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Assessing your practice’s ‘financial health’
Like determining the right treatment for a patient, managing your practice's finances requires the right data analyzed by the right specialist.
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“Double entry bookkeeping was a hell of an invention.”
– Charlie Munger
“I worked in accounting for two and a half years, realized that wasn’t what I wanted to do with the rest of my life, and decided I was just going to give comedy a try.”
– Bob Newhart
Lost in the midst of ophthalmic practice management history is a time when the financial health of your practice could be measured with three simple metrics:
- Is the parking lot full?
- Are there still checks left in the checkbook?
- Are you booked out at least 2 months and on the verge of no longer accepting new patients?
Ophthalmic economic analysis has gotten a bit more sophisticated since then. It had to; margins are thinner, and bad things happen faster if you stop sweating the details.
The typical general ophthalmology practice enjoyed 50% profit margins or higher a generation ago. A 35% profit margin is now commendable in most settings. I have urban clients who would rejoice with a 25% clinic profit margin in an environment of low managed-care payments and high urban costs.
In the modern setting, you can no longer hand your checkbook and a box of receipts to your accountant at the end of the year and find out how things went. Today, the wise practitioner watches economic and volumetric statistics monthly so that adverse trends can be discovered early and reversed.
The financial exam
Consider the medical analogy. If you have a young, healthy patient you might ask her to come back in a year or two. Brittle retina and glaucoma patients might be asked to come back in a month or two. But you would probably urge a patient with an incipient infection to come back in the morning to be re-examined. So it is with the numbers; as the patient (ie, your practice) gets more fragile and more prone to illness, you want to see the lab data (profit and loss statements, surgical volume trends and referral statistics) more often.
And here is another medical anal- ogy — one I think you will immediately identify with. Not only do you have to look at practice performance data more often in the present environment, but you also need the right person examining the data and using it to help the patient.
Consider the difference between office managers and administrators. Small practices, which lean on the doctor-owner to make decisions, usually have the former. Larger practices typically have the latter. What is the difference, and how does it relate to business data collection and analysis?
The medical simile is simple: Office managers are to seasoned administrators as technicians are to physicians.
We all know the difference between technicians and physicians. Technicians can, through a combination of rote memory, experience and close supervision, decide what questions to ask the patient and what pre-testing data to gather for the doctor. But techs, for all their abundant value and talent, cannot diagnose disease or initiate treatment. Only the doctor has the training, experience and judgment to know what data are required, what the results mean and, most importantly, what treatment should be initiated.
In the same way, too many eye surgeons put their practices in the hands of the business equivalent of technicians, expecting them to examine an income statement or staffing ratio, diagnose a problem and execute a treatment plan.
Below are four common business analysis elements. Use these elements to start a dialogue with your office manager or administrator. Are they up to the task to be the practice’s treating physician?
- Are they gathering the right statistics?
- Are they doing so with an appropriate frequency?
- Do they know what the statistics mean and what to do with them next (like a doctor), or are they just archiving stats by rote because you asked them to (like a tech)?
- Do they have your authority (within the reasonable bounds of their competency) to initiate treatment, for example, reducing payroll hours if you are over-staffed?
Profit and loss statements
Business, like medicine, is a question of balance. Too much detail and the profit and loss statements are a bear to get through and more costly to prepare; too little detail and you do not have enough information to make decisions.
It is now typical in most practices to generate profit and loss statements within a few days of the monthly close using QuickBooks (Intuit). These reports should be reviewed jointly by the administrator/office manager and managing partner of the practice and then presented jointly to the rest of the practice owners with a written narrative of any favorable impressions or areas of concern.
Collections at the top of the report should break out professional fees (inclusive of testing), optical and contact lenses. The chart of accounts showing each expense by category should have a breakout for contact lens cost of goods, optical cost of goods and optical labor costs. That way you can spot check to make sure goods and labor costs are within normal limits.
How much detail is needed? It would be typical for the chart of accounts for a small to mid-sized clinic with an optical to have about 50 or fewer line items. Moreover, whoever is classifying payments in the general ledger is going to go a bit cross-eyed (as will the practice board).
Balance sheets
This brief report, usually two pages or less, shows the assets and liabilities of the practice. It is beyond the scope of this column to teach you how to read your balance sheet, so if this document is a monthly mystery handed to you by your bookkeeper or accountant, have them walk you through what this document can do for you, just like your professors walked you through your first few hundred lab reports. One of the more valuable gauges of practice vitality or vulnerability that can be calculated from the balance sheet is your practice’s “quick ratio”— the current assets, including accounts receivable, omitting optical inventory, divided by current liabilities. In a healthy practice, the quick ratio is significantly more than 1.0 (ie, you have many more readily available assets than soon-payable liabilities.)
Benchmarks
There are about 50 common, industry-specific benchmarks that I and other ophthalmic consultants have developed and published over the years. Here are just a few of the most common ones, which should be tracked monthly, quarterly or annually, depending on the setting:
- Practice revenue growth rate: Collections this year, minus collections for the prior year, divided by the collections for the prior year – eg, a practice that collected $1 million last year, and $1.05 million this year enjoyed a 5% growth rate, which is typical for a healthy practice.
- Profit margin: These are profits before any physician salaries and draws, divided by collections net of retinal drug costs, if present, to get a percentage that ranges from 30% to 45% for general practices and climbs to 50% or more in some subspecialties.
- Overall lay staffing efficiency: The number of man-hours per patient visit, calculated by adding up the monthly core lay staff payroll hours — omit optical and contact lens staff — and dividing by the average monthly patient visits. For example, Toyota makes a car with about 30 man-hours of labor; an efficient general practice needs about 2.4 hours of staff labor to transit a visit.
- Facilities cost ratio: Rent or principal/interest payments, utilities, taxes and basic repairs divided by total practice collections. The typical healthy range is 4% to 6%.
- Patient visits per exam room-hour: The total patient visits for the year divided by the number of exam room-hours per year, which is calculated by taking the number of fully equipped exam rooms times 2,080 nominal hours available to see patients per year. In the typical practice that is using its facilities efficiently, the benchmark comes to ± one patient visit per exam room-hour.
- Tech efficiency ratio: The tech total payroll hours in a year divided by patient encounters for the same year. This amounts to 0.9 tech hours per visit in a well-run general practice, and 1.3 hours in a retinal practice with more testing to do and older, slower, sicker patients.
Longitudinal performance graphs
Most glaucoma specialists like to arrange some form of master sheet or screen in their patient’s medical records so they can see each patient’s longitudinal medications, pressure check results and the like at a glance. The value of this longitudinal glimpse also applies directly to the management side of your practice. In the best-run settings, each provider is given a monthly or quarterly set of graphs, going back 2 to 3 years, showing such metrics as:
- New and total patients
- Surgical cases
- Surgical density (visits divided by cases)
- Optical capture rates
- Average revenue yield per patient visit
The same graphical approach should be used for the entire practice, showing the above values over time for the whole company, along with statistics such as:
- Patient accounts efficiency (eg, gross collection ratio, open accounts over 90 days)
- YAG capsulotomy and phakic IOL rates
- Established patient-growth rates
- Touch-up rates in a LASIK practice
If you want to be a better, more effective practice owner, stop trying to think like a business person. Think like a doctor. Business stats are just like medical ones. You have to know what stats are important (and you have to memorize the norms, just like in medical school). Just as importantly, you have to know what data is not needed, and who should examine and use the data. As in medicine, there is no point in collecting data unless it is going to be used to make management decisions.