Article Date: 4/1/2002

Vision Plan
Can You Survive Without Vision Plans?
This is the first of a two-part series exploring the practice management issues involved in managed vision care plans. This month, we explore the profitability issues surrounding the plans. Next month, optometrists report their experiences with both managed care plans and private pay patients.

How Managed Care Discounts Impact Your Bottom Line
BY JERRY HAYES, O.D.

DIGITAL IMAGERY BY ANTHONY CERICOLA

In today's world, evaluating managed care plans is a major undertaking for every private practice optometrist. The first consideration revolves around patient acquisition and retention. You may ask, "How many current patients do I stand to lose if I don't take this plan?" or, "How many new patients do I stand to gain if I do take this plan?" Unfortunately, no magic formula will give you the answers. That's a judgment call for each practitioner.

The next consideration is primarily financial. Most O.D.s seem to be willing to earn less per patient if they can make it up in volume. There's nothing wrong with this, as long as you determine how the plan's payment schedule fits in with the overhead structure of your practice.

Understanding your overhead

In a traditional dispensing optometric practice, all overhead expenses fall into what I call "The Hayes Seven Key Expense Areas." They are:

1. cost of goods

2. staff salaries and benefits

3. occupancy costs

4. patient care equipment

5. marketing and promotion

6. general office overhead

7. doctor's compensation or net

Five of these expenses are what accountants call "fixed." They don't change appreciably when your patient volume increases or decreases by a reasonable amount on a monthly basis. The one large variable expense all dispensing O.D.s have is cost of goods, which varies directly with the number of patients. Other expenses, such as staff overtime, postage and telephone, could vary slightly, but not enough for our calculations. Because cost of goods represents approximately 50% of your total overhead, we have to factor it in separately when we consider managed care plans.

Managed care and profitability

Two main areas control how much any managed care program affects profitability. Everyone knows the first one -- how much you discount your fees to be on the panel. Less talked about, but equally important, is "true net." That's because items such as depreciation and other deductions generally make your net look lower. But think about it: The doc who nets 35% has more room to stay profitable with a 20% discount plan than the doc who nets 25%.

Let's look at three fictional practices with the same gross but with different bottom line nets to get an idea of how managed care discounts affect them.

Example #1. Dr. Lowe sees 1,600 patients per year, at an average of $250, for a collected gross revenue of $400,000 per year. He nets $100,000 or 25%. His overhead looks like this:

Gross $400,000

Fixed Overhead $148,000 (37%)

Variable Overhead $152,000 (38%)

Doctor's Comp or Net $100,000 (25%)

Dr. Lowe is evaluating two new managed care plans for his practice. One requires a 20% discount, the other a 40% discount. Here's what happens to his net if he discounts all his fees by 20%:

$400,000 gross minus 20% = $320,000

New Gross $320,000

Fixed Overhead $148,000 (46%)

Variable Overhead $152,000 (48%)

New Net $20,000 (6%)

His net drops to $20,000 (6%). Of course, he's not going to accept a plan unless it will bring him more patients. Yet to bring his net dollars back to $100,000, Dr. Lowe has to increase his patient load from 1,600 per year at $250 each to 2,370 patients at $200 each, an increase of 48%. While it's questionable that Dr. Lowe could see that many more patients without increasing his fixed expenses, his new overhead looks like this:

New Gross $474,000

Fixed Overhead $148,000 (31%)

Variable Overhead $225,000 (47%)

New Net $101,000 (21%)

He now nets $101,000 on a gross of $474,000. We see a lot of practices that look just like this. Here is his net for the plan that requires him to discount all his fees 40%:

$400,000 gross minus 40% = $240,000

New Gross $240,000

Fixed Overhead $148,000 (62%)

Variable Overhead $152,000 (63%)

New Net ($60,000 loss)

Dr. Lowe now operates at a loss of $60,000 on a gross of $240,000. At this rate, he'd be out of business in short order. To bring his net dollars back to $100,000, he'd have to increase his patient load from 1,600 per year at $250 each to 4,513 at $150 each -- an amazing 282% increase! While it's totally unrealistic to expect Dr. Lowe to see that many more patients without increasing his fixed expenses, his new theoretical overhead looks like this:

New Gross $677,000

Fixed Overhead $148,000 (22%)

Variable Overhead $428,000 (63%)

New Net $101,000 (15%)

He nets $101,000 on a gross of $677,000. Surviving, but certainly not prospering. Let's acknowledge that few practices are 100% managed care, so our example may be extreme. But trust me, large practices that have low nets are out there because they've let discounts get out of control. (Note: Not all low nets are a result of managed care. Some practices don't charge enough to both private pay and managed care patients.)

However, a 25% net is on the low side. The average net, according to both data from the American Optometric Association and from the Hayes Practice Index, is about 31%. So let's look at how discounts affect the higher netting practice of Dr. High.

