Those of you who know me know that I am a perpetual student of microeconomics. Call me crazy but I just have a certain affinity for the subject.

In this blog, I’m going to discuss the microeconomic principle of “opportunity cost” and hopefully help you understand its relevance to your practice. As economic pressures gain a grip on medical practices and stress their resources, addressing the concept of opportunity cost becomes instrumental.

In microeconomic terms, an opportunity cost is the cost of an alternative that must be forgiven to pursue a certain action. Put another way, it’s the benefits you could have received by taking an alternative action.

Medicine is rapidly becoming a hybrid of medical care (patient care) and nonmedical care (business management, billing, etc). Unfortunately, unless resources are unlimited, we cannot devote time to one without sacrificing time devoted to the other. That is the applicable opportunity cost. Economists use what’s known as a Production Possibility Frontier (PPF) curve to explore where maximum growth potentials exist. Below might be a PPF curve for Acme Podiatry (fictional). It demonstrates the “something has to give” concept of opportunity costs.

Production Possibility Frontier graph

Now let’s consider the true costs associated with the billing process of a practice. According to national averages, a full-time biller costs approximately $35,000 per year (salary, taxes, benefits) and for each $600,000 in collections, a full-time biller is required.

So a practice generating $1.2M in collections would typically require two full-time billers. Using these national averages, the cost of the billers related to collections would be 5.8% ($1.2M x .058).

But that accounts for only the human resource cost.

We have to also consider the cost of technology, training, office space, etc. Just as the PPF curve explains the opportunity cost associated with medical care versus nonmedical care, there are opportunity costs associated with all of the additional biller expenses just noted.

The total cost of each biller could easily climb to over 8%. And what if the billers were not specialized or these individuals also handle other tasks within the practice? What if the billers were not trained enough to work as accurately and as fast as possible? The costs go up exponentially. The real objective to maximizing growth is NOT to “move along” a PPF curve and give up something to gain another. The real growth comes from “shifting” the PPF curve outward through “specialization of labor”, which requires outsourcing.

In the PPF curve above, Acme Podiatry decided to outsource their billing to “highly specialized and trained” billers. They did so for barely the cost associated with ONLY their current total billing costs. But this specialization allows for an outward shift of the PPF curve so that at any given point of medical care, attention to nonmedical care tasks (which can potentially create even more revenue and quality) are much greater. Now that’s true economic growth!

Production Possibility Frontier graph

So what does it really cost you to perform billing in house? It’s essential that you consider:

Human Resources (salary, benefits, taxes) $_____________

Technology (computers, etc) $_____________

Postage $_____________

Physical opportunity cost (office space in sq feet x cost per sq feet) $_____________

Human opportunity cost (losses on time spent on non medical care) $_____________

Human error/ claim rejections associated with non-specialization $______________

TOTAL $______________

So the next time you entertain the thought of outsourcing, always keep in mind the Production Possibility Frontier Curve and truly know what your current costs and opportunity costs are.

Medicine is rapidly becoming a hybrid of medical care (patient care) and nonmedical care (business management, billing, etc). Unfortunately, unless resources are unlimited, we cannot devote time to one without sacrificing time devoted to the other.

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By John V. Guiliana, DPM, MS

By John V. Guiliana, DPM, MS

Dr. Guiliana is a nationally recognized speaker and author on topics pertaining to medical practice management. He is a Fellow of the American Academy of Podiatric Practice Management and holds a master’s degree in Healthcare Management. He has authored numerous columns in various journals and is the co-author of 31 ½ Essentials to Running Your Medical Practice, as well as The Million Dollar Practice…Keys to Success. Dr. Guiliana is currently a Medical Director of Podiatry for Modernizing Medicine’s award-winning technology. He can be reached at John.guiliana@modernizingmedicine.com.

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