example, if the contract is from an indemnity plan or a PPO, evaluation is relatively straightforward if the management accountant understands a practice's organizational structures and cost control. But if the revenue comes from an HMO capitation contract--that is, a fixed rate of payment to cover a specified set of health services and procedures--evaluating the contract requires additional analysis because revenues are based on anticipated services.

PHYSICIAN GROUP REVENUES

In order to consult with a physician group, a management accountant must have a good understanding of the sources of practice revenues. As noted previously, there are three types of organizational structures for healthcare: indemnity, PPOs, and HMOs. Each organizational structure utilizes distinct methods of revenue reimbursement: Indemnity uses fee for service, PPOs use discounted fee for service, and HMOs use salaries, capitation, and other financial controls.

Indemnity Plans

Under an indemnity plan, physicians historically have been reimbursed primarily through third-party payers such as insurance companies. The actual payers--consumers and businesses--have insurance companies handle reimbursement for two reasons. First, the insurance company is able to handle the overwhelming administration of the plan more efficiently, and, second, it can spread the financial risk over a large pool of individuals. These plans are called indemnity because they reimburse physicians after services are rendered, and the reimbursement method is known as fee for service. Payment is production based: the more services provided, the greater the revenues to the physician. Because the payer is responsible for the cost of the services, the payer assumes the financial risk. Notice that under an indemnity plan there are no ties between the payer (insurance company) and the provider (physician).

But spiraling physician costs led payers to institute managed care plans that, for the first time, linked physicians who provided medical services with the parties who paid for those services. Under managed healthcare, third-party payers, including insurance companies and the federal government in some of its Medicare and Medicaid programs, would control the flow of monies by third-party payers to providers. It also dictated the number of services that could be provided to the patient, who could provide those services, and how much physicians and hospitals would be paid for those services. …

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