Tactics for tight times: How to keep your practice afloat

When a physician practice's cash flow slows, there are many strategies for coping until the stream begins running again.

By — Posted May 16, 2011

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In 2008, the cash flow of the medical practice of Daniel Lensink, MD, an ophthalmic plastic surgeon in Redding, Calif., slowed to a trickle. A large insurer significantly cut reimbursement rates for covered reconstructive procedures. The recession meant that fewer patients were having noncovered cosmetic procedures. He had plenty of Medicare patients to fill up his schedule, but as expenses went up, Medicare pay rates stayed flat.

"When I entered medicine, there was a promise that if I took care of everybody who came my way, I could make a living," said Dr. Lensink, who has a solo practice with three full-time employees. "I didn't realize I could be busy and go broke at the same time."

His practice has returned to financial health, but, like many others, seasonal variations, economic fluctuations, regulatory changes, issues with private payers, severe weather and office burglaries all can create a cash crunch. There are several ways a practice can ride out these storms and survive, although effective solutions vary. Choosing the wrong option can worsen the situation.

"Physicians should think of themselves as small-business owners, or they are going to go under," said Claudia Gruss, MD, a gastroenterologist and a partner at Arbor Medical Group, which has three offices in southwestern Connecticut.

Dr. Lensink got through the rough patch by tapping into a long-established but previously unused home equity line of credit.

"I had the home line of credit for a rainy day, and I was afraid to ask [for a business loan] when the banks were in such turmoil. I just didn't think they would lend money to a business in the red, and I had that home-equity line of credit sitting there," he said.

Experts recommend that practices hold three to six months of cash in reserve to cover any shortfalls. This is common advice for nearly any business or individual managing personal finances, but many physicians say money is so tight that this may be unfeasible.

"My practice has a lot of expenses, and it's not possible at this point," said Warren Brandle, MD, a family physician in solo practice in Gold River, Calif. His practice has an unsecured line of credit that has been tapped into three times in 13 years to help pay taxes.

Borrowing from yourself

Unable to build or maintain a practice reserve, many physicians access other options. The most common step is to tap into personal reserves or defer salary. For instance, Dr. Lensink didn't pay himself in 2009, although he did cover the payroll for his staffers. Dr. Gruss frequently defers her compensation in the first few months of the year, when cash is tight.

"Payroll comes No. 1," Dr. Gruss said. "We have to make payroll, and we have to pay the bills."

Deferring salary is really a form of lending to the practice, but linking personal and professional funds in this way is risky. Most practices are in some type of corporate structure to protect personal assets, but the protection can be lost if personal and professional funds are merged.

"Once the money is put into the practice entity, it becomes available for creditors," said Bob Berg, an attorney with EpsteinBeckerGreen in Atlanta who works with medical practices. "If a physician commingles their personal stuff with their business stuff and they stop following corporate procedures, that raises a whole different risk. It's called piercing the corporate veil. Some could allege that a physician did not follow corporate formalities, and this could put the physician's personal assets at risk."

Aside from dipping into personal funds, there are other resources for short-term borrowing.

The credit crunch has loosened somewhat, and physicians are attractive to banks and other sources of credit. Medical practices can contact a bank for a secured or unsecured line of credit, preferably before problems occur.

"It's worth talking to a bank now," said Manoj Pawar, MD, vice president of clinical operations and physician leadership development at Catholic Health Initiatives in Englewood, Colo. "When there is a problem with cash flow, they are not going to be as open to talk to you."

Experts recommend that practices have access to a credit line that can cover at least three to six months of operating expenses. "You want to have access to six and hope you only have to use three," said Michael Fleischman, a principal at GatesMoore, a health care consulting and accounting firm in Atlanta.

Secured lines tend to have lower interest rates and usually are connected either to a medical practice's assets or accounts receivables.

If a practice owns a medical office building, this is not usually a source of additional lending. Most medical practices that own their offices hold them in a separate corporation, and borrowing against the building and then having the corporation lend to the practice could get incredibly complicated.

Other solutions

Borrowing, however, may not be the only answer. If short-term cash-flow problems commonly occur in the beginning of the year, a practice can leave some money in the practice from the final months of the previous year to pay for next year's bills. Doing this depends on the practice's corporate structure.

