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Effectively ethically reducing labor costs
Decisions in the business of ophthalmology, as in every commercial sector, should be guided by the answers to three simple questions, asked in this order:
- Is it ethical?
- Is it legal?
- Will it make us a more profitable company?
There are hundreds, perhaps thousands, of business decisions to make each year. Some of these are simple: When a new technology becomes the standard of good patient care, you have to upgrade or start delegating such patients to colleagues who have it. But most decisions are tougher than this, and they are getting ever harder in a resource-constrained environment.
Let’s apply the three decision-screening questions above to one of the most difficult decisions that will likely face you in the years ahead: if, and how, you should reduce staffing costs, which are far and away the most prominent expenses in most practices, as the fees your practice receives per service unit almost inevitably stagnate and decline.
It is by looking through this three-piece lens that you can perhaps most clearly see your way to addressing the difficult question of how to trim labor costs. This assumes your staff costs are too high in the first place. In the present environment, labor costs are too high if your general ophthalmology practice is spending any more than about 32% of annual collections on fully burdened wages (ie, payroll, payroll taxes and health benefits). The correct spending threshold is typically closer to 28% or less in retinal and high-volume LASIK practices. In the not-too-distant future, we are likely to be aiming for sub-30% figures in general ophthalmology.
Here are four possible approaches to reducing excessive staffing costs, along with some explanation as to why these approaches could be helpful to you.
Reduce the number of staff
This is the fastest, most direct, least kind but often most effective way to reduce costs. This is especially the case in client practices where overstaffing in selected departments, or in every department, has become a chronic, institutional flaw. As difficult as this may be to undertake, it certainly results in a “Yes” answer to all three screening questions: It is ethical (unless you have promised your staff employment for life), it is legal (unless your attorney deems any of the terminations discriminatory or otherwise wrongful), and it certainly boosts profitability.
Reduce staff wages
This can be done selectively or across the board. With a 5% drop in revenue in many practices during the past 12 months, rising unemployment rates and much lower inflationary trends in the cost of living, this is now seen as more palatable than ever before in the last 50 years. While few owners are taking this move yet, one expects that if surgeon income continues to drop, lay staff will inevitably be next in line for a temporary or permanent 5% to 20% pay cut.
Seen positively, this approach to cost savings, along with reducing hours, which is mentioned below, is much kinder to the staff, who all at least get to keep their jobs, and more practical business-wise because you preserve the investment you have made in training staff. As long as the practice has a widely understood need to economize, staff performance and morale will not unduly slide. In fact, they may even rally.
Reduce benefits, including bonuses
This is a relatively dull instrument, with little material impact on overall wage costs. However, there is considerable low-hanging fruit in this area: Dental and small life insurance policies, although low in cost, are rarely seen as being of much value by younger staff. Turning to health insurance, if you still pay 100% of staff health benefits or any dependent health insurance, you are now an outlier in the typical setting. Paying 65% to 80% of staff health benefits and 0% of family health benefits is now typical.
As for bonuses, in most settings, these are seen by staff as an entitlement and, for non-managerial staff, rarely result in durably greater personal output. Most staff, especially younger workers, pay the most attention to the raw hourly wage.
Reduce hours
This is helpful as a temporary measure and is well-tolerated by staff, especially in markets where unemployment is high. Indeed, a long-ago survey of female workers seemed to indicate that aside from the financial hit, working a 32- or 36-hour week was seen as a real plus, especially for working mothers. Obviously, trimming just a few hours here and there leaves benefit costs intact (typically 10% to 20% of total wages, a higher percent when hours are cut). As with every other staff cost reduction effort here, reducing hours is ethical, legal and effective at enhancing practice profitability.
There is obviously a fifth way to reduce staff costs as a percent of collections: simply increase your collections. I have worked with many overstaffed clients through the years where that approach was effective, feasible and certainly far more palatable than making cuts.
Being practical, if your practice costs are untenable and you cannot merely grow out of them, it is unlikely that you will use just one of these tactics. Your best approach may be to use all approaches to one degree or another.
John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. He can be reached at 619-223-2233 or pintoinc@aol.com.