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Making performance benchmarking work for your practice: Part 1
The first segment in a two-part series on the importance of establishing practice performance benchmarks.
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Benchmark [benCH märk]: A standard or point of reference against which things may be compared or assessed; to evaluate or check something by comparison with a standard. — The Oxford English Dictionary
“Within normal limits” is a concept that frames a subset of a population that conforms to the central range of tendency along a distribution of a given parameter. WNL is often used to identify what is “typical.” — www.wiki.answers.com
Pity the poor Renaissance physician. There was but one lab test in prominent use at the time: to examine and then taste a sick patient’s urine. With professional rigors such as this, I am sure there were very few complaints about our modern medical humdrums such as managed care or weekend call.
Four centuries later, clinical analysis became more fastidious and reproducible. In 1896, the first U.S. clinical laboratory was opened, at a cost of $50 at Johns Hopkins Hospital. Modern fact-based medicine was born. It thrives now, with thousands of assays, tests and associated “within normal limits” to learn in medical school.
Of course, for ophthalmologists at least, there are no more than a 100 or so of these clinical norms to fuss with on an average day. Aside from the occasional interesting case, you only have to worry about being within normal limits for visual acuity and IOP, field of vision, cup-to-disc-ratio and the like.
Every ophthalmologist reading this column could give an impromptu 20-minute lecture on the most recent patient they saw in clinic. Many could do so without notes in front of them. With a chart open, every eye surgeon I have ever met could stand and deliver at length with facts and figures galore.
I bring this up to illustrate the comparatively more primitive state of ophthalmic practice management today. It is only in the last generation that robust financial analysis and benchmarking has been introduced in eye care, and only in the last few years has some of this finally trickled down to the average practice.
Consider the contrast. While every ophthalmologist could impressively sum up a patient’s eye health status, fewer than half of the surgeons reading this column have administrators who could perform the business equivalent. And these administrators only have one patient: your practice.
Room for improvement
In about one out of every five practices I come across, the office manager is not even granted access to the financial reports of the practice — the business cognate of the “lab report.” That would be like you walking into the next exam room and saying, “Nice blue eyes, Mildred. Looks good to me. See you in a year.”
Do not run out and put your manager on the spot, though — at least not yet. But consider what your administrator could do for your business if he or she was as strong at the technical aspects of caring for your practice as you are at taking care of your patients. The administrator would be able to rattle off something like:
“Jones Eye Associates is a 45-year-old general ophthalmology and optometry practice. Our primary service area is Smith, Davis and Westfield counties, which have a combined drawing area of 253,000 people and a population-to- provider ratio of 32,000, which makes our area comparatively underserved. We are ranked No. 2 in local market share behind Higgins Eye Institute and enjoy 23% of the global eye care market and 55% of the local cataract care. For the first two quarters of 2013, practice net revenue is up 8% over the same period in 2012, indicating that we are gaining market share this year.
“We are currently on track to hit 42% consolidated cash-basis profit margins, with the average partner taking home about 53% of his or her personal collections if current trends hold. This favorable profit margin is driven by three core factors. First, we have a surgically dense practice with only eight visits per surgical case. This, in turn, gives us higher collections per patient visit: $198 compared to averages of $160 in fellow practices. Second, we have a much higher level of labor productivity than peer practices, with just 1.8 lay staff hours per patient visit. Finally, we locked in a very low price on office facilities 6 years ago, and with subsequent growth, facility costs are now running only 4% of cash flow.”
Chances are, your administrator is not quite there yet. But, he or she could be very soon with your encouragement.
Just as physicians became more effective through the centuries by objectifying symptoms and signs and codifying the best treatment approaches, so, too, could your administrator become more effective at his or her job. And it will not take centuries, because most of the work has already been done. The foundation for administrative improvement is benchmarking.
We will introduce the first few basic benchmarks here in part 1 of this two-part column and continue next month with a few slightly more advanced benchmarks.
