I just got around to watching the episode of The Profit focused on A.Stein Meats. Now, you may be wondering why on earth I’d be posting about a meat business here — what could that have to do with medical practice management? Well, The Profit deals with a variety of small businesses, and there are often take-aways that apply to almost any business, but the A.Stein Meats episode really hit some notes that are so important for managing the business side of a physician practice — especially the under-appreciated perils of poor management of accounts receivable.
When Marcus Lemonis arrives at A.Stein Meats, he learns that the 75-year-old company is losing $400,000 per year — despite $50MM in annual revenue. He’s initially confused about how the company’s expenses could be exceeding their revenues. But he soon figures out that the biggest missing piece lies in the back office: accounts receivable. The office manager — who nominated the business for the show — reveals that the receivables are more than $4MM. And Lemonis quickly notes, many are so old, they’ll likely never be collected. The owners, meanwhile, seem almost unaware of why they should be concerned about accumulating A/R — after all, they’re just trying to “work with” customers, many of whom are “friends.”
But, as the old saying goes, with friends like that, who needs enemies?
The business’s inattention to collecting the money they’re owed was putting their solvency at risk; revenue is almost irrelevant if it isn’t realized as cash coming into the business promptly. Moreover, the business was essentially financing its customers — without getting paid to do so. Lemonis stated clearly, “we are not a bank” — the same message we give our medical practice clients when they’re too quick to say, “sure, we’ll bill you” instead of asking patients for a credit card at the time of service, or a credit card on-file for procedures that need to be paid for over time.
Medical practices are perhaps a bit luckier than a business like A.Stein Meats in that insurance payments still usually provide the biggest portion of revenue. Most practices learn quickly that collecting on insurance claims must happen promptly, or the money will be foregone forever. The impersonality of the insurance relationship perhaps helps motivate more straightforward requests for payments. But collecting patient payments — now usually at least 25% of total revenue, and climbing — is often handled more casually. And that can mean all the difference between a solid practice business and one that founders.
Now, before anyone cries, “but it’s not just about the money,” please remember that an insolvent medical practice can’t serve its primary mission of treating patients. And please also remember that asking a patient to provide a credit card simply means that the patient relies on a bank — an institution that exists to lend money — to finance their obligation to your practice, rather than expecting your practice to make the loan. (When a patient pays with a credit card, they can then pay over time — with the bank managing the process.)
Above all, as the proportion of medical costs that patients are expected to bear continues to grow, practices will increasingly risk their viability if they fail to manage those receivables effectively. It’s unlikely your practice has expertise in lending — so leave the lending to the banks! The A.Stein story was heartbreaking because the founders had no idea how much trouble they were in, because they didn’t understand how mismanaging their collections and cash could quickly bankrupt their company — despite their steady volume of business. Don’t let this same thing happen at your practice; being busy is only one piece of the puzzle.
Besides the helpful illumination of receivables can quickly balloon into a much bigger problem (and jeopardize a firm’s very existence), the episode offered a few other tidbits that were right on target for medical practices. When Lemonis determined that the general manager wasn’t really fulfilling that role because he didn’t understand anything about work flow and cash flow, I thought of how difficult it can be for new managers in a medical practice to learn their role. When physicians promote a staff member to manager, they often assume the employee will understand the demands of their new role — even when no one mentors them or sets goals to help them understand what’s expected.
Communication — so often a problem in medical practices — was also spotlighted in the episode. The general manager and the office manager sat right next to each other, yet somehow failed to communicate on critical essentials, like whether there was cash to order new inventory and supplies. It always seems surprising, but communication takes real effort in any kind of organization, even when the number of employees is so small you’d assume that “everyone knows what’s going on.”