Managed Care

Pricing Frames Profitably in a Managed Care Environment

Pricing for Profit
by Jay Binkowitz

Managed Care

Jay Binkowitz

Three Managed Care Plans, Three Profit Strategies

By Jay Binkowitz 

Have you adopted a business philosophy that supports profitability with managed care?  If not, you may be losing money on your frames, and you don’t even know it.

Many practices still rely upon a three-times-wholesale mark up formula,  a 15-year-old philosophy that was common before managed vision care became the formidable force it is today. How about those of us that are not marking up three times? Are you an OD who believes that you will make more money simply by filling up the appointment book and seeing more patients? With the wrong mark-up philosophy, you will be losing more money.

Yes, I said losing. You are writing a check, instead of depositing a check, every time you see a patient.

Vision care plans are not a bad thing. Our lack of understanding of how to work with them is the problem. We need to examine strategies, plan by plan.

Eyemed Plan
Let’s look at three different managed care companies.  Practices that see Eyemed patients are familiar with the “60 percent of charge” for frame allowances. If you are purchasing a frame that has a Frames Data wholesale list price of $45 and using a three-times mark-up, here is the formula:

$45 x 3 = 135 – 40% = $81 – $38.25 (net costs of goods, after discount) = $42.75 profit

What do you think the result is with less then three-times mark up? If you established a Minimum List Price (See MLP explanation below) of $169, then here is the formula:

$169 – 40% = $101.40 – $38.25 = $63.15 profit.

This generates a 47.5 percent increase in profit.

There are several different types of Eyemed plans, and each one has its unique features. This is just one example on how to impact the bottom line.

Davis Vision Plan
Davis Vision also has a few different formulas: Percent discount, VS $ allowance, VS wholesale formula. Here, too, the concept of MLP creates the opportunity for you to be more profitable. Lets talk about the $ allowance plan. Each of these plans specifically assigns a $ value for frame allowance (e.g., $14 or maybe $100). Regardless of the amount, you should let your patients know that you give all your Davis Vision patients 20 percent off your eyewear, and that they can feel comfortable about using their plan. You will apply the in-store promotion or their actual allowance. Whichever is greater! Patients are not restricted to just the “frames on the rack.” The attitude your staff should adopt: Go shopping, and let’s find what will make you happy!

Let’s look at an example. If the patient has a frame allowance of $25, and they select a frame that you sell for $135, then you would have charged them $110.

The same frame with MLP is $169 – 20 percent = $135.20. A 23 percent increase in profit. Another example: The patient selects a frame that you sell for $300. They only have a $25 allowance, so they say no. Now you inform then the 20 percent in-store promotion will give them $60 off. They get whichever is greater. So they end up paying $240. Big difference!

The patient is more motivated to consider other frame choices, and you earn more money. Everybody is happy.

VSP Plan
The formula for VSP is very simple and easy to work with. They provide a Wholesale Frame Allowance (WFA) and a Retail Allowance that your patient knows  (e.g., WFA = $45  Retail = $120). If your patient selects a frame that is listed in Frames Data for $45 or less, you do not charge the patient anything. Your retail list price does not matter. Neither does the retail allowance on the patient service record.

If your patient selects a frame that is listed in Frames Data for $46 or more, then you use the retail allowance formula (e.g.  $46 wholesale cost).

Let’s take a look at some examples of mark up with this formula:

WFA = $45  Retail = $120.

The patient selects a frame that costs you $45, and you sell it for $135.

VSP payment to you = $45

Patient payment to you = $0

Actual net cost of goods (after discount) = $38.25

Your profit = $6.75

Dispensing Fee = $39 {varies by location}

Final result = $45.75

With the MLP philosophy, the results are as follows: The patient selects a frame that costs you $46, and you retail it for $169. Because they selected a frame that has a higher wholesale cost then their WFA, you can now use the retail formula. Your retail price – their retail allowance – 20 percent = patient payment. $169-$120=$49 – 20 percent ($9.80) = $39.20.

VSP payment to you = $45

Patient payment to you = $39.20

Actual net cost of goods (after discount) = $39.10

Your profit = $45.10

Dispensing Fee = $39

Final result = $84.10

That is an 84 percent increase in profit.

Here is what happens if you use a standard three-times mark-up:

$46 x 3 = $138 – $120 = $18 – 20% ($3.60) = $14.40

VSP payment to you = $45

Patient payment to you = $14.40

Actual net cost of goods (after discount) = $39.10

Your profit = $20.30

Dispensing Fee = $39

Final result = $59.30  Not quite as good as $84.10!

Here’s something to see. How about those who still use a 2.5 mark-up:

$46 x 2.5 = $115 – $120 = Patient payment ZERO. If your retail price is less than the retail allowance then the patient pays nothing!

VSP payment to you = $45

Patient payment to you = $0

Actual net cost of goods {after discount} = $39.10

Your profit = $5.90

Dispensing Fee = $39

Final result = $44.90.

It cost you $39.10, but how about the cost of operating your business? You lose money because of this mark-up strategy.

That’s a nightmare. But that’s what’s going on in many practices. The harsh fact: If you are afraid to adequately charge for frames, you are losing money big time. And that is not the fault of the vision care plan.

Understanding MLP
So, what is Minimum List Price (MLP)? We know it costs money just to buy the frame: operating money. It costs you $x to receive the frame, unpack the frame, show the frame, turn the lights on and rent your space. This overhead has to be accounted for in your pricing strategy. By using the philosophy of MLP, we recognize that it costs you as much to sell a frame that you purchased for $80 as it does the $15 frame. You need to account for this cost. Understanding that each market is different and that your MLP will vary, it generally falls between $159 and $219. So even if a frame only costs you $30, it should be priced at your MLP.

You can also offer some of these products to private pay patients in packages for less to be competitive. However, if you are providing and communicating great customer service initiatives, you will find it is not always necessary.

The key: Remember that managed care plans don’t dictate your retail frame prices. You can price your frames as you deem appropriate. If you pay $10 for a frame, you can sell it for $169. But you want to have a formula versus an ad-hoc pricing scheme of whatever you feel like from one day to the next.

Follow this simple philosophy, and you will profit from your frames sales in today’s managed care environment: If you can’t mark-up your products, then don’t sell them. In our practice, we embraced this thought process over 10 years ago, and it greatly impacted our bottom line.

Jay Binkowitz is president of GPN, producer of THE EDGE. This web-based software program analyzes eyecare practices and services to identify the strengths and weakness related to practice profitability. For more information: www.gatewaypn.com.

 

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