A Step-By-Step Guide for Doctors To Prepare For A Recession
Introduction
As COO of medical practices, one of my key responsibilities is forecasting, budgeting, and anticipating the business strategy based on the health of the economy and our medical specialty market landscape.
This article is a call to action to prepare our practices for uncertain times.
The Action Plan
Our preparation should be an answer to the following scenario:
What happens if my practice volume is reduced by 30% in the next few months?
Let’s understand the effects on your current finances through your practice’s main financial statements, and let’s plan accordingly:
Income Statement (Profit & Loss)
Your Revenue Goal: Maintain your volumes.
Historically, during economic recessions, insurance companies often tighten their reimbursement policies, delay payments, and increase scrutiny on claims. This can lead to longer payment cycles and increased claim denials.
Focus on your ability to collect and plug the leaks in your billing pipeline. Submit your claims quickly and accurately the first time, every time. As mentioned in several articles in our blog, 1) examine the number of claims submitted weekly, 2) the number of claims approved or denied weekly, and 3) the number of claims re-submitted weekly. Continue monitoring until you have 100% control over this process.
Be proactive and negotiate your terms and faster reimbursement cycles with insurance companies. As Kari Mirabal’s book title says: “You already have the no.”
To offset the downturn, explore additional products and services with lower price points (or full coverage from insurance companies) that you can offer as complements or alternatives to your primary specialty. Consider partnerships with established brands or practices to leverage their sales and marketing infrastructure and avoid any capital investments. It is time to team up and build a stronger group front.
Consider expanding into telemedicine, emotional wellness programs, or concierge medicine to attract a broader patient base and increase patient retention.
Cost of Goods Sold (COGS): Do not run out of critical medical supplies while maintaining low inventory costs.
The effects of an economic recession on medical supplies can vary, with prices potentially increasing due to supply chain disruptions (labor shortages) and higher demand. However, decreased demand for non-essential supplies and increased supplier competition may lead to temporary price reductions.
Simply put, it depends on the type of medical item you need. Let us also consider that an economic recession is very different than a pandemic. What you learn from the Covid days might not apply this time.
Your Inventory
An item-by-item analysis of your supplies will be necessary to avoid disrupting your services. We must classify each item based on 1) how critical they are to keep your practice running, 2) how easy it is to buy, and 3) how much they cost.
The chart below can help us clarify priorities for critical items you need to run your practice. This is an example for reference only, as priorities vary based on shelf life (expiration dates), item size, and risks (exposure, controlled, flammable).
As mentioned, when planning the monthly inventory needs, a possible decrease in volume of 30% should also be considered.
Your Suppliers
Create a list of possible suppliers and always keep at least two sources (three is best), even if price points and delivery times vary. Having a few supply agreements and healthy relationships with vendors will lower your risk and exposure to shortages and price volatility during a recession.
Be proactive and negotiate longer-term contracts with assigned volumes and fixed prices.
Operating Expenses: Plan your capacity based on your expected volumes
Your medical practice has a known capacity for the number of patients you can treat. This is based on the available space (rooms), the equipment, and the employees.
If not yet formally done, calculate your clinic's capacity for each category (space, equipment, and employees). This exercise will also show how well-balanced your resources are: where are your bottlenecks, and where are you wasting resources?
Design a plan to lease/rent your overcapacity if volumes drop. This plan can also include part of your staff and prevent layoffs. Building a high-performance team takes a long time; we want to retain as many employees as possible.
Identify potential candidates for a partnership with another medical specialist so you can fully utilize your available capacity and create a win-win situation for both of you.
Balance Sheet
The Goal: If you run out of cash, know which assets you should sell/lease and when to seek a loan or sell company shares to keep us afloat while we resize.
We need cash to run our practice, especially for payroll, utilities, and services. If revenue starts decreasing, we need to find a source of liquidity fast. Having a plan to generate or preserve cash (if required) will be very helpful in maintaining mental clarity and making sound decisions during stressful times.
Similar to our inventory and capacity analysis, we need to review (or create) a list of equipment, inventory, and investments to identify which ones (non-essential to running our practice) we should first sell and convert into cash.
Identify potential low-interest sources of money. Family members, angel investors, partnerships, the SBA, healthcare lenders, credit unions, association loans, and state grants.
Negotiate every existing loan and utility service to reduce as much cash outflow as possible.
Conclusion:
Understanding your options before they are required will make a big difference in your ability to navigate challenging times and create a competitive advantage that will position your practice at the top of your field when the downturn cycle ends.