Basic benchmarks
1. Revenue growth. If you ever watch corporate CEOs being interviewed about their company’s performance, one core statistic they refer to often is sales, which in ambulatory health care settings is more genteelly called collections, revenue or net revenue. Practice revenue growth rate is simply the collections this year minus collections for the prior year, divided by the collections for the prior year.
For example, a practice that collected $1 million last year and $1.1 million this year enjoyed a 10% growth rate. What should your practice’s revenue growth rate be? Because the demand for ophthalmic services is growing at roughly 4% per year, that would be a reasonable baseline goal. At a 4% growth rate, you will neither lose nor gain market share, and you will be able to keep your head above general practice cost inflation. Young and aggressive practices should aim at 10% growth rates; mature practitioners gliding toward retirement can do just fine with zero net revenue growth, even a slow decline if there is no plan to pass the practice on to a successor.
2. Profit and cost margins. Your practice’s profit, by industry convention, includes all MD or DO salaries, taxes, benefits and dividends. To get the profit margin, simply divide this profit number by total collections. A practice with $1 million in collections and $350,000 in salaries for the physicians has a 35% profit margin and a 65% cost margin. Profit margin norms today range widely from 30% to 45% in suburban general practice. Urban practices with high operating costs and low managed care payments can be “normal” with a 25% or lower profit margin. Rural general practices with low overhead and even lower levels of competition can hit 50% margins. Well-run retinal and plastics practices also commonly achieve 50% profit margins.
3. Collections per average patient visit. This benchmark is also commonly referred to as the “average ticket” and is another easy calculation to make. Take the total monthly collections and divide by monthly total patient visits, inclusive of postoperative visits. A typical figure for a general ophthalmologist is $150 or higher. You can expect another $25 or more if the practice dispenses glasses. Optometrists on your staff will probably have an average ticket of $125 or less. Surgically assertive practices, as well as practices with a high pathology mix and lots of special testing, commonly hit $225 or more. Average ticket figures for retinal practices commonly hit $250 and up. Note: For retinal practices with high drug costs, which are essentially a pass-through expense, one will want to omit any drug reimbursements from the collections figure.
4. Core cost per patient visit. This benchmark provides a very useful practice-to-practice comparison and is also a useful wake-up call for practices with runaway operating costs. Again, the math is easy. Add up the total annual practice costs before all optical or contact lens goods’ costs, depreciation, providers’ wages/taxes/benefits and any exceptional cost of sales, such as injectable drugs, premium IOLs or LASIK center fees. Divide the resulting figure by the number of patient visits per year, including postop visits. If you have a highly efficient practice, your number will be at or under $90. If you have an average practice in America today, your figure may be closer to $120. But this figure is as unhealthy for your practice as a high body mass index is for your health. Lower is better.
5. Staffing cost ratio. The single highest cost category in virtually all practices is lay staffing. Simply divide total lay staff payroll, benefits and taxes by total practice collections (again, net of drug reimbursements). The typical value in a well-run, suburban general ophthalmology practice today is 28% to 32%. Depending upon your practice type and setting, this ratio may be higher or lower for your practice. Retinal and plastics practices with higher revenue yields per patient visit commonly get by spending 25% or less. Urban surgeons with lower managed care payments and higher wage demands can expect 35% or higher in costs without careful efforts at cost containment.
How often should these basic benchmarks be tracked? Most of these statics do not change very much over a period of several quarters. Obviously, key stats like your practice’s profit margin and labor cost should be examined in the monthly financial statements.
Useful information
A final thought: In medicine, we only want to gather information that is going to be useful in making a clinical decision, right? No medical charts have a place to record a patient’s favorite color because this information has no bearing on patient care. The same, simple logic applies in business. While many of the benchmarks covered this month and next may be fascinating to look at one time, you only need to track longitudinally those data which will help you and your management team make better business decisions.
Tune in next month and we will continue with a discussion of 15 more benchmarks, including a few somewhat more advanced benchmarks like your practice’s marketing cost ratio, the number of patient visits per exam room-hour and your technicians’ efficiency ratio.