By Adam Cmejla, CMFC
February 18, 2015
As a financial services firm that specializes in serving optometric clients, one key issue is the production of the practice, specifically gross revenue.
However, many practices have trouble fully understanding and applying this important measure of practice success. But it is the bottom line, the net revenues, that is the more accurate measure of financial success.
Understand What You’re Measuring
As more practices offer medical eyecare, and insurance reimbursements become a larger percentage of practice income, the phrases “billed revenue” and “collected revenue” start to become very important. There have been many times when we’ll be having a conversation with a client and I’ll hear: “We did $1.4 million in revenue last year.” My first question is: “That’s how much your collected revenue was?” To which I get a sheepish response of: “Well, no, we only collected 50 percent of that revenue.” Herein lies the problem (and solution) to evaluating revenue.
Establish How Much You Should Be Collecting
Research and experience has told us that a practice should be collecting approximately 60 percent of fees that are billed, but depending on the different insurance companies that the practice accepts, and the percentage of revenue that comes from those insurance companies, that 60 percent could be higher or lower. Nevertheless, looking at the top line of a profit/loss statement, this gives us the starting point to look at the profitability of the practice and areas that can be improved.
Measure Collected Gross Revenue Per Exam
One of the most important metrics to understand around revenue is the total collected gross revenue (CGR) per exam. The nice thing about this ratio is that it gives important feedback and can be calculated relatively quickly, and also can be dynamic in the metrics. To calculate, take the total collected gross revenue for a specific time period and divide it by the number of patients seen. For accuracy, we’re only concerned with comprehensive exams (both medical and vision plans can be included in this). Numerous industry studies suggest that the average collected gross revenue per exam is around $300, with some practices generating upwards of $500 or more per exam.
There are many factors that figure into what your average collected gross revenue per exam should be including average geographic location/cost of living and other demographics of your community. Collected gross revenue per exam is a key way to determine growth trajectory over a given time period and whether specific managed care plans are profitable for a practice, especially when we want to know how the practice is faring month-to-month or quarter-over-quarter as compared to previous years. Having a good practice management software system in place is pivotal in making measurement of collected gross revenue an easy, repeatable task, one that should be delegated to your office manager, who can then provide the data to you (rather than taking precious doctor time to run the numbers yourself).
Take Action to Increase Collected Revenues
Once you understand the metrics from your CGR and you’ve broken it down systematically across the different insurance plans that you accept, you can now start answering the question: “Is the juice worth the squeeze?” I mean: Is the “cost” of accepting a discount on your usual fee schedule to “play ball” with the plan worth it for your business model? The best way to understand this is to understand your chair time cost.
Chair time is the cost that you incur to provide exams to your patients. To measure this, look at total expenses for a period (except for interest and depreciation expense) and divide that by the total number of exams provided throughout that same period. For example, an annual analysis of a practice may look like this:
If the practice has an average of $300/exam, this practice would have a net profit margin of 10 percent, well below the industry average of about 28-30 percent. In this example, the first question to ask is how can the number of exams seen be increased, since increasing that number would drive down the cost per exam, thus increasing our profit margin. Proper marketing, staff delegation, patient experience, and a systematized business, are important in this equation.
Most practices can find areas to clean up excess chair cost-related spending. Hint: staff is the last place you want to look. Providing an exceptional patient experience is key, and you can’t do that if you’re short-staffed.
In the end, the best way to increase profit margin is to increase CGR. Knowing the metrics of the different ways in which revenue enters the practice, and the parameters of exams, allows an informed business owner to evaluate the efficiencies of their practice. Remember, you can’t grow and improve what you don’t measure.
Adam Cmejla, CMFC, based in Carmel, Ind.,is president of Integrated Planning & Wealth Management, LLC, a financial planning and investment management firm “focused on working with optometrists to help them achieve their true financial potential, build financial confidence and clarity, and delivering kindness and compassion to every relationship they’re privileged to serve.” To contact: 317-853-6777 or email@example.com.