Example #2. Dr. High also sees 1,600 patients per year at an average of $250, for a gross revenue of $400,000 per year, but his net is 35%, or $140,000. His overhead looks like this:

Gross $400,000

Fixed Overhead $132,000 (33%)

Variable Overhead $128,000 (32%)

Net $140,000 (35%)

What happens if he discounts all of his fees by 20%?

$400,000 gross minus 20% = $320,000

New Gross $320,000

Fixed Overhead $132,000 (41%)

Variable Overhead $128,000 (40%)

New Net $60,000 (19%)

Like Dr. Lowe, Dr High expects a plan to bring him more patients. To bring his net back up to $140,000, he has to increase his patient load from 1,600 per year at $250 each to 2,270 at $200 each -- an increase of 42%. Like Dr. Lowe, Dr. High probably couldn't see that many patients without increasing fixed expenses. However, his new overhead would look like this:

New Gross $454,000

Fixed Overhead $132,000 (29%)

Variable Overhead $182,000 (40%)

New Net $140,000 (31%)

Dr. High now nets 31% on a gross of $454,000 -- not too bad. But he had to increase his work by 42%. Here is the scenario for the plan that requires him to discount all his fees 40%:

$400,000 gross minus 40% = $240,000

New Gross $240,000

Fixed Overhead $132,000 (55%)

Variable Overhead $128,000 (53%)

New Net ($20,000 loss)

If the discount (40%) is higher than the net (35%), then it's basically impossible to turn a profit on that plan. Again, Dr. High isn't going to take a plan that won't bring him more patients. How many more patients will he have to see to bring his net dollars back up to $140,000? He'd have to increase his patient load from 1,600 per year at $250 each to 3,873 at $150 each -- an astounding increase of 242%! While it's totally unrealistic for Dr. Lowe to see that many patients without increasing fixed expenses, his new overhead looks like this:

New Gross $581,000

Fixed Overhead $132,000 (23%)

Variable Overhead $309,000 (53%)

New Net $140,000 (24%)

At least Dr. High is back to profitability, but he had to more than double his patient load to do it. It's safe to say that his practice is a lot more work and a lot less fun. Let's examine a third practice, which decides to drop a plan.

Example #3. Dr. Drop grosses $400,000 per year. He sees 800 private patients per year, at $300 each, for a gross of $240,000, and he sees 800 Vision Plan X patients at an average gross of $200 each, for $160,000. This $200 gross per patient includes the amount that Plan X paid the wholesale optical lab, so we can assume that the practice effectively paid the lab bill, just as it does for private patients. (See "Perform a Mini-Audit" on page 40 for details on how to calculate the per-patient profitability for a vision plan). His overhead looks like this:

Gross $400,000

Fixed Overhead $160,000 (40%)

Variable Overhead $120,000 (30%)

Practice Net $120,000 (30%)

Upon dropping the plan, Dr. Drop loses half of the Plan X patients, but retains 400 at the full fees. Those who stay with Dr. Drop could still file a claim for out-of-plan reimbursement from Plan X, but the benefits are less than with a panel doctor. His 400 Plan X patients pay $300 each, for an annual gross in this part of the practice of $120,000. He grosses $40,000 less, but he also sees 400 fewer patients.

His staff requirements now decrease by one full-time equivalent due to the reduction in paper work and claim filing. This saves $30,000 per year in salary and benefits. We'll ignore additional fixed overhead savings that probably exist. The lab bill remains at 30%, but it's lower in dollars because fewer glasses are needed. His new net is:

New Gross $360,000

Fixed Overhead $130,000 (36%)

Variable Overhead $108,000 (30%)

New Practice Net $122,000 (34%)

By seeing 400 fewer patients, Dr. Drop frees up one half day per week, which allows him to see more emergency and walk-in patients and devote more time to managing the practice. This causes an increase in gross revenue of $20,000 in the first year, and his practice generates more referrals of private patients.

What should you do?

There are valid reasons to accept discounted plans. My rule of thumb is that if you're less than 60% booked on a regular basis, accept all decent paying plans until you build your patient volume. When you are 60% to 80% booked, accept only the good plans. And be wary of any plans that require a bigger discount percent than your net.

However, even busy practices can benefit from a discounted plan that fills an otherwise empty appointment slot. That's because once your fixed overhead has been met, any profit margin above your cost of goods goes straight to the bottom line. But it's a paradox because the practice that stands to profit the most from a discounted plan is the one that has only a few empty appointments to fill. Practices that depend too much on discounted plans to fill their appointment books can get overrun to the point that profitability is threatened, as my examples show. Therefore, a few high-quality managed care plans can be good for your bottom line. Just realize that you'll have to learn to cut costs and see patients in a different way if highly discounted plans become the majority of your practice.

