Editor’s note: This is part 1 of a two part series.

Introduction

The recent changes in the health care funding equation has been brought on by a multitude of factors, including the difficult-to-meet deductibles introduced by the Affordable Care Act, payment with an emphasis on clinical outcomes versus fee-for-service, and increased overhead costs due to reporting requirements. These factors, along with economic inflationary pressures, has many small nephrology providers contemplating the future of their practices. It is difficult for nephrology practices of all sizes to keep up with the myriad of regulatory/financial demands being placed on the industry by stakeholders, but these same demands can be difficult to attain for smaller practices, leading to discussions about whether a merger or other intervention should take place.

One of the responses to these increased pressures that is contemplated by many smaller practices, including solo nephrologists, is the idea of merging with another practice. This can lower overall costs by combining/sharing expenses with a larger group of physicians. My work with nephrology practices of all sizes throughout the nation that are contemplating a merger begins with answering two questions that have little to do with the proposed merger, but that must be honestly answered in order to frame the merger discussion with another practice.

How much annual income do you want to take home per year to achieve your idea of work/life balance?

Do you know what you need to do on a weekly basis in order to achieve the stated annual income goal?

The answer that I most commonly hear to the first question is, “as much as possible.” This answer would be the one that almost anyone would give, but in a service industry such as health care, this particular answer is difficult to quantify. As an example, does the physician want to work five days or seven days a week? What time, generally, does the day begin and end?  Will the physician take any vacation time during the year? Often times, after many conversations, the physician will come up with an annual income number. Then I will help them move through the math in order to see if the answer to the second question is realistic for themselves and their individual market.

Case study

The following is a description of an actual interaction between an independent solo nephrologist and myself interested in approaching the local large nephrology practice about merging the two businesses together. The overall data for the independent practice and the market is the following:

Annual net income goal for nephrologist = $500,000

Nephrologist overhead cost: 30% (includes all expenses that are not physician compensation.)

Number of current dialysis patients for nephrologist at three different non-joint venture clinics within a one-hour drive of each other = 100

Annual medical directorship payment to nephrologist for one of three non-JV clinics = $60,000

Number of hospitals serviced by nephrologist = 3

Number of vacation weeks that nephrologist would like to take per year = 9

Number of nephrologists in the large nephrology practice = 31

Number of hospitals in the market = 12

Total number of nephrologists in the market = 36 (one independent, small group of four nephrologists, and large group of 31).

Once we have a clear picture of the annual income that the nephrologist wants to receive, and market data, we can churn through the math to determine if the numbers are realistic, clarify the nephrologist’s work/life balance, and better understand the nephrologist’s local market.

Let’s do the math

Annual gross revenue needed to derive $500,000 annual income goal after applying 30% overhead = $714,290.

$714,290-30% = $500,003

How will the physician create $714,290 in gross revenue?

$714,290-315,600 (dialysis for 100 patients) = $398,690

This assumes that the physician is able to see 80% of their patients 4 times a month, and 20% of their patients 2-3 times a month, at a rate of $271 and $231, respectively, and every month out of the year. Also, assumes 100% compliance by patients to their treatment plan, no dialysis shift changes by nurses or patients, and an average census of 100 to account for patient mortality.

$398,690-$129,000 (hospital rounding) = $269,690

This assumes that on average the physician will receive reimbursement of $60 per hospital encounter, is able to generate 10 encounters per day, visits the hospital five days a week, and generates hospital revenue 43 weeks out of the year to account for nine weeks of vacation.

$269,690-60,000 (medical directorship) = $209,690

The last large portion of a nephrology practice that has not been dealt with is the outpatient clinic component. In order to generate $209,690 in office visits, at an average reimbursement of $50 per visit, the physician would need to see 98 patients per week. If the physician holds clinic Monday through Friday, they would need to see 20 paying patients per day in order to achieve the needed gross revenue to produce their annual income goal.

Here is what would be given to the physician to help decide the best move forward for them and their practice:

In order to generate your annual income goal of $500,000, after overhead expense to support your office, you would need to do the following 43 weeks out of every year:

  • Continued dialysis rounding on 100 patients a week at the three centers.
  • 10 encounters per day, five days a week, at the three hospitals at which you currently round.
  • 20 patients per day, five days a week, within the outpatient office.

This simplified model is a best-case scenario in that it assumes that new business is readily available in the market, all provided care is paid for by either the insurance company or the patient, patient deductibles balances are paid for upon receipt, and that no self-pay patients exist in your practice or hospital rounding.

Laying the foundation

The natural inclination after presenting this math is for the physician to ask themselves if they are willing and able to work at the pace described, but before that internal discussion takes place, I like to introduce the concept of “uncompensated pay it forward.” In order to generate the needed workflow, the physician must invest time and money in creating a referral network to support their annual income goal. The workflow model suggests that 10 patients a day are needed at the hospital––where are these referrals going to come from? Who does the physician have a relationship with to ensure that the referrals continue to be generated? Are the referral sources in danger of being lost to the 35 other nephrologists who are also covering the same hospitals?

The question about whether you should merge your solo/small practice is a critically important one, but one that cannot be made without taking a realistic look at your practice, your goals, and your market. If you find that you are not willing to work as much as the model suggests, then the annual income goal must be lessened, the overhead cost needs to lowered, or alternate revenue streams must be developed. After modeling your individual practice, with different annual income goals, you can derive a better idea of your needs and whether to stay independent, seek alternate revenue sources, or begin the merger conversation with other practices in your area.

Conclusion

The changes in the health care environment will continue to apply pressure to nephrology practices of all sizes. They must continue to analyze themselves to ensure that quality care is being provided to patients while meeting the financial goals of the physician providers. In some instances, being independent makes sense within the market, but that decision should be derived both emotionally (“I WANT to own my own medical practice”) and with data (“Can I AFFORD, in time and effort, to own my own medical practice?”).

Coming in Part II: Given the increased regulatory and financial pressures that have been brought to bear on nephrology practices of all sizes, you have decided to merge with another practice in your market area. What are the next steps?