The Practice Financial Performance Report

1 Onsulting, An Affiliate of The Reardon Group Healthcare, Financial & Management Consulting Main Office Telecommunications: Internet 27 Regency Plaza Main Phone: 610 459-9300 E-Mail: 871 Baltimore Pike DE Phone: 302 656-5530 Web Site: Glen Mills, PA 19342 Fax: 610-459-5122 The Practice Financial Performance Report A Practice Performance Report benchmarks a medical Practice against MGMA norms for revenue and costs, balance sheets, staffing (FTE and costs), A/R and ratios. We can benchmark a medical Practice using any of the more than 700 variables in the Cost Survey Report .

2 benchmarking operations represents more than establishing targets for expenditures. The Report results should be developed through a process in which all providers including the Medical Group s Executive Management Director team (hereinafter MGMD) participate. Cost and productivity issues between providers come into clear view during this process, underscoring the need for administrative and physician leadership. For instance, the process will expose opportunities for integrating systems, facilitate dialogue among the stakeholders in the Practice , and ultimately serve as a catalyst for changes in the operation. The process of benchmarking will surface issues related to physician production, expectations for changes to the case mix and/or insurance mix and opportunities to maximize revenue through fee schedule changes.

3 Reporting The reporting and analysis of operating results through Financial statements must be done according to a consistent methodology. Medical practices historically Report Performance on the cash basis of accounting differing from the accrual methods utilized by larger businesses including hospitals. The differences in the two accounting systems are significant. For example, accrual accounting reports income when services are rendered, whereas cash basis accounting recognizes the income when the payment is received. Because physician practices are not endowed with substantial working capital, the overriding Financial issue is whether there is enough cash on hand to pay expenses. In this regard, accrual accounting can provide misleading information.

4 Furthermore, recognizing the income when services are rendered will have tax implications for the physician Practice as a cash basis taxpayer, an issue that does not concern commercial enterprises and bigger businesses. SAMPLE Practice benchmarking REPORTS Page 2 of 11 C:\2008\TRG\Web Page\New Web Page\Data for Inserts\ benchmarking \ Financial Performance Measures and benchmarking Actual Performance should be compared with benchmarked Performance to monitor the Financial health of the Practice . External data can also be extremely useful for comparing Practice Performance against national and other norms. Just as the physician monitors medical vital signs such as heart rate, blood pressure and respiration in determining the health and well being of the patient, the Medical Group s Executive Management team must monitor their Practice s Financial vital signs in determining the Financial health and well being of the medical Practice in order to identify opportunities for Practice Performance enhancement.

5 Expenses The Financial health and well being of the physician Practice is not determined solely by the flow of money into the Practice ; however, the Practice s ability to manage its finances prudently is critical. Although the physician leadership should monitor all expenses, three expense categories provide them with a strong indication of Practice Performance : Total non-provider operating expenses, Staff salaries, and Provider compensation. Non-provider operating expenses (excluding provider compensation and costs of provider benefits) are expenses incurred to operate the Practice and should be compared to the benchmark. Staff and physician salaries represent the wages each group receives. Since human resource expenses are the largest costs incurred by medical practices, these expenses should be closely monitored.

6 In summary, the Practice Performance Report provides the physician leadership with the key elements that indicate the Financial health and well being of their medical Practice . Sample Practice Data In the following Tables we depict the Practice operating results of a 3 Full Time Equivalent (FTE) physician medical Practice specializing in Anesthesiology. SAMPLE Practice benchmarking REPORTS Page 3 of 11 C:\2008\TRG\Web Page\New Web Page\Data for Inserts\ benchmarking \ Financial Table 1 depicts the Practice data as reported on the cash basis for one full tax accounting year which has been recast into the same categories of Revenues and Expenses utilized in the MGMA Annual Cost Survey datasets. TABLE #1: Income Statement (% of Total Medical Revenue) 1/06-12/06 Revenue (% of Total Medical Revenue) $ Percent Table 5a Net fee-for-service collections/revenue $1,418,068 Net capitation revenue $120,436 Net other medical revenue $23,616 Total medical revenue $1,562,120 Net nonmedical revenue $0 Total revenue $1,562,120 %NMR Cost (% of Total Medical Revenue)

7 1/06-12/06 Table 5b Operating Cost $ Percent Total business operating staff $84,987 Total front office support staff $102,939 Total clinical support staff cost $130,931 Total ancillary support staff cost $45,010 Total employed support staff benefits $86,483 Total contracted support staff cost $5,117 Total support staff cost $455,468 Information technology $19,098 Drug Supply $37,825 Medical and surgical supply $21,086 Building and occupancy $101,952 Furniture and equipment $10,407 Admin supplies and services $29,913 Professional liability insurance $25,768 Other insurance premiums $2,981 Outside professional fees $8,015 Promotion and marketing $3,305 Clinical laboratory $33,639 Radiology and imaging $6,747 Other ancillary services $5,192 Billing purchased services $31,441 Management fees paid to MSO $68,438 Misc operating cost $16,994 Cost allocated to Practice from parent $145,512 Total general operating cost $568,312 Total operating cost $1,023,779 Practice benchmarking REPORTS Page 4 of 11 C.

8 \2008\TRG\Web Page\New Web Page\Data for Inserts\ benchmarking \ Financial Table 5c Provider Cost Physician Providers Total physician compensation $490,050 Total physician benefit cost $78,208 Total physician cost $568,258 Nonphysician Providers Nonphysician provider compensation $62,214 Nonphysician provider benefit cost $12,977 Total nonphysician cost $75,191 Provider Consultants Provider Consultant Cost $0 Total Provider Cost $643,449 Total Cost $1,667,229 SAMPLE Practice benchmarking REPORTS Page 5 of 11 C:\2008\TRG\Web Page\New Web Page\Data for Inserts\ benchmarking \ Financial Table 2 depicts what is commonly referred to as a Common Size table comparison.

9 Here the respective percentages that each dollar category of expense represents in Table 1 is compared converted to a percentage of each dollar of fee collections and the percentage of each dollar of collections that goes toward covering an item of Practice expense is then compared to the National (or sometimes regional) benchmark data for your specific Practice specialty. From this comparison, the percentage spread for each line item is then noted for the percentage deviance from the suggested normative data for comparison. It is here that the major categories of expense begin to reveal themselves for items such as: Total support staff cost Total general operating cost Total operating cost Total physician cost Total nonphysician cost Total provider cost Total cost From this data it begins to become evident where the major cost overruns (if any) begin to reveal themselves.

10 TABLE #2: Revenues & Cost (% of Total Medical Revenue) MGMA percentile 50 is the benchmark. 1/06-12/06 MGMA 1/06-12/06 Revenue (% of Total Medical Revenue) Percent Percent % Difference Net fee-for-service collections/revenue Net capitation revenue Net other medical revenue Total medical revenue Net nonmedical revenue Total revenue Cost (% of Total Medical Revenue) 1/06-12/06 MGMA 1/06-12/06 Operating Cost Percent Percent % Difference Total business operating staff Total front office support staff Total clinical support staff cost Total ancillary support staff cost Total employed support staff benefits Total contracted support staff cost Total support staff cost Information technology Practice benchmarking REPORTS Page 6 of 11 C.