Dr. Hayes is a frequent writer and speaker on practice management issues. He's the founder and director of Hayes Consulting. Contact him at (800) 588-9636 or jhayes@hayesconsulting.net.

 

 

The Million Dollar Practice
GARY GERBER, O.D.

Which practice makes more money: The one with one patient or the one with one million patients? Let's rephrase the question so it's more meaningful. Which practice is more profitable? Put this way, many other questions need to be asked and answered. Overhead expenses such as rent, labor costs and inventory carrying costs all affect profitability. Let's look at each of these two practices in more detail.

One in a million

This practice has only one patient per year. This patient, a well-known multi-billionaire, is demanding. Because he's famous, he requires that no one else be present in the office during his visit. This eccentric has been wearing the same eyeglass frames for years and has repeatedly refused changing the style. Therefore, the dispensary has only one frame.

Because the doctor sees only this healthy patient once a year, he has accordingly pared his profession liability insurance and other insurances to a bare minimum. He's also arranged an agreement with another doctor to sublet the office to him for 1 hour per year.

After the doctor examines the patient's eyes, the patient happily hands him a $1 million check for all of his troubles and says, "Thank you. I'll see you next year." The doctor locks up the office and heads home to enjoy 364 days of vacation.

Perform a Mini-Audit Profitability Analysis

You can perform your own "mini-audit" of any vision plan by taking monthly statements and analyzing about 100 randomized cases. It's important to maintain a representative proportion of the various types of cases you see under the plan (exam only, contact lens, eyeglasses, special lens types such as progressives and other options, etc.). Ignore any purchases that were made for services and materials that weren't covered by the plan. Here's what to do:

A. Start with your total usual and customary charges for covered services for each patient. Ignore private purchases. If the plan caps off what you can charge for some lens options and you currently charge your private patients more for these items, be sure to add in that amount.

B. Deduct what the plan actually paid on this patient's behalf.

C. Deduct what the patient paid toward these services.

D. If the plan covers optical lab costs, calculate a fictitious lab bill for the covered materials in this case, based on what a wholesale lab would charge you. This amounts to an invisible payment that the plan made to you, since it paid this bill for you. Do not include contact lens costs, or frame costs if you supplied the frame; you were paid for these in line B. Deduct this amount.

E. The total remaining is your gross profit (before overhead expenses) on this patient.

F. Calculate the percentage discounted with this plan by dividing line E by line A (E/A X 100) -100.

A million to one

Our second practice sees one million patients per year. The reason why the practice is so busy is because the doctors have devised an ingenious marketing strategy -- they provide eye exams for $1. To service all of these patients (about 4,000 per day), they have a 125,000 square-foot office and a dispensary that contains 45,000 frames. Of course, caring for 4,000 patients per day requires a sizable staff -- 512 to be exact. The practice's chances of being sued are high because of the sheer number of patients, so it has a $500 million liability policy.

One and one million meet

At a trade show in New York City, our two doctors meet each other. As often happens, the conversation turns to how their practices have fared.

The first doctor says, "We had a pretty good year. We grossed $1 million."

The second says, "We didn't do nearly as well. We only grossed $1 million."

Admittedly, these two non-existent examples are on the extreme fringes of the bell curve. Yet they serve to explain the relationship between a high volume of patients at reduced fees and a low-netting practice. Essentially, they illustrate the difference between a practice taking all low-paying third-party plans and another that takes none.

Attracting that elusive million-dollar patient

I doubt that any of us could ever make our practices so special that we would find someone willing to pay $1 million for our services. Yet if we look at what that imaginary patient would want from us and configure our practice to intentionally attract him, maybe we can find two patients who would pay $500,000 each. Or how about 10 patients paying $100,000 each?

By seeking patients who are more profitable, we're establishing our policies and procedures from the top down vs. from the bottom up. We're attempting to grow our practices not by attracting huge numbers of patients, but by attracting huge numbers of dollars. We do this by focusing on those basic consumer needs that every top-shelf enterprise -- be it a five-star hotel or boutique clothing store -- already knows. We focus on doing whatever it takes to make the customer, or in our case, patient, ecstatic with our products and services.

The fallacy of managed care

I'm not anti-managed care. I'm pro-making money. For this reason, I recommend that you evaluate each plan that comes across your desk on its own merits. Accept those plans that you can profit from and reject those that you can't. Keep in mind though, a plan that promises you millions of covered lives won't necessarily make you profitable. And remember that it doesn't take a million patients to have a million-dollar practice. It takes a $1 million.

Dr. Gerber is the president of the Power Practice, a company whose mission is to make optometrists more profitable. Learn more at www.powerpractice.com or call Dr. Gerber at (800) 867-9303.

 


Optometric Management, Issue: April 2002