At a recent optometric society meeting, I sat at a table with five colleagues who ranged from new graduate to seasoned O.D. Most of the group spoke of being booked three to eight weeks out; everyone shared that their practice revenues were up, yet they all agreed with one young doctor who lamented, “I just don’t understand how I can be doing so well but still struggling to make ends meet at the end of the month.”
In what seemed like an effort to reassure the others, one senior colleague commented, half-jokingly, “I’ve always worked hard, seeing patients six days a week, and after 20 years I still don’t know if I’ll be able to pay all the bills, much less take home a paycheck, but I’m still in business.”
Like the senior colleague, many optometrists care for patients all year long, trusting that the financial reports will add up, and that there will be some money (e.g. profit) left over. I believe in optometry’s responsibility to act in the best interest of each patient in every interaction. But it’s the financial health of each of our practices that allows us to do so.
Fortunately, by learning the different purposes of practice management and business accounting software and gaining a basic understanding of which key performance metrics to consider, optometrists can improve the quality and profitability of their practices. Let’s dive in.
PRACTICE MANAGEMENT SOFTWARE
Practice management software is perfect for tracking productivity and for managing staff and practice processes. Data points, tracked over time, reveal staff performance trends, alerting practice administrators to areas of concern. For example, our staff goal is to pre-appoint 95% of each day’s patients for their next visit. If we regularly fall below our agreed upon minimum acceptable rate (90%), training is scheduled on this metric. Each metric has a goal and a baseline. Performance below baseline triggers attention and training.
In our practice, we collect metrics daily and place them into two categories :
- Clinical activity: This is the number of professional services billed, appointment utilization rates and pre-appointment percentages.
- Prescription fulfillment (aka capture rate): This is the number of frames, spectacle lenses, contact lenses and optional screening tests (think retinal imaging).
These metrics are reviewed by the entire staff daily, weekly, monthly, quarterly and year over year, so the practice can improve continuously. O.D. owners and practice administrators should choose key performance metrics that will yield the greatest benefit to their current situation.
Practice management software also provides a critical piece of financial information: service fee discounting. This occurs when the practice accepts less than its usual fee for services provided. It’s a significant metric because it is the largest practice expense and can reveal whether the O.D. should drop a low-paying health care plan.
For example, a practice charges $200 for a comprehensive well vision exam. Third party payer A reimburses $150, third party payer B reimburses $100, third party payer C reimburses $50 and Joe, an independent payer, pays $200. The practice has performed and billed $800 worth of services, but has only collected $500. That is a 37.5% service fee discount.
In using practice management software, the optometrist can subtract the total fees collected in a given period of time from the total customary fees billed, which provides the average service fee discount. Then, the service fee discount of each of the third-party payers can be evaluated and, following their contract guidelines, the O.D. can cancel the lowest paying 25% of plans below the average.
When I did this, at a practice I bought that accepted every plan available, two things happened:
- We temporarily saw fewer patients, but collected more money. (You read that right; the practice worked less and made more!)
- After three to six months, the schedule became full again, but with higher reimbursements. (The practice was back to its usual workload — and collecting more money.)
We repeated this cycle every six months until we reached the point where we are now accepting only third party plans that meet our profitable reimbursement requirements. This requirement is determined by calculating practice chair cost per exam and then adding a percentage for desired profit. It can be expressed as a minimum acceptable reimbursement or a maximum service fee discount.
BUSINESS ACCOUNTING SOFTWARE
Business accounting software programs allow for budgeting, tracking and managing practice cash flow and expenses for increased profitability. (This requires some preparation at the outset; optometrists should work with a bookkeeper or accountant to accurately set up the income and expense categories in their programs for best use.)
The report on these items, pulled on a monthly, quarterly and annual basis, is called profit and loss. For our purposes, this report should group money into eight distinct categories. The following are brief descriptions of each expense category, in the order I prefer them to appear on my report, along with a range of industry benchmarks. These benchmarks, which are percentages of a practice’s collected income, are geared toward more traditional modes of optometric practice and may vary remarkably from a practice that has more medical eye care patients vs. standard refraction patients. They are provided as general reference points. The important thing is for O.D. practice owners to develop their own expense history. Then, using personalized benchmarks, optometrists can track and influence the practice trends to their own benefit.
- Collected income. Always at the top, this is the amount of total fees collected and deposited.
- Cost of goods sold (COGS) (26% to 32%). This includes the cost of anything purchased for resale (contact lenses and solutions, dry eye disease products, eyewear care kits, plano sunglasses, etc.) and for the materials and labor costs associated with creating a product to sell (frames, spectacle lenses and, if the optometrist does lab work in house, a percentage of the optician’s salary equal to the percentage of time spent finishing eyewear).
- Staff salaries and benefits (18% to 24%). This encompasses all employee costs: benefits, taxes, uniforms, travel, professional dues, cost for certifications, etc. Remember to subtract the portion of the optician earnings used to calculate COGS. We set our budget at 25%. If we are below budget at the end of the fiscal year, we distribute the balance to staff as a bonus. Do not include any salary or benefits paid to doctors in this category. (See “Net Income,” below.)
A good benchmark for a traditional optometric practice is to keep the combined total of COGS and staff salary and benefits below 50% of collected income. The remaining four expense categories typically combine for another 15% to 25% of collected income. This will leave a healthy profit margin of 25% to 35%.
- Marketing and promotion (1% to 3%). This includes all expenses for both internal and external marketing. We try to keep this as close to 3% as possible. The reason: Some things shouldn’t be the target of budget cuts because they help retain and attract patients.
- Occupancy costs (6% to 8%). This includes rent or mortgage, property insurance, maintenance, taxes, utilities and all other expenses incurred on behalf of the facility that houses the practice.
- Patient care and equipment costs (3% to 5%). This includes ophthalmic equipment purchases, lease payments and interest on equipment loans, as well as the cost of disposable items used in office to provide patient care: diagnostic drops, sponges, etc.
- General office overhead (6% to 8%). This includes everything that doesn’t fit in to a category above: office supplies, computers, copiers and scanners, phone systems, postage, printing, legal, accounting and IT services, dues and subscriptions, insurance, taxes, etc.
- Net income. This number is equal to the collected income at the top of the report, minus all six subsequent expense categories. Congratulations! This is the total profit created by the practice. Net income includes all financial benefits of any kind provided to doctors in the practice, even employed associates: bonuses, distributions, personal benefits, health insurance premiums, retirement fund contributions and salaries to doctors.
PUT THE SOFTWARE TO WORK
Practice management and business accounting software are tools at the disposal of every practice administrator. O.D.s should utilize the metrics tracked by each to improve the value of their practices. The reports mentioned above are standard to most software, and, where not, the metrics can be acquired and placed into a simple spreadsheet for analysis. With a general understanding of the different purposes, the useful information and the benefits of each software, O.D.s should take the time to create concrete plans for a successful 2020. OM