Episode 16: Taking Care of the People Who Take Care of Your Money
As we learned in our conversation with Joe Mull, there are many things that help to improve retention and one of them is money. I’ve seen many groups who have bonuses, but while all are well intended, many are set up in a way that are difficult to administer, or even counterproductive.
I encourage our clients to set up performance-based incentive compensation programs so that they are paying their teams additional compensation that is completely based on how well the team performs. There is nothing subjective about it – it’s all easily measurable, and this is key.
For today’s episode, we’ll focus on incentive Compensation for your Revenue Cycle Team – I like to start here, as these folks understand money. I recommend that all groups expand then into a broader program, with performance-based incentive compensation for everyone on your team.
Let’s start with the basic philosophies of a well-designed incentive comp system:
First, it is based on performance, not how well liked the group is, or where their office is located, or what color their hair is.
Second, it is always measurable, and always based on the numbers. This means it is always objective – never subjective, which makes it easier for you. The numbers don’t lie, and there is no room for politics or favoritism.
Third, everyone will know if they’ve earned the bonus or not – there is no room for confusion.
Fourth, the goals should be attainable, with a little bit of stretch. Be sure not to make them completely unreasonable – everyone will give up before you start, or they will lose interest quickly.
Fifth, it should be paid timely and regularly on a predictable schedule – usually quarterly. And last, it is NEVER tied to a holiday, or year end, or anything else that happens every year. This is not a bonus, it quickly becomes an entitlement, and woe is the leader who decides to do away with the Holiday Bonus… talk about a Grinch!
If groups have had a Holiday Bonus, or a Christmas Bonus, I recommend CHANGING it to the performance-based incentive compensation, and if possible, increasing the amounts you are paying out. If it’s designed correctly, and begins with the clinic’s overall financial performance as a baseline, this will mean more money in everyone’s pockets, and you and your partners won’t have to take a pay cut to do it.
So, in order for ANYONE to qualify for performance-based incentive compensation, you must first have financial performance! I generally recommend that groups aim for at least a 5% improvement over the prior year’s financials. This means there is then additional money to pay the incentive comp. Do the math, and figure out how much this is – if your bottom line last year was $1,000,000, and you achieve a 5% improvement, then you have an additional $50,000, some of which you could pay out as incentive comp. Perhaps you say there will be $25,000 paid out, and if there are 10 people on your team, each person is eligible for $2,500. Bonus payouts don’t always have to be equal, but an egalitarian approach is easiest to administer and defend. People will talk about their bonuses, so if you’re paying different amounts to different people, best to make that a structured system with some logic behind it, like higher amounts for longer tenures with the practice, or differentiate by roles, so an Advanced Practice Provider might be able to earn more than a front office person.
The next step is to figure out what you’ll focus on. Remember that you get more of what you focus on as a leader, so select your metrics carefully!
If we’re continuing the example of creating incentive compensation for your revenue cycle team, some of the KPI’s we discussed in Episode 6 make for great incentive comp metrics:
You can easily start with the % Under 30 Days, or % Under 60 Days if that works better for your group as this gets right at the question of “how young is the money in your accounts receivable?” and it incentivizes your team to work on keeping those percentages high. I recommend starting with your baseline, and then looking to improve it by a few percentage points. So, if your % Under 30 is at 50% currently, you might give the team a quarterly goal to get it to 55%, which should be doable. Be sure to discuss with the team and put in some guardrails so you don’t get unintended consequences. In the above example, one quick way to get there would be for your billing team to write off all old balances, which you wouldn’t want them to do.
Days in Accounts Receivable is a great one to continue with – it does require a little calculation, so you’ll want that to be set up and VERY clear to everyone as to what their performance is. Again, to calculate that, take Total Gross Charges over a period of time, and divide by the number of calendar days in that time period. This gives you your charges per day. Divide that into your total Accounts Receivable balance to get your “Days in A/R.” This is a more sophisticated metric, as it gets at the health of your A/R overall.
As you continue to increase the sophistication of your metrics, you could add the % of Clean Claims, which could be used as a shared metric for your front office and your rev cycle team, as they really need to work together to make that one sing. As we’ll discuss in our next episode, the revenue cycle begins at the front desk, with a new patient registration. If data is collected completely and accurately, this greatly increases the chance of a clean claim, which is what we call a claim that goes through and gets paid the first time. We love those! Your team should too. Focus on this as a metric with some incentive comp behind it will pay many dividends! Your practice management system might generate that statistic for you – it’s also sometimes referred to as a “First Pass Rate” and if not, your billing manager could do some manual calculations by looking at a random sample of 50 or 100 claims. We expect the clean claim rate to be in the 85 – 90% range, with highly performing practices at or above 95%. If setting this as a metric, you might look for 1-2% increases per calendar quarter depending on your starting point.
You may now be asking: how much should the incentive compensation be? We’ve seen bonus amounts in the $200 – 500 per quarter range be effective for front line staff. This equates to $800 – 2,000 per year in additional compensation for each staff person, which is enough to move the needle. In general, if you’re at 5-10% of total compensation, it’s a great start. Many people who study compensation theory recommend that you keep base compensation flat and give annual increases in the form of performance-based incentive compensation until that portion equates to about 30-35% of total compensation. This is the point at which you truly have everyone’s attention. It can, however, be very effective even at lower percentages.
We do recommend that you have different levels of compensation for managers and providers, as $800 – 2000 per year may or may not be motivating to higher income earners. Again, going with a percentage of total compensation is easiest.
We also recommend that you give some thought to how best to design these – they don’t need to be complicated, but they should be well thought out. You should also think about who will do the calculations and who will review them. Usually, your manager or administrator will do the calculations and it’s best to have them reviewed by you or your Finance or Executive Committee prior to the payouts. That way, everyone is on the same page, and there are no surprises.
Once you’ve got an incentive compensation plan up and running for several quarters, now you can begin to think about how often you want to update the plan and/or change the metrics. You can drive performance up in a certain area, and give it enough time for the team to create systems, workflows and habits that drive high performance in an area. Then you can shift the focus! Chances are good that the good habits that were developed will persist. Then your new focus will help to take the whole game to the next level. Keep them on that upward spiral!
Best to give several months’ notice to the group when you’re making changes, so they can begin to shift their focus and figure out the new system. Some groups will even measure the performance of the new metric for a while before putting actual compensation on the line for it.
I strongly suggest that if you start with a system for one department in your clinic that you move to applying these principles to incentive comp design for the rest of the practice as soon as you can. Let everyone catch the bug, and learn about measuring performance. You’re bound to see some pretty amazing changes!
Join me for our next episode, where we’ll focus on your Front Desk, where the Revenue Cycle begins.