Do you know what your profit is with vision plans?
March 12, 2014
I find very few optometrists actually know how much profit they make with the vision plans they accept. Oh, there is a vague feeling that it is not very much or that one plan is better than another, but when it comes to actual numbers, no one really has the facts. I understand this to some extent; after all, the payment systems are rather complex. Each vision plan has different fee maximums and there are product charge backs for some items while other parts of the lab bill are paid in full, invisibly.
In spite of the complexity, however, you really should know approximately how much profit you make with each plan. After all, you made it through a very high level geometrical optics class, I’m pretty sure you can figure out the gross revenue minus the cost of goods equals your profit. Read on and I’ll show you a very easy way to get a good read on this elusive but vital data.
Why you need to know
As business owners, it is extremely important that we understand the profitability of all aspects of our practices. When we know the profit margins, we can make smart choices about the resources we can devote to a specific business channel and we can also decide if we even want to continue with specific services, products or third party payers. Changes are occurring in our industry faster than ever so we should reevaluate the profit margins in the major categories of the practice on a regular basis. Vision plans are a major category of most practices!
With most businesses, different products and services have different profit margins and that is quite normal. We may enjoy a great margin on one thing and a smaller profit on another. That does not mean we should dump the service with the small profit. Some profit may be better than nothing at all. For example, my practice earns a higher profit on prescription glasses than it does on plano sunglasses. The plano sunglass market is more competitive and the same product is sold in other places, so our mark-ups are lower. That does not mean that I’m unhappy carrying non-Rx sunglasses in my optical.
It is very difficult to make a judgment about profitability by looking at the vision plan fee schedules alone. There are too many variables to evaluate and we end up looking mostly at the exam fee. That scares most doctors off, but it is more accurate to consider the complete mix of patients. This is also true if you are contemplating accepting a new vision plan. To determine profit margin, you really have to accept a plan, use it for about three months, and then run a retrospective study like I describe below.
We need facts, not emotion.
It seems to me that our perception of vision plans is based on a very emotional response. If you read the OD internet chat forums and social media, there is no shortage of strong opinions and heated discussions. Of course, those forums are set up for that very purpose and they can be very helpful, but be warned that there are many myths and inaccurate statements about vision plans. There are many misunderstandings.
One good example is the emotional aspect of seeing the charge backs on the vision plan explanation of benefits (EOB). In many cases, it appears as if you are actually losing money seeing a patient. Some vision plans require the practice to write them a check if charge backs exceed payments. But realize that the more your charge backs are, the more the patient paid you for extra items. The greater your charge backs, the greater your profit.
I’m not defending vision plans; they are what they are. But let’s work with facts and data, not hearsay and rumors. Do a little homework in your practice as described in the next section and find out your profit margin with each vision plan. Also, it is a good idea to actually read the provider manuals.
I recommend you perform a retrospective study on 20 actual cases that you have recently examined or dispensed eyewear to within a specific vision plan. You will determine the gross profit you received on each case and then take the average for all 20 cases. You should repeat this process for each vision plan you work with. Once you know the mean profit level for each vision plan, you can make intelligent decisions about working with vision plans, accepting new ones and comparing them. When I conducted this study in my practice, I found my profitability with vision plans was actually greater than I expected.
You will need to pull the clinical and optical records for each of the 20 patients and also have the vision plan statement (or EOB) that details the payment and chargebacks you received. You should also have access to the patient’s personal account ledger with your practice in order to include the items the patient paid for.
I would like you to select the 20 patients randomly without knowing what they purchased, but you should prorate the types of cases selected based on your real world experience. By that I mean select the correct mix of: exam only, exam and glasses, exam and two pairs of glasses, exam and contacts, and glasses only. The correct mix will reflect the percentage of each of those types of cases you see in a large sample in your practice.
When I did this analysis in my practice, I used the following mix:
- Exam only: 10% or 2 cases
– Exam and glasses: 60% or 12 cases
– Exam and two pairs of glasses: 10% or 2 cases
– Exam and contacts: 15% or 3 cases
– Glasses only: 5% or 1 case
I would leave medical billing out of this analysis, but know that if you bill some services for patients with vision plans to medical insurance, your profit will be even better than shown on this analysis.
The goal of the analysis is simple: add up all the payments you received from all sources (the patient and the vision plan), deduct all costs of goods (including items you paid for and charge backs from the vision plan) and the result is your gross profit for that patient. Add up the gross profit figures for all 20 patients and divide by 20 for the average profit per patient for this vision plan.
We call it gross profit because we are not considering your office expenses like staff or rent. We are just considering cost of goods.
You should include all items that you sold on the first exam or the annual exam no matter who paid for the items. This includes everything, even if the vision plan did not cover the item. For example, you should include screening retinal photos or other optional tests, multiple pairs of glasses, contact lenses, nutritional supplements, etc. If you were paid to do in-office edging, factor in your lab costs and add any net payment. Too often we only look at the vision plan payments and we forget the patient paid for many items as well.
Deduct all cost of goods that are billed through your lab or suppliers, but use the actual amount you pay so the profit is accurate. Don’t use the Frames Data price, use the price you paid after any discounts. If you paid for contact lens products, deduct that cost. Also, deduct the charge backs shown on the vision plan EOB.
Get the average gross profit per patient for this vision plan.
You can also total up your usual and customary fees for these 20 patients if you wish and average those totals. That data is not helpful in the profit analysis of vision plans, but it is an interesting comparison to private pay.
A word about marginal costs
As you reflect on your profit margins, be sure to consider how busy you are. If your appointment schedule is not full, you are better off accepting additional patients even if they have lower profitability than your private pay patients.
If you add up all your fixed expenses (rent, staff, utilities, equipment, marketing, etc.) and divide by the number of patients you saw in that time period, you get your cost per patient (also called chair cost). That can be a big number and you might think that if the gross profit is not greater than that chair cost, you should reject the vision plan. But you must ask yourself what the cost would be for you to see an additional patient if you have empty appointment slots. That cost is called the marginal cost and that cost is actually zero. You have already met all your practice costs and seeing an additional patient costs nothing. So any gross profit you produce on those patients is pure profit. Some profit is better than no profit.
Best wishes for continued success,
Neil B. Gailmard, OD, MBA, FAAO
Editor, Optometric Management Tip of the Week
Dr. Gailmard's new book, Practice Management in Optometry: A Blueprint for Success Based on the Optometric Management Tip of the Week, is now available on Amazon.