"Where doctors get in trouble is when they are taking out every cent on a monthly basis," said David Wold, CEO of Health Information Services in Park Ridge, Ill. "It creates a lot of stress for the practice."

Experts recommend that practices conduct an audit to determine where cash is going out and whether it is coming in appropriately. Audits can address cash shortfalls when they occur but also may be a way of preventing those shortfalls.

"The first goal is really to make sure [the shortfall] doesn't happen," said Marc Lion, president of the National CPA Health Care Advisors Assn.

"And if it does happen, take a look at your billing, collection and denial-management procedures."

This can be carried out within the practice or by an outside consultant or accountant. "It all depends on the skill set of the folks that are there to be able to tell you about the shape of your practice," said Kevin Weinstein, vice president of marketing at ZirMed, a revenue cycle management company in Louisville, Ky.

If an outside entity is brought in, the price of an audit or revenue analysis would vary widely. It can be as much as a few thousand dollars per physician, although experts said the payback can be significant.

People who conduct audits say expenses are rarely the root of the problem. The way money comes in is usually the issue. "We always try to look at ways to work with practices to lower expenses, but the more common problem is billing," Fleischman said.

For instance, if a practice is having problems with cash flow at the beginning of the year, is it possible to collect more at the time of service? When a patient has met a deductible, can insurance claims be submitted more quickly? Are they usually submitted correctly?

"Revenue cycle management is so critical, especially when the co-pay and the deductible are 20% to 30% of the total," Dr. Pawar said.

Looking at all concerns

Audits also may identify other issues. Office staff might not be following up on denied claims. Claims may not be coded properly.

Is the front desk verifying insurance and collecting appropriate co-pays? The problem could rest with payers. Are they paying the practice the contracted rate? Are some services being bundled inappropriately? Is reimbursement being made to the practice in a timely fashion? Comparing the practice to benchmark data from the Medical Group Management Assn. and other organizations may be a way of detecting problems.

"You want to understand what you are actually collecting and what you are not collecting," Weinstein said.

For example, a few years ago, Eric Ramos, MD, a solo family physician in Modesto, Calif., was outsourcing his medical billing and noticed that his accounts receivables were growing but that his balance sheet was not. So he brought the billing back in-house to keep it under tighter control.

"If you don't manage billing, if you don't oversee things in your practice, you are going to go bankrupt," Dr. Ramos said. "It's very difficult for a physician to be a practitioner and a business person at the same time, but you have to make sure that the business end is working well, is productive and is well-managed."

He has borrowed money from his family to keep his practice going, but these loans have been repaid.

Such an analysis may reveal staffing problems that explain why various billing procedures are not being completed. Having too many people run the practice can get expensive. Having too few means that some tasks that bring money into the practice, such as submitting clean claims and following up on denials, are not getting done.

"Sometimes you need to spend more money to bring money in," Fleischman said.

As for Dr. Lensink, he is slowly paying off the home-equity line of credit that helped his practice survive. He opened a second office in Oregon, where insurance pay rates tend to be higher than his home state of California. He is now able to cover his salary, and his practice is back in the black.

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Cash flow solutions

When a medical practice hits a financial rough patch, several steps can be taken to get the business through. Here are the pluses and minuses of various options:

Option: Using a physician's personal funds.
Advantages: No interest charges and no application process.
Disadvantages: Physicians' personal funds are at risk.

Option: Accessing a line of credit secured by the practice's assets.
Advantages: Banks are usually willing to lend to physician practices.
Disadvantages: Interest charges can get expensive.

Option: Accessing a line of credit secured by a physician's personal assets.
Advantages: Loan may be easier to get than a business loan, and the interest rate may be lower than for other forms or credit.
Disadvantages: A physician puts personal assets at risk.

Option: Accessing unsecured credit.
Advantages: Assets of a practice or a physician are not at risk.
Disadvantages: Interest rates tend to be higher, and this type of debt may be more difficult to access.

Option: Deferring physician compensation.
Advantages: No application process or interest charges.
Disadvantages: May create financial problems for the physician.

Option: Leaving some money in a practice from one year to the next.
Advantages: Cash flow will be more even.
Disadvantages: May have tax implications, depending on the corporate structure.

Option: Maintaining a three- to six-month cash cushion.
Advantages: No application process or interest charges.
Disadvantages: May be hard to build and keep up.

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