"I
didn't go to optometry school to settle for being average." This sentence was the
first of many that quickly let us know that Dr. Natasha Davern wanted more than
"okay."
Taking pre-emptive action
Dr. Davern had been out of school
for eight years, worked four days a week and had a net of 19%, or $109,250, in 2002.
According to the American Optometric Association annual report, Caring for the
Eyes of America, 2004, the mean net income of an optometrist with less than
10 years experience was $117,857 in 2002. An employed O.D. working for an optometric
practice earned $90,438 (mean net income).
Consequently, Dr. Davern was earning
less than other O.D.s with her same experience and only slightly more than an
O.D.
employed by another O.D. Given her low net income, she wondered if it was really
worth it to be in private practice. She also said that her biggest fear was that
she'd wake up one day and realize that she was 50 and was still doing things the
same way she'd done them five years out of school.
Looking back to go forward
A historic look at her financial
growth showed a practice that had stalled. Let's look at Dr. Davern's revenue growth
rates:
When she opened her practice, she
had signed up for a lot of managed care plans. She said that she'd done this because
she wanted to fill the books and thought it would be better to be busy than limp
along with three or four patients a day.
While it was true that she was
now booked two weeks in advance, she was afraid that her average patient mix was
pulling her into a cycle of mediocre net. Her Profit and Loss Statement for 2002
is shown above.
Calculating costs
Could Dr. Davern be more profitable
if she changed her mix
of
managed care plans? The solution lies in the answer to the question, "How much do
you have to charge to stay in business?" A quick financial evaluation to determine
if a plan is profitable is to calculate chair costs — 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.
Dr. Davern was considering eliminating
one of her poorest paying plans. To maintain anonymity, let's call the plan the
ABC plan. Because Dr. Davern was considering eliminating 25% of her patients or
718 patients, we calculated chair cost per hour and per patient.
- Chair
Cost per Patient = Fixed Cost ÷ # of Complete Exams
- Chair
Cost per Patient = $258,750 ÷ 2,875 = $90
- Chair
Cost per Hour = Fixed Cost ÷ # of Hours
- Chair
Cost per Hour = $258,750 ÷ 1,176 = $220
To determine chair costs per patient,
we divided her fixed costs
(all expenses except Cost of Goods Sold) by the number of comprehensive examinations
she saw in 2002. Chair cost per patient was $90.
We also calculated chair
cost per hour by dividing total fixed costs by the number of hours she was available
to see patients during 2002. Dr. Davern's office was open from 9 to 5, she took
one hour for lunch and spent one hour per day on management. In addition, she took
three weeks of vacation per year, which meant that she was actually available to
see patients 1,176 hours in 2002. Chair cost per hour was $220.
According to the sampling we
did of ABC plan patients, the total average fee collected was $152. Her average
cost of goods (COG) on ABC patients was higher than her overall practice average
of 36% — this patient group had a COG of 47%. Therefore, her gross profit
(revenue minus cost of goods sold) was only $81. Dr. Davern's gross profit on ABC
plan patients was not high enough to offset the chair cost per patient of $90. Quite
obviously, she was losing money on her ABC patients.
Don't forget compensation
Remember, the formula
for calculating chair costs is the same
as the formula for calculating the break-even point. This means that the doctor's
compensation is not included in chair cost. If you want to calculate chair cost
per patient including reasonable compensation for yourself, you would add reasonable
O.D. compensation to fixed costs before dividing by the number of complete exams.
Create the right image
There are ways to attract and keep
patients that aren't price driven. Consumer research confirms that offering the
lowest prices in town and trying to be all things to all people creates a patient
base that may think you're okay, but won't be willing to spend money with you on
premium products or non-covered testing. In essence, trying to be all things to
all people confuses your patient base.
To survive and thrive, it's essential
that today's eyecare practitioner achieve what marketers refer to as top-of-mind
awareness.
Radical image makeover
Before Dr. Davern agreed to a radical
image makeover that included shedding a managed care plan that was weighing her
down, she wanted to know how switching
from a managed care practice to private pay would impact her bottom line.
During the prior 12 months (2002),
the practice saw a total of 718 ABC plan patients, which totaled $109,136 in revenue.
With an average cost of goods sold of 47%, or $51,294, her gross profit was $57,842
($109,136 x 53%). Without the ABC plan, total revenue would have been $465,864 ($575,000
total 2002 revenue minus $109,136 ABC plan revenue) and total cost of goods would
have been $155,706 ($207,000 total cost of goods in 2002 minus $51,294 ABC plan
cost of goods) or 33%. That's a three-point drop in cost of goods.
The potential "side-effects" of this
makeover were that if she didn't make any other changes to her overhead structure,
her net would decrease from $109,250 to $51,408 or 11% ($465,864 revenue without
ABC plan patients minus $155,706 cost of goods minus $258,750 fixed costs).
We repeatedly emphasized to Dr. Davern
that if she eliminated 25% of her patient base without proper strategic planning
and implementation, her net would plummet.
Watch out for COG
Our analysis of the practice's participation
in such a low reimbursing managed care plan was that her average revenue for this
patient type of $152 was low compared with her practice revenue per patient of $216
($575,000 total 2002 revenue minus $109,136 ABC plan revenue divided by 2,157 non-ABC
plan patients) without the ABC plan.
Typically, when a practice is doing
too much managed care, it
has high Cost of Goods. Cost of Goods Sold of 36% was significantly higher than
the recommended range of 27% to 33%. And, her Cost of Goods Sold for ABC plan patients
of 47% was extremely high. This is because fee changes don't impact patients with
plans who have set reimbursements.
Is it worth the risk?
Was the risk of extreme change worth
the possible benefits?
Because raising fees does not impact
higher cost of goods associated with managed care plans, we suggested she drop the
ABC plan. We estimated that if she did this without implementing our other management
suggestions, her net would decrease from $109,250 or 19% to $51,408 or 11%. Simply
put, this business decision had to be supported by re-evaluating other business
expenses, including staffing levels.
To improve her net while possibly
decreasing her gross, her radical makeover involved implementing the following,
with careful consideration of the implications:
- Maintain staff salaries and
benefits at 21% of collections
- Maintain general office overhead
at 9% of collections
- Selectively raise fees by
15% overall
- Drop the ABC insurance plan
- Implement internal marketing
tactics
- Execute staff training that
focused on professionalism and VIP service.