Optometric Management Tip # 165   -   Wednesday, March 16, 2005
Dropping Managed Care Plans, Part 2
Evaluating chair costs, marginal costs and time management

Before we evaluate specific vision or medical plans for acceptance (or continuation) in your practice, we should first evaluate your practice costs. Knowing how much it costs you to see a patient is the first step in determining if a plan is profitable, and how profitable. This evaluation is often referred to as chair cost – as in what is the cost incurred each time a patient sits in the exam chair? You can calculate chair cost per patient or per hour; both are useful.

Chair cost calculation - the easy way

The basic premise is to divide your fixed costs by the number of patients you see in a given time period, like one year. Similarly, you could divide the total fixed costs by the number of hours your office was open during that time period. Fixed costs are considered to be everything in your list of expenses, except your cost of goods sold. One easy way to figure this is to take your true gross (collected revenue – not billed charges), and subtract all cost of goods (frames, contacts and lab bills) and subtract the practice net (or all doctors’ income). If your practice has typical expense ratios, you would subtract about 30% for the COGS and 30% for the net, leaving 40% of your gross as fixed costs. If your practice grosses \$1 million, your fixed costs would be \$400,000.

Counting the number of patients or the number of hours can be trickier than it seems. Patient numbers are really the number of exams performed, but should that be full exams only or all office visits? It could be either way, or you could use a formula that counts an OV as a half point and comprehensive exams as a full point. The important thing is to be consistent when you make comparisons. You might want to use a value that relates to the plan you’re evaluating, such as, counting full exams only if you’re looking at a vision plan that will be used primarily for full exams. The hourly calculation begs the question of using all office hours or just hours when doctors are scheduled for patients.

If the million dollar gross practice above saw 4,000 patients, the chair cost would be \$100 per patient (\$400,000/4000). If it were open 2,000 hours, the hourly chair cost would be \$200 per hour.

Marginal costs

Knowing the per patient cost in our example, we might deduce that if you accept a vision plan that pays less than \$100 for an exam, you’re losing money on each patient. The old joke is that you can’t make up a per unit loss with volume! But it’s really not that simple. In reality, when you consider participating with a managed care plan, you’re fixed costs are already being met. The rent is already being paid and staff salaries are already covered. A fair question might be, what would be the additional expenses involved in seeing the patients that come from that plan? Those expenses may be zero, unless you have to hire one more staff person. The rent would not increase and the electric bill will remain the same with or without this vision plan. The analysis of a special group of expenses like this is often called the marginal cost.

How full is the appointment book?

A key factor in your evaluation is how well booked you are with patients. This factor goes hand-in-hand with your cost analysis. There is some truth in the common sense approach that says a low-paying exam is better than no exam. A good analogy is in the airline industry. If a commercial jet takes of with empty seats, those revenue opportunities are lost forever. The airline would be better off discounting the tickets for those remaining seats to \$49 each, than having the seat be empty. In fact, that is exactly what airlines do, through the use of sophisticated pricing models. Likewise, an appointment slot with an empty exam chair is revenue that can never be recovered in your practice.

Beware of the inertia of managed care

There is danger in accepting too many managed care plans, however, just because the practice is not fully busy. Your practice develops a momentum that can be hard to change. The practice philosophy can be formed by the patients you see and by the fee levels that are generated. Policies are built around managed care plans and frame inventory is based upon plan coverage amounts. Staff training and staff attitude can shift. The practice reputation begins to reflect a managed care approach, and before you know it, you are not the high fee / advanced service practice you once dreamt about.

Remember, building time into your schedule purely for administration, and not patient care, is a good thing. Use that time for practice development and marketing that will build the private-pay sector of your practice. We’ll focus on analyzing managed care plans next week.

Best wishes for continued success,

Neil B. Gailmard, OD, MBA, FAAO
Chief Optometric Editor, Optometric Management