May 2010

Economic downturn has upside for your practice

By Jason Kraus

Call it rose colored glasses, or simply being the eternal optimist. Whatever you call it, historical evidence suggests that certain companies can trace their phenomenal business successes to decisions made during severe recessions.

This is not surprising when you consider that business success is often a function of how well a company can distinguish itself from its competitors. The most common response to an economic slowdown (or, in the current case, meltdown) is to run for cover. This usually involves reductions in spending, hiring, marketing, innovating and risk taking of any type. While the herd is running for the hills, this may be the best time for your practice to make large competitive gains by heading in the opposite direction.

Frequently, survival is not really at risk. Most businesses overreact to changing economic climates. Ironically, this overreaction may actually increase risk to a business, if cost cutting and other measures begin to diminish the quality of the goods or services provided. The skill of determining the proper response to a slow period is well worth developing, and practitioners who act boldly may reap the rewards of their prescience for years to come.

To have a multitude of tactical options available, practices need to be operating in a financially sound fashion before financial challenges arise. If your practice is living on the fiscal edge, even the slightest economic tremor might cause considerable aftershocks. Cash flow management, cost controls, inventory management and revenue projections all need to be thoughtfully aligned to avoid major consequences in response to a relatively minor change in the business climate. Each of these business areas should be detailed into departmental processes and be represented as components of an overall budget. It is usually advisable to apply this management approach to your personal and family finances as well, especially in the case of solo or very small group settings where the practitioner’s income is derived from “what is left over” after expenses. If you are personally living from check to check, a slight decrease in practice revenue may create a financial burden that will eliminate most of your business options. This, in turn, may cause you to reduce costs in an ill-advised fashion. Some general measures of financial soundness would include: up to date accounts receivable (no more than 15% of the total outstanding balance should be more than 90 days old), payroll expenses that are less than 25% of your total collections, and a bank balance that will cover at least three months of practice expenses.

Maximizing your time

Assuming that your practice is being relatively well managed and that you have the profit margins and financial discipline to withstand the periodic ebb and flow of revenues, you should consider reviewing practice strategies and attendant tactics when faced with a prolonged downturn in the economy. This starts with taking advantage of one of the unintended benefits of a slowdown: When patient volume drops, it affords practice managers the opportunity to work on your business rather than simply working in it.

Start by evaluating the efficiency and effectiveness of all business functions within the practice. It is essential to remain objective in your assessment. Most business processes can be measured and compared to established benchmarks or an internal budget. For example, your Accounts Receivables management can be tracked against A/R aging benchmarks, collections ratios, clean claim ratios, denial appeals, etc. If you or your staff is not performing up to the benchmark or other standard, a thorough assessment should be conducted to reveal the areas of deficiency. The culprit is usually a flawed process, a deficient staff, or a combination of both. These practice weaknesses can more easily be addressed during a slow period than a more hectic time. Take advantage of staff cross-training opportunities and process testing during this time.

You can apply this type of thoughtful analysis to all areas of the practice. If you can improve departmental performance as a result, you may be able to buffer some of the deleterious effects of a slowdown. At minimum, you will reap greater financial rewards once the pace of your practice regains its lost momentum.

Cost cutting measures should be considered in cases where expenses are not yielding meaningful and measurable benefits. Consider the following cost centers or revenue streams:

1. Non-clinical staffing. Review the number, functions, and costs associated with all non-clinical personnel. Consider wage freezes, mandatory furloughs, and shorter work weeks if the revenue shortfall is significant in degree or duration. When a practice is not growing, the percentage of payroll expense should not be more than 20% to 25% of total revenue. However, it is important not to cut in areas that will diminish effectiveness of billing and collections, provider productivity, or customer service.

2. Clinical pathways and utilization. Determine whether the treatment protocols for the practice are up to date and comprehensive. If there is room for improvement, you may be able to offset some of the revenue decline by providing more wide reaching patient services.

3. Middle management. Some larger organizations create middle management positions in anticipation of sustained growth. People are hired based upon an anticipated need rather than an actual one. A needs-based review often reveals that you can do more with less if the rest of the team is skilled and motivated.

