The Big Squeeze - responding to rising costs and declining reimbursement
We hope you had an amazing holiday! Now that we have regained consciousness from our cookie and eggnog coma, we’re back to your regularly scheduled programming.
Here’s the programming part (felt like we needed a transition):
The saying goes, “you can’t manage what you don’t measure.”
But what’s worse than not measuring and therefore not managing?
Measuring the wrong things, thereby managing the wrong things.
Imagine this…
You’re tracking your collections. Looking good. You’re watching your patient volumes. Solid. Your denial rate? Under control.
But then you look at your bank account and think... we crushed it the last 2 months, volumes, our revenue cycle, everything. I thought there would be more money in the account.
What’s going on?
And before we get into it too deep, the caveat is that we believe independent and private practices should be paid more. Higher reimbursement outside of large systems leads to lower healthcare costs.
Now, on with the show.
The Squeeze
From 2014 to 2025, Medicare physician reimbursement has declined about 10% in real, inflation-adjusted terms.
In that same period, practice costs have increased about 57%.
That’s quite the chasm.
Where The Money Goes
Of all the costs to deliver care, labor is the most significant, typically consuming about 80-90% of operating expenses. That include clinical labor and administrative labor. With inflation, consumer price indexes, and cost of living on the constant rise, it’s making labor more expensive. Not to mention the optionality of our economy, making good people harder to come by.
And while these costs are up, Medicare keeps cutting, insurance companies keep making it harder to get paid, and all that fun stuff.
Great, depressing, what can be done?
You can’t control the “payers.” You can’t control inflation (only Janet Yellen can do that). And you can’t control the labor market.
But you CAN control your visibility into what’s actually happening in your business. And that’s where most practices come up short.
See, when costs are rising this fast and reimbursement is falling, you can’t afford to be three months behind on your financials. You can’t afford to wait until your accountant tells you something’s wrong. You can’t afford to guess.
You need real-time clarity on:
Unit Economics by Service Line. Which services are profitable after you allocate overhead? Not which ones look profitable on the surface.
Cash Flow Forecasting. What does your runway look like in 90 days? 180 days? Are you going to make payroll in August when volumes dip? Should you take that distribution?
Operational Metrics. How do your costs per visit trend over time? Where’s the variance coming from?
Proper cost allocation. Are you overloading one service line or CPT code so that it looks unprofitable? Are you under allocating so that you think you are making money, but actually losing money?
The practices that will survive this squeeze without selling to Dr. Von Barronstine’s Yachtspital fund (if they don’t want to) are the ones that know their numbers, know the cost drivers, and look at the finances in a way that gives true meaning and insight into opportunities.
They know exactly what a 2.8% Medicare cut means for their bottom line before it hits. They know which service lines to double down on and which ones to rethink. They know when to hire and when to hold.
Wrapping Up
The squeeze is real. Medicare reimbursement is down. Costs are up. And the gap is only getting wider.
But the practices that win in this environment aren’t the ones hoping for congressional intervention. They’re the ones that see their numbers clearly, make decisions quickly, and adapt before the pressure becomes a crisis.
Know your numbers, they are trying to tell you something.
Disclaimer: The content provided is intended for educational purposes only and does not constitute financial or legal advice. This content is not intended to create, and receipt of the newsletter does not constitute, an attorney-client relationship. While efforts have been made to ensure the accuracy of the information presented, it may not necessarily reflect the most current legal developments or regulations and does not provide a complete representation of all associated legal and compliance considerations for any given topic. Therefore, readers are encouraged to seek professional legal advice or consult with appropriate professionals regarding specific legal issues or concerns related to their individual circumstances.