As with everything related to the pandemic, the convergence of unusual events has led us to reconsider conventional norms- forcing us to rethink the importance and usefulness of things like a practice budget. During “normal” financial times, budgets are very important to help practices evaluate/monitor the financial state of their practice. Yet, the past year has lacked any sense of normalcy and forced many practices to consider ignoring the budget (or previous year comparisons) for a bit. As such, it may be more important for practices to focus on cash flow planning for the next few months instead of continually fretting over comparisons that we know are not helpful for the time being.
The next few months will be very tactical for practices when it comes to financial management. Each week the practice should be monitoring and planning their cash flow as previously shared here. This is a fundamental activity every practice needs to undertake to ensure your financial stability.
Impact On Provider Compensation
Many practices around the country are sharing stories of 20-30% decreased patient volume and charges so far in 2021 (or more). Since a large portion (or all) of the owner compensation comes from the funds left over after paying all the bills, it’s not unusual for 20-30% reduction in overall revenue to decrease the amount available for provider/owner compensation by as much as 50-75%.
Given the significant reduction in patient visits (and revenue), many Pediatricians are scratching their heads as they review their February numbers. One thing to keep in mind is that the tide is turning and pediatric practices will return to fairly normal visit patterns sooner rather than later. Hopefully, children will return to decent check-up season by July and returning to school in the Fall. Practices need to be mindful of macro-economic concerns over the next year that may affect patients’ ability to retain employer-sponsored coverage or create a shift of more children onto the Medicaid rolls. Until then, “Cash Is King” and practices need to closely watch every dollar coming in and leaving the practice.
Keep Things In Perspective
According to one great source of information related to practice management that we at PMI follow, Reed Tinsley, CPA reminds everyone that most, if not all, physician practices do not have an expense problem. Rather, they have a revenue problem. Unlike specialties that offer ancillary services to increase revenue, Pediatrics is fairly limited in options (other than ensuring you have an effective system to identify and reach children due for checkups.) As such, many of the conventional financial metrics such as budget variances are lopsided and reliable Key Performance Indicators look distorted.
Being people of action, practice leaders feel the need to do something to reverse negative KPI or reported financial trends. Unfortunately, there is nothing one can do about the rent and vaccine bills due except plan your cash flow. PMI believes care should be taken when it comes to non-provider labor expenses. Specifically, practices need to be mindful that if employee hours are reduced to save cash, it leads to two specific problems:
⦁ If the employees do not get enough hours, they may realize they could get more money filing unemployment given the ⦁ Congressional-approved weekly bonus amount;
⦁ Reducing the staff potentially leads to a situation whereby remaining employees are left getting burned out.
Both of these concerns could complicate things as patient volumes begin to return in the future. One scenario practices should try to avoid is scrambling to rehire employees when demand returns to provide care for children. PMI realizes that it may not be financially viable to keep all employees until patient visit volumes increase. However, we advise practices to be fully aware of the potential consequences of trying to squeeze too hard on non-provider labor costs.
An incentive to keep the employees fully-employed is the recently amended Employee Retention Credit (ERC) that provides a tax credit for practices in 2021 with the credit increased to 70% of Qualified Wages and limited to $7,000 of credit for each quarter. In addition, the gross receipts test only requires a 20% drop in gross receipts in order to qualify when comparing the first two quarters of 2021 to the same quarter in 2019. [Source]
Depending on how the forgiveness for your first PPP loan was handled, practices may also be able to gain some credits for Q4 of 2020.
With good cash flow planning, the ERC could potentially offset the cost of retaining employees during these slow times. PMI will be providing an update on the ERC program next week and encourage practices to speak with their accountants about how this program can help you retain and protect your most valuable asset.