It is that time of the year when department chairs and division directors come to the hospital administration asking for financial support for the upcoming year. Few specialties can be self-sufficient in...
When a medical practice wants to hire a new physician, they will often turn to the hospital to ask for financial support. The hospital gets lots of these kind of requests – more than they can afford to pay for. For the medical practice to get what it wants, you have to know what the hospital wants and how to write a compelling pro forma. You want to show that the hospital’s investment will bear fruit over the next several years.
The pro forma is a statement of projected income and expense for a new physician, service line, or piece of equipment. What the hospital is going to want to see is:
- Will the new physician bring new business to the hospital?
- Is the new physician needed to provide necessary services that would falter without the new physician?
- What type of ramp-up period will the physician require in order to be maximally productive?
To create the compelling pro forma, there are a couple of caveats. First, be concise. If the pro forma is longer than 1 or 2 pages, it is not going to be read in detail. Second, don’t make it excessively technical. The hospital chief financial officer and executive director are usually not physicians and even though they will be knowledgable about medical issues, you need to be sure that you are writing the pro forma using words that they will understand. Third, be realistic in your projections. The people who run the business of a hospital are used to over-exaggerated claims of future programs and if they find you are overestimating income in one section, they won’t believe anything in the entire proposal. Fourth, don’t make your reader have to work to figure out what you are trying to say. Be sure that your sections and tables are clearly labeled so that even with just a brief glance, someone can find the information that they want and understand exactly what you are saying.
To create the compelling pro forma, break it into 5 sections (in order): introduction, revenue, costs, hospital support needed and summary. Your goal is to “Tell them what you are going to tell them, tell it to them, then tell them what you just told them”. The introduction is telling them what you are going to tell them; the revenue, cost, and hospital support needed is what you are telling them; and the summary is telling them what you just told them.
Introduction. Concisely say why this physician or position is needed in your hospital and what the net value will be of the physician/position. Notice that I used value and not profit. Although the hospital is going to be interested in increasing income, sometimes the value is in other measures, such as length of stay, patient satisfaction, mortality, or public relations. The value will depend on the particular specialty and circumstance. For example, the value of a joint replacement surgeon will be in improving lucrative elective inpatient surgical admissions but the value of a palliative care physician will be in improving patient satisfaction and length of stay. The introduction should be short – no more than 2-3 sentences – just enough to remind the reader why this particular physician/position is important.
Revenue. As a person who reads a lot of pro formas, I like to have revenue up front before expense in most situations. This allows me to see financial value to set the stage before I hear about how much it will cost me. Most revenue projections should extend for 3-5 years, depending on the specialty. Physicians who require a longer ramp-up time to get fully busy need a 5-year projection (for example, a urologist straight out of residency who will need to build a referral base and start of with longer OR times per surgical case). On the other hand, a physician who will be busy from the first day of work may only need a 3-year projection (for example, an experienced radiologist who will only need a year or two to hit peak operational efficiency after he/she gets used to the workflow in your hospital). If you can base projected revenue off that of an existing physician, this will improve the perception of validity of the compelling pro forma because you have an internal precedent.
The best medium of exchange to use in revenue projections is the RVU. For some specialties, it may be the work RUV and in others, it may be the total RVU. For example, if the physician will be hiring his/her own office staff, paying for a billing company, and renting office space, then the total RVU is probably better. On the other hand, if the physician will be using hospital staff for scheduling, having the hospital do the billing, and using office space provided by the hospital, then the work RVU is probably better.
Next, you’ll need to project how much, on average, the doctor will get paid per RVU. If there is a physician in a similar practice in the hospital, then you can use his/her payer mix to come up with an average number of dollars per RVU to expect. Start with Medicare reimbursement per RVU – currently about $38/RVU. Adjust that number up if the doctor will be seeing patients who have higher paying private insurance and adjust that number down if the doctor will be seeing Medicaid or uninsured patients.
