Why Income May Drop if You Sell Your Practice to a Hospital

George Conomikes


January 26, 2012

In This Article


Recent reports from the MGMA (Medical Group Management Association) show that hospital- owned practices are 25% less productive than those that are privately owned. Our experience as medical practice consultants confirms these findings.

In some cases, previously-profitable practices start to see a decline in their income. In other cases, the practices may have been less profitable to begin with. Here are the major roots of the problems and some suggested solutions.

1. Centralization of Billing and Collections

A New England hospital brought in varied practices, eventually totaling 82 physicians. The hospital decided to centralize the billing operations and put these activities under the control of the hospital's financial VP.

Fifteen months later, when we were called in, the net collections for these physicians, had dropped by an average of 18 percent. The result: these once-profitable practices were now losing money and the physician salaries were threatened. This same scenario occurred with an Oklahoma hospital that had acquired the practices of 24 physicians.

Our findings were that the hospitals' financial V.P.s knew little about medical practice billing. Additionally, the practices, prior to being acquired, were doing a creditable job.

At the individual practice, it is the symbiotic relationship between the front-desk staff and the billing staff which makes the difference. If the front-desk staff does not do an effective job of gathering and updating the patients' demographic data, plus collecting required copayments and deductibles, then the tasks of the billing staff become formidable. At this stage, the billing staff and/or the practice manager step in to show front desk staff what is needed to cut down on unnecessary billing and collections work.

With centralized billing, there is no such connection between front-desk staff at the practices and the more remote centralized billing staff. And there is no data that supports the effectiveness of centralized billing. It may appear to more efficient, but usually is not as effective.

An accurate measure of collections effectiveness is a practice's Net Collection Percentage. The sample formula, in this example, uses data for the prior 12-month period:

Payments $750,000          
Charges minus Contractual Adjustments = $1,000,000 - $200,000 = 93.75%

Contractual Adjustments are write-offs for lower fees/payments in payer contracts.

This Net Collection Percent of 93.75% shows that 6.25% of copayments, deductibles and other allowable fees, that should have been collected, were, in fact, not collected.

Well-run practices have Net Collection Percentages of 97.5%. A figure of 95% should be the minimally acceptable result for any practice.


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