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Assessing the profitability of a service

Medical accountant Michael Ogilvie looks at how practices can decide whether to carry on with a service

Medical accountant Michael Ogilvie looks at how practices can decide whether to carry on with a service

In the current economic climate, it is essential that all GP practices undertake a thorough review of the ongoing profitability of the key income streams they have.

There are always areas of activity that any GP practice can review to decide if they should be discontinued or done differently. Reviewing your activity is simple common sense, but when everyone feels under time pressure it can get overlooked.

In many cases, it is only after a thorough review that you will be able to assess whether the income achieved from a particular service warrants the time and costs involved, whether you should be looking at changing the way you run that service or if you should consider the possibility of replacing it with a new service. This article will look at the four key stages of the process.

1 Identify income streams

Many practices do not have adequate systems in place to easily identify how much they receive for each service claim or whether they are claiming all the relevant components of that service.

Members of the Association of Independent Specialist Medical Accountants can provide their clients with an overall comparison of annual practice results to a national average and this can help to identify any significant differences and possible areas of concern. Your practice manager should also be able to provide a breakdown of every service and the amounts received for each claim, including any target-related income streams – such as for childhood immunisations.

They should keep a spreadsheet detailing the claims submitted each month, with the number of claims made for each service item, the expected amount to be received for each claim and the total expected income for that month. This should then be reconciled to the actual amounts received each month from the primary care organisation, and any discrepancies investigated.

To help identify if any claims have been missed, the spreadsheet should also include the actual claims made in the previous year in each category. This can then be used as a point of comparison with the current year to bring to light any significant differences.

This will serve as a useful double-check against actual claims made each month or quarter, and you will then be able to assess the effectiveness or otherwise of your implementation of the service.

I am still amazed by the number of practices I visit, where the partners sit down with me to review the income streams and together we try to identify reasons for variations.

The first point I make is that annual accounts should simply be a verification of the quarterly management accounts each partner should already be receiving. Unfortunately the preparation of management accounts is all too rare.

With management accounts broken down by income stream, or by service, the variation to expected performance can be analysed.

Also common is a variation in performance between partners and team in generating income. This can happen because practices are unaware of the opportunities to claim or perhaps because of missed training, Mainly though, it is because people have been too busy to "code up" the activity for which they should have been rewarded. The solution to that problem is training, leadership and monitoring by the practice manager. 

2 Quantify direct costs

For each of the income streams you have identified, you should also make a list of costs associated with it. Of course, there are many general overhead costs – such as light and heat or insurance – that are difficult to attribute to a particular income type.

However, there may well be some direct costs, that by undertaking a detailed review of your payments, you are able to identify as relating to a specific service.

For example, imagine there is a new initiative to conduct a patient survey into eating habits. The costs of the stationery, the printer ink and postage would all need to be taken into account.

Some costs will be in terms of capital – meaning that instead of being included as an expense in the profit and loss account when they are incurred, they are treated as an asset and included on the balance sheet. The asset is written off against profits over a number of years in the form of depreciation – a cost in the profit and loss account to reflect the depreciation in value of the asset.

As the asset will be used for a number of years, it may be harder to assess the income streams that are associated with it.

You will need to consider the total period that the asset will be able to generate income before it becomes obsolete or perhaps before the associated service is withdrawn.

For example, you might be considering purchasing a particularly specialist piece of equipment. You would need to assess how long it would take for the capital outlay or potential financing costs to be recouped – if income streams arise as you expect.

I was approached by a practice which wanted to offer bone density scanning – involving a £40,000 cost for the scanner. Despite this large initial outlay, it was exceeded by the income earned from the service, so the partners agreed to offer it.

There might be other opportunities to increase your income by offering the use of the equipment to other practices, or reducing your costs by leasing rather than buying equipment.

3 Identify any opportunity costs

On top of direct costs, there will also be indirect or opportunity costs. These are not caused directly by the service, but result from the difference in the income the service generates and the income another, more profitable service might have offered if it had been provided instead.

For example, you might nominate a dedicated member of staff to hand questionnaires out in the waiting area and deal with queries related to them. While this might well mean that a high proportion of questionnaires are completed, you need to decide whether the cost of deploying that member of staff to carry out that task is worth the additional points and resulting income.

The most precious resource you have in your practice is GP time. You want to ensure that you are doing the tasks that only you can do and that the time you are spending gives rise to the highest income possible.

In some cases, this may mean looking carefully at whether other members of your team could co-ordinate and run a particular scheme. For example, perhaps the survey into eating habits leads to a second stage of work, monitoring the weight and blood pressure of those patients.

You might decide that you and your current staff do not have time to take this on, but if the anticipated amount available is sufficient it might more than cover the wages of a new nurse or healthcare assistant. Even if the net income after salary is fairly small, this is extra income for the practice that has not involved any extra work for the partners.

4 Analyse the impact on your profits

Once you have identified your key income streams, verified that you are making all applicable claims in relation to those services and identified any relevant costs, you will be in a position to assess the profitability of those services. Obviously if you are making a loss, then you will have to think about discontinuing the service.

You should make a profit contribution forecast by looking at the actual results for the previous year, with income and expenses split into detailed categories and on a month-by-month basis. The actual results then need to be adjusted for changes known for the coming year – for example, an increase in wages due to a new member of staff or the addition of a new service item.

Then adjust your forecast to remove the appropriate income and expenses for the service you want to discontinue to see the impact on overall profits, so you can make a final judgment about whether it is worth continuing.

This kind of process is simple, but takes time. In order to prepare a useful forecast, you need to have access to detailed financial information and be updating your books every month.

You may also need to seek help from your accountant to set up the profit forecast template to ensure that it fulfils all your requirements and gives you the information you want.

Some areas might – on paper – appear to be loss making, and this would be the time to consider other factors. For example, that service might compliment another, more profitable area or you might be aware that in the future that service is going to become prioritised, with additional funding being made available. You might also consider whether it could become profitable by thinking laterally. For example, perhaps you could offer minor surgery to another smaller local practice that does not have the capacity to offer it itself.

But how much profit is enough? There is no overall figure for this and it will depend on you and your partners. I was approached by a GP who wanted me to assess the benefit, or otherwise, of offering additional non-GMS dermatology-related services. Despite the additional staffing costs, the service would have made a £10,000 extra profit contribution per year, but the practice decided this was insufficient to justify the additional management time and worry.

Mike Ogilvie is the director at OBC The Accountants, East Sussex (www.obcaccountants.com). This article was first published on 8 November 2011 and updated 7 November 2012.

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Readers' comments (4)

  • practical and helpful

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  • If a practice leases space to a pharmacy (or other complimentary service), they should also review the rent that they charge. Here at GP Surveyors we come across many who haven't reviewed this for years so are losing out on thousands of pounds a year!

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  • Mike Ogilvie

    Agreed - it is a specific area often overlooked by Practice Managers

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  • Very good for accounting and managing practice business.

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