As financial & business advisors to the healthcare industry we often preach the importance of leverage in practices in order to boost the overall financial performance of the practice. The logic is sound and the financial incentives clear, however, one variance that needs to be considered in this equation is the quality of care provided by the practice. Above the obvious clinical and patient-care implications that are far beyond our scope of knowledge, practices need to consider the potential financial impacts of leverage vs quality of care.
Leverage: What are we talking about?
When discussing leverage, we mean the number of additional practitioners and ancillary support service providers in a practice in relation to the number of owners. For instance, a sole practitioner with a single administrator is in a low leverage scenario, whereas a large practice with five equity partners, ten non-equity physician providers, and twenty physician assistants would be highly leveraged. The largest single benefit of leverage is obvious: the more leveraged a practice is, the more revenue that will be produced by non-equity providers, ultimately for the benefit of the practice owners.
There is no magic number or formula for the “right” or “best” amount of leverage, as there are too many variables in the equation. One such variable is inherent to the type of medicine provided, as certain specialties naturally are high leverage (such as Cosmetic Surgery practices) whereas very specialized, niche or cutting-edge practices may not have the opportunity for such leverage. The needs of patient population and the current marketplace (regulatory, economic and geographic) can also determine the optimal leverage for a practice. In considering the right level, a practice should look externally at what other successful practices are doing and what opportunities exist but should also look internally and figure how this leverage fits with their vision of their practice.
Leverage vs Quality of Care
Leverage is ultimately a “good” thing from a production standpoint. As with nearly every other business, there are diminishing marginal returns from this leverage from both a revenue perspective and from an output (quality of care) perspective. Many advisors focus only on the dollars and cents of the diminishing returns on leverage from a revenue perspective (think adding 2 staff when the practice volumes may only support 1 additional staff, with the thought that more staff will mean more patients seen). However, it is also important to look at any potential decrease in the output of the practice, that is the quality of care that patients receive and how that can ultimately be a financial negative.
One practice we work with recently started to increase the use of Physician Assistants in order to increase the practice’s overall productivity and at a lower cost point than a Physician. When they added the PA’s, the practice volumes clearly supported the need and the doctors felt confident that the PA’s could provide care to patients that fit within their vision and patient needs. However, they found over time that the use of these PA’s had increased the amount of complaints and negative reviews of their practice on social media, an important referral source for this practice. The complaints presented a two-fold problem to these doctors: they were indicative, they felt, that the quality of care they were providing was not up to their standards and had a negative impact on their future referrals. So, while a short-term boost in revenue brought in by the PA was great, the long-term impact was a decrease in their growth rate and referral mix from a very important source.
We have, at times, also found the opposite to be very true as well, that the leverage actually can INCREASE the quality of care from a practice, which can have an overall positive growth to the practice. A client of ours recently established a secondary location to help diversify their geographic profile. At first, this move was financially unsuccessful, as the new outpost was not as productive as the other locations. However, they decided to move more resources and leverage to the space and as a result increased the quality of care patients were receiving by allowing the physicians more interaction time with their patients, increasing the quality of care and reputation within the area, making this new location one of their most profitable. When one thinks of leverage it is normally associated with a lower quality of care, but sometimes the increased leverage can improve and yield big dividends.
Leverage is an important tool in growing a physician’s practice, and the right amount of leverage is not the same for any two practices. It is also important that in the quest for growth that physicians do not lose sight of their vision when it comes to the quality of care provided to patients. Sometimes the additional leverage can decrease the quality of care which can hurt referral sources and organic practice growth (even beyond the repercussions of providing poor patient care) and in other cases additional staff can in turn increase the quality of care as patients are given the time and attention they require. The key is to find the right balance by looking for good staff that share your practice’s commitment of care, and constantly measure and evaluate both the quantifiable financial results and patient satisfaction.
Edward McWilliams, CPA
Ed is a Partner in the firm’s tax and business advisory practice focusing on providing services to middle market private companies across different industries as well as to early stage startups. Ed has over a decade of experience providing tax and business consulting services to these companies of different sizes and across different industries, bringing a broad and diverse knowledge base and strategic solutions to the many complex issues that businesses face.