CHICAGO—Do you know your practice’s financial numbers? The financial stats may not be top of mind as you see patients, but they can make a big difference in your practice’s financial viability.
That’s what Adrienne Hollander, MD, of Arthritis, Rheumatic, and Bone Disease Associates, Voorhees, N.J., shared during the ACR Convergence 2025 session Practice Pulse: Tracking the Financial Health of Your Clinic.
Dr. Hollander’s practice in the Philadelphia area has 16 physicians and two advanced practice providers (APPs). When she joined the practice 21 years ago, the practice would get financial statements once a year. “No one knew what to do with them,” she said. “We didn’t know if we’d have enough money each month to make payroll.” Unknown factors over the financials would keep her awake at night.
As she got closer to becoming a partner, Dr. Hollander’s anxiety over the practice’s financial health grew significantly.
Physician-owners nowadays can take a deeper look at their practice finances with the help of electronic medical records and specialized software—and they should make a point to look at those numbers.
“If we think about the financial statements, it’s like taking the vital signs of your practice. Vital signs may not be enough with a patient, and you need to look at labs and X-rays. You often need to look deeper into other data to see what’s really going on,” said Dr. Hollander, referring both to patients and practice financials.
Financial Statements
One type of financial statement that physician-owners/partners should review monthly is the profit and loss sheet. This measures revenue, expenses and profit. This will often fluctuate from month to month. Your revenue, minus your expenses, is the net income, which you can put back into the practice if you choose to do so.
The second financial statement to review is the balance sheet, which focuses on the liquidity of the practice. This takes a closer look at what your practice owes but also what it owns—basically, assets vs. liabilities.
Cash vs. Accrual Accounting
As you dig a little deeper into the practice’s finances, you may use two approaches to accounting: cash basis or accrual basis. “Most small practices do cash-basis accounting. As we get bigger, we use accrual-basis accounting,” Dr. Hollander said.
With cash-basis accounting, you recognize revenue when you get it, not when a physician or APP provides the service. Expenses are recorded when they leave the practice bank account. Cash-basis accounting is useful to identify your cash flow, but it does not give the full picture of your practice’s financial position, Dr. Hollander said. It also can give a distorted impression of your practice’s health. For example, you may have had a very busy October but it doesn’t look like it because the government shutdown delayed Medicare payments.
With accrual-basis accounting, revenue is recorded when you provide the service even if the practice is not yet paid for it, and expenses are recorded in the same manner.
“A profitable practice on a cash basis isn’t necessarily profitable on an accrual basis, and vice versa,” Dr. Hollander explained.
The amount of drug inventory you have on hand also can affect your profitability. “If you have a very large inventory in your fridge, that’s money not coming into the practice. When we started, we ordered inventory once every two weeks. Now, we order two days prior so we don’t have too much inventory on hand,” Dr. Hollander said.
Looking at Metrics
Once you’re clear on balance sheets and types of accounting, you can dig deeper with certain metrics. One metric that Dr. Hollander recommended tracking is operating expense ratio, or how much of every dollar is spent running the practice. This is calculated by looking at the operating expense net of drugs and excluding the owner’s draw, divided by collections. The goal is to get that ratio below 60%.
Another metric to consider is days cash on hand, an important consideration in case something terrible happens, like a pandemic or government shutdown. Knowing your days cash on hand can ensure funds are still on hand to pay staff. Calculating this involves looking at cash on hand divided by daily operating expense. “Traditionally, you would like to have two to three months on hand,” she said.
Current ratio is a metric to make sure that what you owe is not more than what you own. It’s taken by looking at current assets and accounts receivable and dividing that by the liabilities, accounts payable and upcoming payroll. Typically, you want this number to be above one.
Making Changes
As you analyze numbers, you will likely find areas that need improvement to help the practice run better financially. Dr. Hollander recommended using a process called DMAIC, which is part of the Six Sigma process. It involves:
- Defining a problem.
- Measuring the current process.
- Analyzing the problem to find a root cause.
- Improving the problem with solutions.
- Controlling to make sure that improvements are maintained.
This is no different from the process that you might use with patients, Dr. Hollander said. She gave the example of identifying (Defining) a patient who has high blood pressure. You find out the patient’s blood pressure is 160/100 (Measuring). You analyze the potential cause, such as a poor diet or a medication that contributes to higher blood pressure (Analyzing). You work with the patient to find a solution (Improving), such as changing their diet. You then check in occasionally (Controlling) to make sure their blood pressure remains lower.
Dr. Hollander’s practice used the DMAIC process to analyze a low appointment fill rate, which was at 80% in 2022. Their goal was to get it to 90%. Practice leaders discussed possible reasons for the low fill rate, including improving the workflow for schedulers or having a provider who is new and may not have a large patient base.
One physician said that a high no-show rate may be the issue—at 9%, that was indeed part of the problem. They changed the no-show policy and improved appointment confirmations, which slightly helped the fill rate.
On further analysis, practice leaders saw that a number of patients would cancel two days ahead of time, and schedulers had trouble getting people from the waitlist to take appointments. At that point, they began to call people already on the schedule for a couple of weeks later to see if they wanted to come in earlier. This also improved the fill rate.
One other move that helped was realizing that many patients would call on Friday to cancel Monday appointments. Practice leaders hired a virtual assistant to call on Sunday to fill some of those Monday slots.
“Now, our fill rate is 92%. With 18 providers, that’s a huge difference,” she said. The process of reaching these improvements takes time, however, she added.
Other dig-deeper metrics that practices can examine include Work Relative Value Unit (wRVU) production, claim denial rates (aim for less than 5%), accounts receivable aging (target less than 15% that are more than 90 days) and drug margins (which should be greater than zero).
Vanessa Caceres is a medical writer in Bradenton, Fla.