A tale of two practices and the most critical business data you should be tracking today

Practice owners and administrators should have accurate information readily available to assess the practice’s economic fitness.

John B. Pinto

I am sitting at my desk, perplexed, looking at two brand-new client files, one from the East Coast and one from the West. Both clients received exactly the same set of instructions a month ago, to furnish data from a 10-point list needed for me to evaluate their economic fitness.

The staff in both practice settings are experienced, hard-working and committed to their doctors. But I can already tell that one practice is heading for success, while the other is destined for failure on its present course.

None of the requested data was very exotic. Assets and liabilities. Staffing details. Volumetric and financial statistics for the past few years. The usual dry business statistics used to uncover performance gaps and recover missing profits.

File No. 1, from “Smith Eye,” is only 11 pages thick. The staff of Smith Eye warned me before their data arrived that they were having difficulty finding the information I requested. They were right. They furnished only a staff list, scraps from an old CPT report and cataract counts. When I called this morning to ask if more was coming in a second package, they said, “Nope, that’s all we have.”

File No. 2, from “Jones Eye,” is an inch thick. It includes a tabbed and cross-referenced binder with a table of contents and sections linked to each requested area of practice performance. In addition, although not asked, the practice sent a long narrative from the administrator with her sense of the practice’s strengths and weaknesses, plus a gallery of office photos.

Here is the unexpected surprise. Smith Eye, the practice with the 11-page file, has 10 providers, has annual collections approaching $8 million and is part of a major urban hospital system with a fleet of vice presidents and accounting clerks. Meanwhile, Jones Eye is a solo, private practice, operating at one-fifth of Smith Eye’s scale. Dr. Jones’ spouse still does the books, and the office manager doubles as a fill-in tech on Fridays.

Here is the second surprise. This paradoxical observation, that the best data and follow-through sometimes come from the smallest practices, is not uncommon.

How could this be? Economist E.F. Schumacher quipped many years ago that “small is beautiful.” Although he consulted for major industrial concerns, Schumacher noticed the considerable diseconomies of scale that were present in the largest businesses. And so it is in ophthalmology today. Practices with up to two or three surgeons and $5 million in revenue tend to be more profitable and organized than their jumbo competitors.

Advantages of small scale

Here are some of the differences making Jones Eye the stronger of the two practices:

• The manager of Smith Eye no longer reports directly to her doctors, who are fellow employees of the hospital system; instead, she reports to a clinical vice president. And besides managing Smith’s faltering eye department, she’s stretched thin running a small dermatology clinic. Her colleague at Jones Eye is focused solely on the interests of her employing ophthalmologist.
• For the manager of Smith Eye, generating a departmental profit and loss statement entails a requisition to accounting and a 2-week wait for the data to emerge from a powerful but obtuse general ledger program. At Jones Eye, the manager calls the doctor’s wife, who can e-mail the requested QuickBooks report within the hour.
• At Smith Eye, firing an incompetent worker takes months of protocol and paperwork; at Jones Eye, the decision is made and executed on the same day.
• At Smith Eye, paper charts are sent to a remote billing office, reviewed for proper coding and not charged out until a week or longer has passed; the practice has to invoice for most patient-responsible amounts, which further retards cash flow. At Jones Eye, patient charges are checked off by the doctor, posted a few steps away at checkout and submitted to third-party payers the same day. Co-pays and refraction fees are collected at checkout.
• If you were to stop the manager of Smith Eye in the hallway and ask a few basic performance questions (“What’s our profit margin here? What are staffing costs per average worker? What’s the surgical density?”), she would likely say, “I’ll get back to you after I put a request in to accounting.” And at Jones Eye? The answers would probably come immediately: “38% … $43,000 … 23 visits per cataract surgery.”
• Most tellingly, at Smith Eye, the department manager has to call together a task force to review and revise even the simplest policies, while at Jones Eye, the front-line manager is empowered to make most policy decisions on her own using the abundance of available data at her command.

Although there are significant differences at many levels between these two practices, the most important differences are the proximity between the producer (the doctor and patient care staff) and manager, and the quite-disparate depth of available information.

Assessing practice health

Every health care provider knows how to briskly assess a patient’s state of health. In a few moments, pulse, blood pressure, respiration, alertness and belly growls confirm the good (or poor) news. As a practice owner or administrator, you must develop the same ability to quickly gather and assess your “patient’s” vital signs.

Here are five essential metrics you should be able to rattle off accurately:

1. Profit margin. This is conventionally reported based on cash-basis profits available for MD or DO compensation. If collections are $1 million and expenses (before depreciation and before MD compensation and perks such as a personal auto or family medical insurance coverage) are $600,000, then the profit margin is 40%.

2. Revenue density. The net revenue collected per patient visit is a key driver for overall economic performance. The revenue yielded per individual patient visit in general ophthalmology is typically $150 or higher. Pediatric averages are closer to $140, and retinal figures can exceed $400 inclusive of drug costs. Sometimes, in an effort to see an overabundance of patients, eye surgeons will overlook a patient’s wider needs and end up not only shortchanging the patient, but the practice as well. It is more financially effective to serve 45 patients in a day with an average ticket of $185 than 55 patients with an average of $145.

3. Lay staff productivity. There are dozens of metrics for ophthalmic labor productivity, but the big-picture view is simply furnished by calculating the lay staffing costs (inclusive of wages, taxes and benefits) as a percentage of collections. A healthy range in general ophthalmology (as well as most subspecialties apart from retina) is 28% to 32%. The figure is closer to 25% in retinal settings, due to the higher revenue yield per patient visit.

4. Provider productivity. A general ophthalmologist working full time (defined here as 4.5 days or more per week, 46 weeks or more per year) should be able to transit 500+ patient visits per average month. Patient count targets are closer to 450 for most subspecialties. At the same time, you should be aware of a growing trend toward “hypervolumetric” providers who, with exceptional effort, are now transiting more than 800 visits per month and still providing great care and happy patients (not to mention ecstatic finance managers).

5. Facility utilization. Here is a simple way to coarsely calculate whether your facilities are too large or small. Count up the number of fully equipped exam rooms (plus unused rooms that could function as complete lanes in the future). Multiply this figure by 173 (the nominal number of work hours available in a typical month). Take the resulting product and divide it into the number of average patient visits per month. If the answer is 1.0 (with units of “patient visits per exam room hour”), you are at about 100% of nominal facility capacity. Here are three examples:

• A practice with five exam rooms can comfortably transit about 865 patient visits per month and is using about 100% of its capacity when doing so.
• If the same practice is serving only 650 visits per month, it is operating at only about 75% of its capacity.
• If the practice sees 1,038 visits per month while open a normal 40 hours per average week, it is running at an uncomfortable 120% of capacity and should consider activating exam rooms, eliminating the least interesting patients or expanding hours.

• John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. He is the author of John Pinto’s Little Green Book of Ophthalmology; Turnaround: 21 Weeks to Ophthalmic Practice Survival and Permanent Improvement; Cash Flow: The Practical Art of Earning More From Your Ophthalmology Practice; The Efficient Ophthalmologist: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees; The Women of Ophthalmology; and his new book, Legal Issues in Ophthalmology: A Review for Surgeons and Administrators. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; website: www.pintoinc.com.
• Disclosure: No products or companies are mentioned that would require financial disclosure.