4. Satellite locations. Many practitioners employ satellite strategies based upon the presumption of growth. If the downturn is severe, consider delaying or downsizing these deployments.

5. Older contracts. These include commercial insurance, buy-sell agreements, and commercial leases. Some of these contracts may be based on higher practice valuations than are currently accurate. Landlords may also be more receptive to lease re-negotiations in a tough real estate environment.

Yes, invest

The success stories that emerge from deep recessions combine strategic investing with business process improvements. After a thorough review of unproductive cost centers and improved business operations, the final and scariest part of your plan is to invest time and/or money in business development activities. Investing any of your financial resources in “non-essential” categories may seem counterintuitive to most practitioners. However, marketing should never be considered non-essential. Minimally, the percentage of practice revenues that were allocated to marketing prior to the slowdown should be maintained.

There is considerable evidence to suggest that increasing spending during recessions improves long term return on investment (ROI). In 2002, McKinsey & Co. (New York City) published a study based on data collected from approximately 1000 firms between 1982 and 1999, including the recession period of 1990-1991. The study identified some key differences between the strategies of the best and worst performers, with the measure of performance being changes in the company’s market-to-book ratios. Interestingly, one of the most significant differences between winners and losers involved their spending on marketing and advertising during the recession period. Far from tightening their belts when the economy went south, the best performers increased their spending in these areas, not just relative to their competitors, but also compared to their own spending in better times.

Just three years ago, a survey of more than 150 senior marketing executives published in the International Journal of Research in Marketing mirrored findings of the McKinsey & Co. report. The authors developed and tested a model examining the outcomes for companies who pursued active marketing strategies during times of recession. Again, those companies that increased marketing and advertising in the contraction phases of the business cycle performed better than those that stuck to the traditional line of cuts that often take place during a recession.

There are probably a number of reasons why these results are consistently found. It has become increasingly more difficult and expensive to get a message across to the intended target audiences. During recessionary times, as companies reflexively pull back, there is less messaging and market noise to get through. The likelihood of patients and referral sources receiving your thoughtful communication is increased. During times when many businesses are failing, recipients of advertising and marketing messages are more responsive to them. People appreciate the reassurance that things are OK at your business during tumultuous periods. Finally, you may be able to negotiate a lower cost to conduct your advertising and marketing activities, as publications, directories and other sources are likely to be more receptive to discounts and other advantages.

While your competitors are hunkering down trying to weather the storm, you may want to consider looking for new markets in which to expand. New revenue streams have the added benefit of offsetting some of the losses from your existing referral sources, which may be slowing down. Since such a high percentage of a typical medical practice is driven by patient referrals, this takes on even greater importance.  In slower times, employees who otherwise may be idle can be redeployed to identify and pursue additional, and maybe non-traditional, referral opportunities. These can include athletic clubs, schools, massage therapists, nutritionists, community organizations, and other professionals or groups who have contact with people who might benefit from your services.

Although staff cuts may be unavoidable, extra care should be taken to reassure the value and importance of all staff as your practice navigates an extended economic downturn. During these times, fear and worry rob your team of energy and focus. Relieving them of these concerns and making them feel safe and appreciated will yield higher levels of performance while times are tough and will help to strengthen long term loyalty to your organization when the business climate improves. Thank them regularly for their contributions and find small but meaningful, non-financial ways to reward outstanding efforts. This may include things like additional vacation days taken during slow periods, movie passes, or recognition plaques.

Finally, never diminish or forget the core values of your organization. If you have been able to build the practice on quality or service reliability, make certain that you do not make any changes that will negatively impact those core values. In fact, reinforcing them in both your customer messaging and employee communications is recommended. In stressful times, more communication is what is called for; with your customers, your employees, and your partners.

Although nobody looks forward to going through a difficult period, it doesn’t need to spell disaster. In any business, challenging times help to separate the winners from the losers. Strong leadership and good planning will go a long way to lessen the burden and reinforce relationships without compromising quality of patient care.

Jason Kraus is executive vice president of Langer Biomechanics and former partner in the practice consulting firm SOS Healthcare Management Solutions.

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