Lastly, project the number of patients the doctor will be seeing on a typical workday and then determine how many workdays that doctor will be working per year. Don’t forget to factor in vacations (usually 2-4 weeks per year, depending on the practice), CME time (up to 1 week per year), and holidays (there are typically 10 holidays per year but most years, at least 2 of those days fall on a weekend so 8 days is a good number to use). Also, don’t forget to factor in weekends which will vary from specialty to specialty. A general surgeon who working a weekend will usually have relatively little new income generated on that weekend since he/she will only be doing emergency add-on surgeries and their inpatient rounding will be on patients who they are already billing a global surgical fee for the entire hospital stay. On the other hand, a critical care physician will be generating just as much new revenue on a Sunday as he/she will on a Monday. In an academic medical center, not accurately accounting for weekends is one of the most important reasons why a physician’s actual financial performance ends up looking a lot different than was projected in the original pro forma. As an example, take 2 physicians in the same specialty, one has 33% clinical time (15 weeks of inpatient care) and one has 100% clinical time (45 weeks of inpatient care [after accounting for 7 weeks of vacation, CME, & holidays]). If weekend call is split equally among all physicians resulting in both physicians taking one weekend per month rounding on the inpatient service, then the physician with 33% clinical time will have a lot more than 30% of the number of RVUs as the 100% clinical time physician at the end of the year – in fact, it will be 40%, making it look like the 33% clinical FTE physician is knocking it out of the proverbial RVU park. If we assume that a physician generates 36 RVUs per day then:
Expense. Only include those expenses that are reasonable but make sure that you list all of the reasonable expenses. It is important to be consistent. If you are asking the hospital to subsidize a physician’s salary, then don’t include expenses for cell phones, journal subscriptions, and gas mileage for driving from the office to the hospital – unless the hospital covers those expenses for all physicians. Here are the expenses that I believe are reasonable:
- Shift differential (eg, additional pay for doing night shifts)
- Malpractice premiums
- Cost of trainees (in many institutions, attending physicians have to pay for a portion of fellow salaries)
- “Taxes”, including Dean’s taxes and departmental taxes
- Business expenses including billing, compliance, legal, etc.
- Office expenses (staff, equipment, supplies, answering service, electronic medical record, etc.)
This is where using the total RVU versus the work RVU as a basis for the income analysis becomes important – if the physician will personally be incurring all 9 of these expenses, then use the total RVU. On the other hand, if the physician only needs to cover his/her salary and benefits (and the hospital pays for everything else), then use the work RVU. If the physician will be covering salary, benefits, and malpractice, then use the work RVU + malpractice RVU. If you use the wrong number (eg, use the total RVU when you should be using the work RVU), then the hospital leadership will think that you are either dumb or devious – either way, they are not going to believe anything you tell them in the future.
Hospital support needed. This is the bottom line of what you are asking the hospital to pay to subsidize this particular physician. In its simplest form, this is the anticipated expense minus the anticipated revenue for each year. This will typically be highest in the first year out and then drop each subsequent year. For some specialties, it will eventually reach zero, if it is anticipated that the physician will eventually be self-sustaining once his/her practice matures. For some specialties (such as palliative medicine and hospitalists), hospital support will always be necessary, albeit at a lower amount than the first year of practice.
Summary. The hospital business leader has just spent 5 or 10 minutes scrutinizing your numbers to be sure that they are accurate and that you are not trying to take advantage of the hospital and then checking your work to be sure that the amount of dollars that the hospital is being asked to come up with is correct. In the summary section, you need to bring them back from their left-brain accounting mindset to their right-brain strategy mindset by reminding them why this particular physician brings net value to the organization. It will be similar to the introduction section but try to make it short: 1 or 2 sentences.
Your first pro forma will not be your last pro forma so it is important that you get it right the first time. If you do, then you will get the reputation as a fair and realistic planner so that when you submit your next pro forma, they will see you as a trustful partner rather than a deceitful adversary.
July 22, 2017