BUSINESS: financial foundations
Calculating Chair Cost: Part 2
Three ways to use chair cost calculations.
DAVID MILLS, O.D., M.B.A.
In part one of this two-part series (June 2014 OM), we learned how to calculate chair cost. In part two, I discuss three ways that chair cost can be used to strategize important business decisions.
1 Set your fee schedule.
Many factors should be evaluated when determining charges for the services you provide. One factor is chair cost, which directly measures the operational costs, or fixed expenses, of the business. To review, it is calculated by dividing your fixed overhead by the total number of practitioner hours.
You want to be sure that you generate enough income per hour to at least meet this value. If fees are set too low, below the value of chair cost, it is impossible to generate profit.
For example, let’s say your chair cost is $62.00/hour. However, after figuring all your expenses, including variables, such as a lab bill, you determine you need a chair cost of $77.50/hour to generate a profit. Therefore, you would need to set your fees high enough to at least generate enough per hour to cover all your expenses, both fixed and variable.
Remember, we, as O.D.s, are only concerned about revenues collected on services, not on material sales. Also, it is important to only consider the amounts you are actually going to receive, the approved amounts for the service set by the insurance provider.
2 Evaluate the addition of a new associate.
When considering adding a new associate to your practice, one factor that should be examined is the effect the addition will have on chair cost. Assuming you are not replacing your current work hours with those of a new associate, the number of practitioner hours per month for the practice will increase.
However, don’t forget to add additional operational expenses associated with the new hire, such as the associate’s salary. Perhaps you will need to add an additional staff person, or you may find that other fixed expenses increase. Calculating the chair cost associated with the new associate helps illustrate how much revenue is ultimately being generated to net practice income.
3 Determine insurance plan profitability.
Knowing your chair cost is vitally important when evaluating participation in different insurance plans. For example, if the chair cost is $62.00/hour and the insurance plan you are evaluating only pays $40.00 per visit, you are $22.00 in deficit.
The common response is to examine more patients per hour. That could be a viable solution, however, don’t forget to recalculate the chair cost to determine whether this strategy increases the operational expenses. Often times, to increase your number of exams per hour, you must increase staffing or other fixed expenses. In other words, the chair cost may continue to climb, negating the positive effect of examining more patients per hour.
Calculating chair cost is vitally important to the sound business management of the practice. Knowing how each dollar of revenue collected is allocated to meet expenses and, ultimately, generate profit, is critical in managing any business. OM
Optometric Management, Volume: 49 , Issue: July 2014, page(s): 56