A financial primer: hospitalist leader says programs can be economically viable - The Hospitalist Movement

Physician Executive, Nov-Dec, 2002 by Adam Singer

IN THE ARTICLE...

Take a look at the numbers to see how a hospitalist program could support itself.

THE ECONOMIC VIABILITY of hospitalist medicine is the source of much debate, even among those practicing in the profession.

Prominent leaders of the movement have suggested that hospitalist medicine is not economically viable without external financial support. I believe this mindset reflects a far too myopic view of the situation and dangerously stifles broader thinking concerning the industry's vast potential.

Hospitalists are no different from any other medical specialty as far as its financial fulcrum is concerned. When revenue exceeds expenses, the practice becomes economically viable, It is that simple.

The real financial issues challenging the profession are twofold:

1. At what volume point does economic viability occur?

2. How much money should a practicing hospitalist expect to earn for a commensurate amount of work?

Professional fees generated by patient encounters account for almost all of the revenue in a hospitalist practice. Physicians bill for these encounters using evaluation and management codes.

The amount of money that gets paid for each of these codes is almost always determined by some percentage of Medicare's annual fee schedule. Hospitalists may have multiple other types of contractual relationships that pay in alternative manners such as case rate or capitation, but at the end of the day the actual reimbursement can always be tracked back to a percentage of Medicare.

The revenue of a hospitalist practice is best calculated by taking all the money that a doctor collects and dividing it by the number of patient encounters that it takes to generate that revenue.

For example, if $100 was collected in a month where the doctor saw 10 patients, then you could say that each encounter, independent of source of payment, was worth $10.

On average, a hospitalist practice will generate approximately $75 per encounter. This is based on a balanced payer mix that includes Medicare, Medicaid, PPOs, HMOs, indemnity insurance and indigent individuals. The $75 number presumes a reasonable patient population that is 50 percent Medicare, 10 percent Medicaid, 30 percent PPO/HMO/other and 10 percent indigent.

Based on these assumptions total revenue can be calculated for any given interval simply by adding up the number of patient encounters and multiplying that by $75.

Expenses

Next, consider the expenses of a hospitalist practice.

While this varies from practice to practice, it is safe to say that this includes malpractice insurance, which we'll estimate at $8,000 annually, and billing and collecting fees at 8 - 10 percent of collected revenue. We will also estimate $2,500 per month for a host of general administrative expenses including answering service, beeper service, telephones, credentialing fees, licensing fees, etc.

While there can be many other expenses such as CME, marketing materials and others, these are all discretionary in nature and, while valuable, do not belong in any base equation of financial viability,

What is notably missing from the expense line is the cost of the classic medical office. The lack of need for outpatient facilities and staff will reduce hospitalists' expenses by more than 30 percent over their outpatient counterparts. Couple this significantly reduced expense with similar reimbursement and volume capacity, and it becomes clear why hospitalists can earn above-market incomes even without subsidy.

If we calculate the daily cost of these expenses, the following numbers emerge based on a 365-day year:

* $21 a day for malpractice

* $83 a day for general expenses

* 10 percent of collected revenue for billing/collecting

Economic viability

So at what encounter volume does a hospitalist practice become economically viable?

A doctor managing just two encounters a day produces $150 (2 x our base assumption of $75) of revenue. Expenses, based on the above formula, are $119 a day, resulting in a daily profit of $31.

Obviously, not many doctors will work at the implied $930/month they would earn in the above example. Yet this exercise does demonstrate that even at a ridiculously minimal encounter volume, a hospitalist practice is viable without any outside support or subsidy.

Using a more realistic average of 10-15 daily encounters, the above formula would predict net positive revenue of between $148,000 and $240,000 per year for each doctor in the practice working 275 days. This is net profit and occurs without any subsidy and at a modest level of patient encounters.

When you consider that hospitalists can augment their revenue by providing services to nursing homes, rehabilitation facilities, teaching programs, research initiatives, medical directorships, contracts to manage ER unassigned patients and the like, it becomes clearer that the issue is not one of economic viability.

Instead, I believe the real issue facing hospitalist medicine is one of balance between a sense of economic entitlement and work ethic. Doctors that choose to become hospitalists need to understand the basic economics of medical practice -- how much they can expect to earn and what it will take to get there relative to patient volume, days worked and professional commitment.