A clear understanding of your costs protects profits, eases planning

November 16, 2010

Leaders in our practice started looking critically at our operations. We wanted to find out how well our billing and administrative operations function. Radiology profitability, as with most physician practices and businesses, is as much about keeping your overhead down as it is about increasing your income. I’ve learned that as long as revenue comes in and physicians’ paychecks are as big as-or bigger than-last year, most partners believe that all is well.

Leaders in our practice started looking critically at our operations. We wanted to find out how well our billing and administrative operations function. Radiology profitability, as with most physician practices and businesses, is as much about keeping your overhead down as it is about increasing your income. I’ve learned that as long as revenue comes in and physicians’ paychecks are as big as-or bigger than-last year, most partners believe that all is well.

Yet failing to cast a critical eye on your business operations may mean you miss lurking problems that emerge when revenues tighten. These problems may cause you and your colleagues to work harder than necessary for what you bring in.

We took a two-part approach to examining our practice’s back-office functions: We had to get a handle on exactly what we were spending for these activities, and we had to find benchmarks against which to compare our figures.

Costs vary by segment

A partner pointed out one of our biggest challenges: We are a heterogeneous group with different structures for physician pay. We use both flat-fee and fee-for-service arrangements. We have hospital-based practice parts and teleradiology-based practice parts. To examine business operations, we had to split those parts and assign administrative costs for each. Billing costs for the hospital-based arrangements are relatively high because we do our own coding and billing, revenue capture, and denials management. Administrative overhead for the hospital-based arrangements is relatively low because we use hospital transcriptionists, hospital IT services, hospital marketing, and hospital secretarial support. The teleradiology part of our practice is low in billing costs, since it’s mostly charged per case (as a flat-fee arrangement). However, teleradiology has high administrative support costs, as we maintain internal PACS, pay for our own transcription, and use our own secretarial and marketing staff.

After working out what we spend on each part of the business, we needed to know whether the results were good or bad. Benchmarks are a good place to start. Some of our partners and administrators protest that benchmarks for medical groups overall aren’t valid for radiology because the specialty has unique aspects. Yet leaders of every type of medical practice believe they have unique problems. That does not mean benchmarks are useless. Most businesses have one or two unique components, but they essentially operate just like every other business of that type.

Industry benchmarks valuable

Yes, you need to consider your medical practice’s distinctive characteristics, but industry benchmarks are still valuable. The Radiology Business Management Association produces a number of benchmarks for billing costs, administrative costs, and staffing. The Medical Group Management Association can provide figures for billing staff FTEs.

It gets harder when you want to look at things for which associations don’t exist. Then you need to be a little creative. Comparison with competitors is helpful. Call them. To get a handle on teleradiology costs, our administration contacted large teleradiology companies to inquire about their overhead.

Benefits of analysis

What does all this analysis achieve? It helps us understand what is costly, allowing us to focus on where we can cuts costs and what the impact of those cuts will be. For the hospital-based practice, reducing billing expenses will affect only a certain part of the business. Therefore, that approach may not be the most effective way to reduce overhead. For our teleradiology component, can we find a more efficient PACS or transcription service? Can we combine marketing and other administrative functions? Can we structure our contracts to reduce costs, such as asking for volume discounts on transcription or IT services?

Analysis of operations allows us to be wise about our practice’s growth strategy. Which part of the business should we expand? Where should we make cutbacks? What marginal revenue can we expect if we push that part of the business? Keeping a close eye on operations allows our organization to be as effective, efficient, and enterprising as possible.


Dr. Woodcock is medical director for MRI at St. Joseph’s Hospital in Atlanta. He is also a member of the executive board of Atlanta Radiology Consultants and is the practice’s executive officer for finance. He may be reached at rjwatlrad@gmail.com.