Article Date: 2/1/2004

practice made perfect
A Practice for Prosperity
By Marilee Blackwell, M.B.A., C.P.A., A.I.B.A., and Donna Suter

We've all heard the customer service mantra "the patient [often called the customer] is always right." In the case of Dr. Wayne Burns, remembering this resulted in an increased net from 25% to 33% and gross from $306,000 to $550,000. During our first phone call, Dr. Burns told us that he was netting 22% and wanted to know if we thought this was low. We said yes, that his net should fall between 30% and 40%.

Getting a plan

Dr. Burns knew that his staff costs were high, but he didn't know why or what to do about it. His primary objective was to increase his net. We discussed the history of his practice, historical revenue, third-party plan participation, inventory, scheduling backlog, competition, staff salaries and staff performance.

Dr. Burns opened the practice in 1996 and grossed $100,000. He grew rapidly from 1996 to 1998. But each year thereafter, the rate of growth slowed -- in 2002 he grew by only 1%.

The good news was that third party plan participation in Dr. Burns' community was low and he had a healthy appointment backlog. In fact, his biggest third-party plan was 5% of his revenue and his appointment backlog was two to three weeks.

Our next step was to perform a detailed analysis of his practice that included calculating Dr. Burns's practice net, staff productivity, revenue per O.D. hour, revenue per patient and exams per O.D. hour. The table below shows how his seven key expenses compared to our recommended ranges.

 

Dr. Burns's Seven Key Expenses

 

ACTUAL

 NORM
Revenue  306,394    
Cost of Goods Sold 91,918 30%  27% to 33%
Staff Salaries & Benefits 73,535 24% 15% to 20%
Occupancy Costs 24,512 8% 4% to 8%
Patient Care Costs & Equipment 12,256 4% 3% to 5%
Marketing & Promotion 6,128 2% 2% to 4%
General Office Overhead 21,448 7% 6% to 9%
Doctor's Compensation 76,599 25% 30% to 40%

 

Zeroing in on the problem

Our calculations indicated that Dr. Burns's net was slightly higher than he thought at 25%. We also verified that staff salaries and benefits of 24% was the primary cause of his lower- than-average net. For the typical practice, we recommend that our clients maintain staff costs at 20% of gross revenue or below. Dr. Burns wasn't located in a high-cost-of-living community, so his staff costs should have been at the lower end of the recommended range.

We determined that Dr. Burns was seeing 0.75 patients per O.D. hour available to see patients and had revenue per O.D. hour of $170. The norms for low-volume practices (annual gross revenue of $400,000 or less) were 1.4 patients each O.D. hour and revenue of $281 each O.D. hour. In addition, Dr. Burns had revenue for each patient of $210, which was similar to the norm.

To determine office efficiency, we calculated and analyzed staff productivity by dividing annual gross receipts by the actual number of non-lab staff hours worked that year. The minimum acceptable staff productivity is $65 each hour for each employee. Staff productivity is considered "good" if it's between $65 and $80. Anything more than $80 is considered "excellent."

Dr. Burns's staff productivity was $71 per hour per employee -- within the "good" range. So high staff wages and low staff productivity weren't the cause of the high staff salaries and benefits.

Dividing up the work

During the consultation, we wanted to know what parts of the exam process Dr. Burns delegated and what elements he performed himself. He explained that he performed patient history, tonometry and instilling dilation drops. He also "helped" with frame selection and dispensing. He believed that doing those tasks himself improved the patients' perception of the quality of care at his practice. (Anecdotal information collected from patients didn't support his beliefs.)

We agreed that the patient's perception of quality is key to a successful practice, but we disagreed about the best way to mold that perception. We felt that Dr. Burns's staff productivity was artificially inflated because he was performing tasks that he should have delegated to them.

The patient decides

It isn't true that the quantity of the doctor's time with the patient is the most important component of the patient's perception of quality. Patients don't know how to judge the quality of the doctor's exam, but they can and do make an immediate judgment regarding the quality of the interaction.

Patient research confirms that you can enhance the quality of patient interaction by removing yourself from tasks that you can delegate to the staff, such as case history, instilling dilation drops and selecting frames. Spend some of the time savings achieved interacting on a personal level with the patient. Use the rest of the time to see more patients.

In fact, if Dr. Burns had seen 1.4 patients each hour for 40 hours each week and 49 weeks each year at revenue of $210 each patient, his gross revenue would've been $576,000 (1.4 patients x 40 hours x 49 weeks x $210) rather than $306,000. That difference in his gross also enhanced his net.

Dr. Burns's lack of delegation resulted in high staff salaries and benefits as a percent of gross and low net. Our key recommendation was to delegate, delegate and delegate. We also coached him on how to make a positive impression on patients and to convey his interest in their well-being.

Not always what you think

The solution in Dr. Burns's case involved re-evaluating his own belief system about how the patient judges the quality of the exam. His perception of quality of care and the reality of efficiency through delegation stood between him and a healthy net.

Remember -- one important component of practice growth is the doctor's productivity. This translates into your ability to make a positive impression on patients, to delegate and manage your staff and to objectively separate your perception of quality from the patient's perception of quality. In the final analysis, the patient is always right.

 

Ms. Blackwell, president, Blackwell Consulting (800-588-9636) and Ms. Suter, president, Suter Consulting Group (423-236-5465), team up to offer financial guidance and on-site consulting services designed to increase your gross revenue and improve your net income percentage.

 



Optometric Management, Issue: February 2004