“The single biggest problem in communication is the illusion that it has taken place.”
-- George Bernard Shaw, Leadership Skills for Managers
George Bernard Shaw’s words could aptly be applied to the situation of Dr. Barbara, who’d sold her first practice to a hospital system but was left frustrated and angry after less than two years of employment. Amid much criticism, she resigned and restarted her own private practice.
Dr. Barbara’s practice was an S corporation and her 1120S was filed on a tax basis. She drew a salary of $10,000 gross per month. The remaining practice income funded the retirement plan, fell to profits she retained as a bonus, or was left in the accumulated adjustments account (AAA). Her taxes were paid on both via her W-2 and K-1.
Once employed under the work relative value model (RVUw), she was paid a guaranteed salary for one year. In the second year, Dr. Barbara’s compensation would be based upon her work RVUs multiplied by a conversion factor determined by the hospital each year. Her accountant’s analysis compared her total practice RVU count to the hospital’s work RVU computation. Dr. Barbara had a very active office lab and a solid “pass-through” arrangement negotiated with Quest. Yes, all the ancillary RVU work was no longer included in her computation. Dr. Barbara’s world had dramatically changed.
In her first year of employment, Dr. Barbara received her quarterly statements in the mail without explanation. Since they had no bearing on her paychecks that year they went unread. She never asked a question. Year two was different.
In the sixteenth month of employment, after having put the first quarter’s report in her drawer, Dr. Barbara received a check that was less than 70 percent of her prior check. Things spiraled downhill quickly.
Although there are many lessons here, the main takeaway is that George Bernard Shaw was right, and here’s why.
Accounts receivable
When many physicians look at their accounts receivable (AR) aging reports, they view the balance as too high but fully collectable. This viewpoint permits the physician to blame the biller for not doing his or her job while creating the false sense that there is a lot of money available to them in the near future. Although she retained her AR upon the sale, Dr. Barbara collected less than 40 percent of it.
Unlike the accrual balance sheet, accounts receivable never appear on the cash-basis balance sheet. Hence, the physician will never see a calculation of the collectability of the receivables as an asset.
A line item on the profit and loss statement (P&L) called write-off to bad debt, which is taken against the charges and affects accounts receivable, is a foreign concept to the majority of physicians. Hence, most will question the bad debt allowance, thinking it too high or unrealistic. In the worst case scenario, the physician may even accuse the employer of stealing their money. In addition, many physicians have never turned a patient’s account over to a collection agency and will fight over implementing such a program for the fear that it will alienate “their” patients. But from the institutional perspective, they are no longer “their” patients.
Gross revenue
In most of the financial statements I see in small practices, the accountant’s preparation is on a tax basis. This means that gross charges, contractual write-offs, and adjustments to bad debt do not appear on the statements.
So when the doctor receives a financial statement that lacks further explanation and lists charges instead of receipts as gross revenue, the physician will often misread the news. This leads the physician to question the write-offs as being too high – viewing them through the lens of their own practice history and statements that listed refunds and returns, which referred to insurance, patient refunds and bounced checks or rejected credit cards. Physicians often confuse net revenue as meaning the same as net receipts.
Expenses
Under the accrual model, expenses are incurred and earned when the bills are received and fulfilled, not when the check is written to pay the bill. To complicate matters, if a payment is made in advance of the bill being received – for an upcoming meeting, for example – these are not listed as expenses on the P&L but rather appear on the balance sheet as pre-paid expenses. To the physician, this is often seen as illogical or “voodoo economics.”
Physicians do understand the concept of accounts payable even if they are not clear regarding how it is accounted for in financial statements. Physicians rarely ask about expenses related to whether they are paid or not as they assume that they are, in fact, paid.
When the physician is uninvolved in how expenses are handled in the larger environment and it does not affect their income, behavior changes and apathy for the operational overhead ensues. Institutions leave themselves open for extensive finger-pointing when a physician, like Dr. Barbara, has no incentive to keep costs low or had no access to the detailed information that would have allowed her to positively impact the numbers.
Net income
Under cash or accrual, both agree the net income is what is left after all expenses. The rub is when the CFO tells the physician that information after the physician has been paid. This is a foreign concept to physicians as they have spent years viewing that: Net Income = Gross Available For Take Home Pay
When Dr. Barbara was told that she was not profitable for the hospital, her salary was reduced as per her contract and she became dismayed and incredulous. People need incentives. The best incentive models offer transparency and good alignment with responsibilities. Anxiety and attrition can be prevented by spending time educating the physician on the terminology as part of their orientation, and explaining how the “new accounting” differs from what they are used to.
Keeping the physician regularly informed can set the physician on the right path, preventing meeting room shouting matches and negative diatribes on websites like Yelp.