Growing EBITDA as an Independently-Owned Physician and Dental Practice

Independently-owned physician and dental practices face many challenges when it comes to managing their financial health. Tracking and optimizing the right financial metrics is crucial, whether you’re ensuring profitability and cash flow or positioning the practice for potential growth or succession.

One metric that often takes center stage is EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization). However, while EBITDA can provide valuable insights, it’s important to understand its limitations and the broader strategies required to optimize your practice’s financial performance.

In this article we’ll explore what EBITDA is, explain its importance, and discuss a series of strategies you can put in place to grow the EBITDA of your practice.

What is EBITDA and Why is it Important?

EBITDA is a widely used financial metric. It measures a company’s profitability by calculating earnings before deducting interest, taxes, depreciation and amortization expenses. In the context of healthcare accounting, EBITDA can be a valuable tool for comparing financial performance to other practices, evaluating potential acquisitions or mergers, and assessing operational efficiency.

EBITDA aims to paint an objective picture of a practice’s core operating profitability by excluding non-operating expenses (like interest and taxes) and non-cash expenses (like depreciation and amortization).

It has become a widely used metric, particularly for valuation purposes and industry comparisons. This is because it allows for a more standardized assessment of a company’s financial performance, independent of its capital structure or tax situation.

However, because it does not account for depreciation or amortization, it may not always accurately reflect the actual costs associated with running your practice. EBITDA is not equivalent to cash flow — which, from a day-to-day operational perspective, is perhaps more important to the ongoing financial health of your practice.

In short, while EBITDA is crucial for measuring profitability in certain circumstances — for example, benchmarking against competitors, mergers and acquisitions, or for private equity — it’s important to evaluate this metric in conjunction with others for a more holistic view.

How Healthcare and Dental Practices Can Optimize EBITDA

Improving EBITDA can significantly impact your practice’s financial health and is often a significant driver of potential valuation of your practice in the event of a sale. However, accurate data and reporting are necessary to establish effective optimization strategies.

Revenue Cycle Management

Effective revenue cycle management is crucial for maximizing revenue. This involves strategies like:

• Efficient scheduling to minimize gaps in patient flow, ensuring maximum utilization of resources and minimizing lost opportunities for revenue.
• Accurate billing and coding to ensure proper reimbursement from payers. Incorrect coding can lead to denied claims and revenue leakage.
• Proactive follow-up on denied claims and appeals to recover rightfully owed revenue.

Revenue cycle enhancement can take many forms but typically starts with a comprehensive analysis to identify missed revenue opportunities. For example, a practice might choose to implement automated appointment reminders and optimize its scheduling processes with the aim of reducing no-shows and cancellations. This in turn leads to increased patient volumes and higher revenue.

Staffing Optimization

Salaries are often among the largest expenses for a medical practice. Optimizing staffing involves strategies such as:

• Addressing issues that detract from productivity, such as high turnover, absenteeism or poor performance.
• Enhancing patient and staff experience through training, process improvements and fostering a positive work culture.
• Evaluating the necessity of each role and eliminating redundancies to ensure efficient resource allocation.

For instance, a practice that invests in staff training and development may see improvements in patient satisfaction. This helps increase retention and referrals and, ultimately, drive revenue growth.

Cost Management

Beyond staffing, practices should review and manage other expenses, such as subscriptions, software licenses, electronic medical record (EMR) system costs and rent and occupancy costs. Cost management strategies may include:

• Negotiating favorable terms with vendors and suppliers.
• Implementing cost-saving measures like energy-efficient practices or remote work policies.
• Regularly reviewing and renegotiating contracts and service agreements.

By effectively managing costs, practices can improve their overall profitability and EBITDA.

Other Important Metrics to Monitor

While EBITDA is a useful metric, relying solely on it provides an incomplete picture of a practice’s financial health. A comprehensive financial assessment that analyzes the full array of financial metrics is crucial for gaining a true understanding of a practice’s performance, profitability and long-term viability.

Think about it the same way you might think about making care decisions for your patients. The more diagnostic information you have, the better placed you are to make decisions.

By analyzing other metrics in conjunction with EBITDA, you can:

• Gain a more comprehensive picture of your practice’s financial position.
• Identify areas for improvement.
• Develop strategies to optimize performance.

We’ve summarized some of the other financial metrics that physicians should monitor to understand the overall financial health of their performance.

Cash Flow

EBITDA does not directly measure cash flow, as it excludes interest, taxes and capital expenditures. Monitoring cash flow involves tracking the inflows and outflows of cash from operating, investing and financing activities. Key cash flow metrics include:

• Operating cash flow: Cash generated from core business operations after paying expenses.
• Free cash flow: Cash available after accounting for capital expenditures and other investments.
• Cash burn rate: The rate at which a practice is depleting its cash reserves. This is particularly important during times of expansion where you might be investing in anticipation of future growth.

Monitoring cash flow is essential for ensuring your practice’s ability to meet its financial obligations, invest in growth opportunities, and maintain adequate liquidity reserves.

After-Tax Profit

EBITDA excludes taxes, which can be a significant expense for a profitable practice.

After-tax profit, also known as net income, represents the actual profit remaining after deducting all expenses, including taxes.

Monitoring after-tax profit provides a more accurate representation of your practice’s true profitability and the funds available for reinvestment or distribution to owners.

Optimize Your Practice’s Financial Performance with James Moore

While EBITDA is a valuable metric for independent physician and dental practices, it should not be the sole metric that defines your financial performance. Instead, opt for a more comprehensive approach that considers cash flow, after-tax profit, growth potential and market position. This will give you a more complete understanding of your practice’s financial health and long-term viability.

James Moore’s experienced healthcare advisors can guide you in optimizing your financial performance, streamlining operations and positioning your practice for sustainable growth and profitability.

Contact James Moore today to schedule a consultation and take the first step towards maximizing your practice’s financial success.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.