Certain functions obviously require expertise beyond the capabilities of the ophthalmologist and the practice staff, such as accounting, legal, and equipment maintenance services. But what about other services, such as personnel, special testing, billing, transcription, etc.? How do you know when it is a good business decision to outsource these services?
Three Major Reasons to Outsource
Performance, cost, and quality of life are the criteria to consider in evaluating an outsourcing decision.
The choice to outsource is not always a clear-cut decision. There is usually interplay among the three factors of performance, cost, and quality of life. For example, if you outsource billing and the cost is slightly higher than the cost of doing it internally, but the performance is significantly higher, outsourcing becomes an easy choice. Similarly, if a practice is achieving optimal collection performance at a cost near the outsourced cost, but staff time could be more economically used elsewhere, then outsourcing may make sense.
Analyzing each business process will help you determine what to keep as part of your internal operations and what to outsource.
Who does it best?
Is the best performer also providing the most value for the service?
Does the service need to be performed by the very best provider?
What services do you specifically need?
How do you measure good performance?
If there are processes that you cannot perform adequately, no matter what resources you apply, or processes that will clearly be performed at a higher level if outsourced, the decision is relatively simple‹simple, that is, if increased performance will make a difference in your practice.
What’s the market rate for these services?
How do you measure value for your dollar?
If your costs are higher (or lower) than others, are the services you are paying for the same?
Regardless of the costs‹can you afford (or not afford) to pay the fees being charged?
If outsourcing will significantly lower the cost of performing the process (without impairing performance), then outsourcing makes sense. Some of these services might include more sophisticated computer systems and technical staff, as well as systems or staff to manage your computer, tax preparation, and financial performance.
Quality of Life
What risk is there in doing without the services?
What impact will doing without them have on you or your staff?
Although some services are more cost effective when performed in the practice, the time taken by the physician and manager to either perform or manage them has a negative impact on the staff’s primary mission, and a potential erosion of well-being occurs. Similarly, certain tasks, competently performed by an outside contractor, will usually improve the morale of practice staff (such as office cleaning). Conversely, a regularly repeated task, done internally and not done well, can lower morale (such as staff payroll and taxes).
What Services Are Outsourced?
The services most commonly outsourced are legal, accounting, billing and receivables management, bookkeeping, payroll, laundry, eyeglass lens production, office cleaning, staff (leasing), and clinical laboratory.
Other services that are not common to all practices but that are often outsourced include various management services, such as consulting for a specific ongoing project management.
The example below demonstrates how performance, cost, and quality of life can be used to make these decisions.
Legal and Accounting
The major decision to make based on performance is not whether to outsource legal and accounting but which outsourcing vendor to use. It is important to choose a firm that specializes in (or at least has a large number of clients in) businesses similar to yours‹medical practices and, specifically, ophthalmology practices.
With legal and accounting services, most practices feel that outsourcing is the only choice. As an administrator or office manager, you need to determine (along with the physician owners of the practice) if you are getting the services you require, and only the services you require, and if the charges for those services are appropriate. A good monitoring system is required to manage the volume and cost of the legal and accounting services received.
For example, demand itemized bills from your attorneys, listing the time spent and the legal matter concerned. Review these listings and determine if you could shorten the attorneys’ future time by providing more information or preliminary work from the physician and staff.
Another cost-saving measure is to employ a law firm geared to providing efficient and effective services, limiting attention to matters that really require expertise and spending no more time than necessary on those matters. Our experience, by the way, is that most law firms specializing in the representation of physicians meet these criteria. Be wary of “healthcare” attorneys whose major clients are hospitals, insurers, or healthcare businesses.
Quality of Life
The consequences of inadequate or incorrect legal or accounting advice are significant. Timely, accurate, and useful advice will allow the practice a sense of well-being that usually transcends associated costs.
Bookkeeping responsibilities depend on a staff member with the training, resources, and time to perform this task. Do you have such a person? How much does it cost you for this person?
A decrease in the level of performance most commonly shows up not in bookkeeping per se but in other business processes that cannot be adequately performed because of the bookkeeping responsibilities. A common pitfall is to focus on a mechanical task like bookkeeping and to postpone more difficult tasks within the practice.
Most communities have a plentiful supply of freelance bookkeepers who will work in the practice on a part-time basis, usually at a fixed price per month. The cost is generally comparable to or lower than your staff costs for doing the task internally. We occasionally see a physician doing the practice’s bookkeeping. From a straight business perspective, a physician’s time is clearly more costly than a bookkeeper’s (see “Quality of Life,” below).
