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Ensure all work is cost effective

Ensure you look at existing, as well as prospective, work to ensure your practice is as cost effective as possible, says accountant Rosemary Smith

Ensure you look at existing, as well as prospective, work to ensure your practice is as cost effective as possible, says accountant Rosemary Smith

How does a practice set about establishing what work is cost effective and what is not?

From an accountancy point of view you need to work out, from your latest accounts, what is the cost of opening your surgery on an hourly rate.

This should include all the costs. Be careful to include all expenses and time costs – doctor, nurse, admin, secretarial, materials, telephone costs etc. These can easily be prepared on a spreadsheet.

Make sure, when working out income against costs, that the income level is achievable.

All too often these days there is a clause in the details that means the income is not guaranteed. Therefore you must concentrate on an income level that is definitely achievable.

Not only all prospective new work but also current work needs to be assessed to ensure that it is cost effective.

The current dilemma facing many practices is whether or not it is going to be cost effective to offer extended hours, so this is a good example to show how a cost benefit analysis works.

GP's have to make a decision on whether to open longer hours without really knowing how it will impact on their profits.

Based on the maximum funding level of £2.95 per patient, it has been suggested that a "typical" practice with 6,000 patients might be able to earn £18,000 under the DES. However, does it make financial sense to take part?

Financial sense in this context means generating immediate profit. But you need to bear in mind political advantage too.

In other words, offering to do work for the PCT may not be cost effective but could put the practice in a better light for more important work in future.

This is because in the future growth/development funding will be aimed at expanding practices.

The Government is doing its best to ensure that practices cannot achieve the DES by simply rearranging existing appointments.

Therefore many PCT's are insisting that the extra hours have to be over and above what the practice is currently providing.

They have also stated that the additional time can only be provided in certain ways – 1.5 hour blocks after 6:30 in the evening or 1 hour blocks before 8:00 in the morning or on Saturday mornings.

So, what might it cost the "typical 6000 patient practice"?

Assuming three additional hours have to be provided, this could be done on 2 weekday evenings. Assuming the GPs do not want to work the additional hours, costs to pay a salaried GP have been included here:

Per annum

Additional income £17,700

Heat & Light - extra 3 hours per week £400

Staffing 2 members – extra 3 hours per week @ £8hr £2500

Salaried GP – 3 extra hours per week £6500

Additional Profit £8300

Tax due @40% £3320

Employer's s/ann @14% £1162

Employee's s/ann @7.5% £622

Increase in net income £3196

Assuming 3 partners, this is an additional £1065 per partner.

Additional factors

Other factors to consider when discussing extended opening are:

• Impact on QOF points

• Can any additional money be earned by offering other services during the extended opening?

• If practices operate from shared premises, will additional security costs be incurred?

• Can staff hours be juggled, so that additional costs are not incurred?

• What are neighbouring practices doing? If there is a risk of losing patients by not offering extended hours when neighbouring practices are, the average income of £100 per patient would be lost

• If only one practice in a health centre wants to open late, do they face the additional running costs for the whole centre?

But always remember cost-effectiveness is only one of a number of criteria that should be employed in making decisions.

Issues of equity, needs and priorities, for example, should also form part of the decision-making process.

Sometimes some work may be clearly shown as less cost effective and could be replaced by another service.

For example, an underperforming minor surgery session may be more effectively replaced by a session of insurance or HGV medicals to increase profits.

But again bear in mind that not using facilities that have been purchased by the practice makes no sort of financial sense.

More than ever a reason for not starting up a new service without making as sure as possible that it will be cost effective.

As conventional streams of income come under attack by the government, it obviously makes sense to diversify.

And this is why having good systems of measuring cost effectiveness are so important. Because it is no use diversifying if by doing so you are going to lose money.

Rosemary Smith is healthcare manager with Tenon, the UK's third largest medical accountant

Important points to note

• Develop a good system of measuring cost effectiveness – you will need it
• Don't just apply the cost effectiveness test to prospective work – apply it to work you are already doing
• Some activities, though not strongly profitable in themselves, can lead to greater profit. See the big picture
• When factoring income into your calculations, make sure it is certain income, not just income that might materialise

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