Article

ECONOMICS OF VISION PLANS

Q: How do I evaluate the profitability of managed vision care plans in my practice?

A: Managed vision care plans provide optometric practices with a means to attract patients to fill open appointment slots. In this respect, the discounts provided to vision plans and their members can be considered a write-off, calculated as the difference between usual and customary fees and fees paid by the vision care plan and members. In simple terms, vision plans are an investment in marketing. By accepting discounted fees, O.D.s are, in essence, “paying” a marketing fee to vision plans.

Most practices use cash basis accounting (vs. accrual accounting). As a result, the write-offs for vision plans are largely hidden. Given that these write-offs are now averaging 36% of practice gross revenue,1 it’s critically important to understand what can become the largest expense in an optometry practice.

To arrive at the write-off number, subtract the collected charge per vision plan patient from the collected charge per non-vision plan patient. (See Table 1 for an example of how to calculate a micro level financial view of a practice that accepts 50% managed vision plan patients.)

Table 1. The Economics of Vision Plans
Actual Annual Revenue (Accrual Basis) $1,508,000 (100%)
Write-Offs = 33.7% of Revenue 508,000 (33.7%)
Annual Collections (Cash Basis) $1,000,000
Total Number of Patient Exams 2,444
Number of Patient Exams With Vision Plans 1,222 (50%)
Average Gross Charge per Patient $617
Collected Charge per Patient (Non-Vision Plan) $617
Average Collected Charge per Patient (Vision Plan) $201 (32.6%)
Average Cash Collected per Patient $409
Number of Vision Plan Patients 1,222
Actual Write-off per Vision Plan Patient $416 (67.3%)
Annual Vision Plan Write-Offs $508,000 (33.7%)
Table 1 shows a calculation of vision plan write-offs for a sample practice. (Note: The numbers have been rounded for ease of review.) It is recommended that optometrists perform this calculation with their practice’s actual numbers.

When dealing with vision care plans, many practices look at revenue, but do not evaluate the profitability. With more than 50% of the U.S. population covered by some form of vision plan, it is instructional to ask, how can optometrists evaluate the true impact of vision plans on their practices?

TRY THESE STEPS

Step one: Using the prior year’s profit and loss statement, O.D.s can identify their total fixed cost of operations. A list might look like this:

Staff labor: $250,000

O.D. labor (the total base salary cost of replacing yourself and associates): $150,000

Occupancy (rent, maintenance, etc.): $100,000

Insurances: (malpractice, property, casualty): $10,000

Total value of your equipment divided by reasonable useful life: $315,000 ÷ 7 years = $45,000

Total: $555,000

Step two: Divide the total cost of operations by the number of comprehensive exams provided (we’ll use 3,000). The result is the chair cost. In this case, $555,000 ÷ 3,000 = $185.

This number is the approximate cost of providing an exam. However, recognize that this cost will vary quite dramatically depending on the O.D,’s ability to fill capacity. Using the 3,000 exams in the above example, and assuming a 260-day year, the optometrist would have seen an average of 11.5 patients per day. One can then surmise that the 13th patient’s chair cost is significantly less than that of the first patient. This excess capacity is often the rationalization for accepting vision plans.

Step three: Armed with the estimated chair cost, the optometrist can calculate the average revenue resulting from each of the plans with which they participate. This can be reasonably calculated by taking the last 10 patients seen for each plan and calculating the O.D.’s reimbursement vs. their usual and customary charges for these patients.

With this data, optometrists are now prepared to answer a broad range of key questions:

  • Does the accounting system provide the information needed to make good business decisions?
  • Is the optometrist operating at capacity or is there room in the schedule for more patients?
  • To accept a vision plan, is the O.D. reducing time with all patients at the expense of full-pay patients?
  • What is the administrative investment made in vision plan patients vs. full-pay patients?
  • Is the optometrist maximizing the realized revenue from vision plan patients?

Whether the O.D. chooses to reduce the reliance on vision plans or makes the investments necessary to improve the return on the marketing investment within vision plans, this question is complex. Improvements to the optometrist’s financial performance will result from making a comprehensive assessment and ensuring that the practice’s performance is in alignment with the O.D.’s goals. OM

  1. Cleinman Performance Network Partners data.