Quality of Life
Because measuring quality of life is subjective and because there is no business formula to use, this component of the valuation process can be the most difficult to perform. Be careful to avoid (or attempt to avoid) personal prejudices and agendas! Having cautioned against that, we’ll offer the prejudice that even if there is an excellent bookkeeper in the office, it is highly likely that that task could best be done outside the office in order to allow your staff person to accomplish other‹usually more income-generating‹chores (collections, follow-up insurance tracers, returned mail, etc.)
Closely related to bookkeeping, this task has its own nuances and opportunities for problems along with many regulatory, tax, and record-keeping issues.
There has been a proliferation of payroll service companies, and their more extensive automation and greater experience make it difficult for a practice to equal delivery of this service from an outside vendor.
Because of the competitiveness in the market, the cost of outsourcing these services is low enough that, when combined with the usually higher level of performance, the decision to outsource is generally easy to make.
Quality of Life
This is a task that should be outsourced (in most cases) to relieve the manager and the physician of the concern that it is being properly performed.
Billing and Receivables Management
This is the operation at the center of the practice’s financial performance and is one of the most anguished-over outsourcing decisions.
As we’ve discussed in earlier issues of this newsletter, a major problem with most practice billing operations is that their performance is not objectively measured. To assess whether an outsourced billing operation can improve performance, you must start with a collection target and measure your current performance against that target. Your prospective billing vendor should be willing and able to have its performance similarly measured.
Another aspect of performance is proper checks and balances in the billing process. Charge entry and payment posting should be performed by two different staff members. This is a basic rule of embezzlement protection.
In a solo practice, there is generally an insufficient number of staff to allow separate performance of these functions, even if part-time employees or employees with split responsibilities are used. Consequently, the billing process cannot meet commonly accepted standards of performance in the area of embezzlement prevention unless inordinately high costs are incurred for extra staff.
Yet another aspect of performance includes expert systems and staff expertise. The billing company may have computer capabilities beyond those afforded by the typical practice computer system and staff. Data analysis and interpretation may be provided as a part of the standard billing package, offering aspects of performance not achievable by the practice on its own.
The following example is of a solo general ophthalmologist with $600,000 annual medical/surgical income. For the purpose of this analysis we will exclude optical dispensing and refractive surgery income. Keep in mind that if you have an Ivy computer system or any other system that needs to be replaced, costs must include new software.
|System Cost Amortized||$5,000||$0|
|Billing Fee (7% of $600,000)||$0||$42,000|
This analysis assumes that the collection performance of the outsourcing vendor and the practice’s internal business office are equal. If the practice is having any difficulty achieving its targeted collections, the decision to outsource should offer an expectation of improved performance.
Another aspect of the cost comparison is in the area of staffing. The $35,000 staff cost in the example above reflects salary and benefits for one full-time biller and a portion of the employee cost for adding a second staff member to assure an embezzlement-proof process. The cost impact to the practice of any staff turnover in the business office will be significant. The training of a new staffer in the computer system and in the business processes of the practice will take time‹time for which the practice will pay. This is also an area that impacts performance.
Quality of Life
Outsourcing billing can afford the practice administrator time to effectively manage practice operations. For both the administrator and the physicians, outsourcing can offer the peace of mind of knowing that the billing is being done right and that appropriate financial performance is being achieved. Finally, it will allow the physicians to devote more time to practicing ophthalmology.
The key steps in evaluating outsourcing decisions include the following:
Keep it simple at the beginning. Eliminate risk by selecting projects that will not undermine the practice if the outsourcing decision or if the vendor selected proves to be a mistake. We suggest that payroll, transcription, and equipment maintenance are good beginning outsource projects.
Make sure you do thorough research on the vendor.
Who are their clients?
How long have they been in business?
Visit their facilities‹do they appear to have adequate and competent staff and systems?
What are their employment policies?
What is their turnover rate?
Are they properly licensed?
Do they have appropriate E&O (errors and omissions) insurance?
Will they give you references?
Get measurable performance promises, including a straightforward, clear, and understandable contract with acceptable term and termination clauses. Use your legal support to review the agreement.
Verify that you are not getting more than you need‹in other words, do research on yourself before you make decisions!
Consider punitive and reward aspects if the vendor fails or exceeds your expectations.
Have all your agreements reviewed by your legal or financial advisor.
Always make sure you have an exit clause.
Below is a table of outsourced functions showing the relative importance of the three factors: performance, cost, and quality of life.
|Service||Performance||Cost||Quality of Life|
Use this table, adding your own criteria to these, as well as any other practice operations you find appropriate for outsourcing.
Ron Rosenberg, PA, MPH, Author, Practice Management Resource Group
Irene Chriss, Editor Director, AAO Practice Management Dept.