eyecare by the numbers

Some Sobering Math

Al Cleinman

Today's successful optometry practice bears little resemblance to that of even a decade ago. While I could rattle off a dozen dramatic changes, the most significant from an economic perspective have to do with medical optometry and the impact of vision plans on your practice.

Following is some sobering math.

FACT: PRACTICE PROFIT MARGINS ARE ERODING

Even though the average practice is realizing more revenue (as a percentage) from higher margin “professional fees,” it's likely that your practice saw a significant decline in “Collection Percentage” (the relationship between cash receipts and gross charges) during the past five years.

This means that, as a percentage, there is less money available to pay for practice “wear and tear.” This erosion is the direct result of an increase in the penetration of vision plans and the failure of reimbursements to keep up with practice costs.

FACT: COST OF GOODS OR LABOR IS NO LONGER OPTOMETRY'S LARGEST EXPENSE CATEGORY

Most optometrists suffer from a lack of the right information presented in the right way. As just one example, the vast majority of optometry practices use cash basis accounting. Cash basis accounting records income when it is received and expenses when they are paid.

As a result, the profit and loss statements of most optometrists don't even include the practice's largest expense item: vision plan and insurance write-offs.

For the purposes of this article, please think of vision plans and insurance write-offs as a marketing expense. You are, in effect, paying your various vision plans (and their members) for the honor of serving their members. Effectively, you're paying them to put “butts in seats.”

FACT: THE MONIES AVAILABLE TO YOU HAVE DECLINED DRAMATICALLY IN THE PAST FIVE YEARS

Unfortunately, the cost associated with this effort actually disappears in a cash basis profit and loss statement that only records cash receipts as income. As the “collection percentage” chart clearly demonstrates, the monies available to you have declined dramatically in the past five years. Simply stated, you must understand this expense.

One can reasonably conclude from the analysis above that the practice is “paying” $197 per patient to put the vision plan patient in the exam chair. These write-offs are a combination of the incentives being provided to the patient in the form of discounts and the discounted fees being reimbursed by the vision plan. It's a significant marketing investment.

In the example, the practice is effectively investing $197,000 in managed vision plans. When you think of this number in the context of a marketing expense, it's easy to question the efficacy of participation in at least some vision plans.

What could you do with $197,000 allocated in a different way? If you split the difference and gave your managed care patients $100 toward their eyecare and eyewear, what would be the result? What if you invested half this amount in brand-building strategies and marketing promotions? What if you invested more in developing your team and your environment? What if you made dramatic improvements in your patient experience?

These are tough questions, for sure. And I don't purport to have all the answers. But what I do know is that having access to good financial and operating data provides you with the solid footing necessary to answer tough questions.

Moving from cash basis accounting to accrual basis accounting will provide you with better information. In an eroding margin environment, this knowledge is critical to better understanding what's really going on in your practice. You'll make better decisions as a result. Without it, you're effectively “bowling blind.”

A few questions to ponder:

• Does your financial management system provide the information you need to understand the impact of a given vision plan on your practice?
• Could you do a better job with $197 per patient than some vision plans do on your behalf?

Many years ago,

a very wise man said to me: “Al, if you look at numbers long enough, they'll start talking to you.” It's those words which are the strategic foundation for this column exclusively written for Eyecare Business.

Alan Cleinman is the founder and CEO of Cleinman Performance Partners (www.cleinman.com), a business consultancy specializing in the development of high performance optometry practices.

The information contained in this column is derived from the database of Cleinman Performance Network, the members of which are generally very large optometry practices. The information is not intended to represent national averages. The opinions contained herein are those of the author and do not represent the opinion of Eyecare Business or its publisher.

©2011 Cleinman Performance Partners, Inc.