Cost containment: Getting the lead out

The concept of zero-based budgeting would benefit many practices.

Issue: November 10, 2016

ByJohn B. Pinto

“Perfection is achieved, not when there is nothing more to add, but when there is nothing left to take away.”
– Antoine de Saint-Exupery

It is hard to get and stay lean. In any year, roughly one out of every seven Americans goes on a diet. And the number of people who desire to lose weight is even greater than the number of people who actually undertake a weight loss program.

I bet the statistics are about the same for ophthalmology practices and the business equivalent of weight control: “cost containment.”

A majority of practices are larded with too many workers, under-used office space and wasteful capital outlays.

Why is this?

Many practices staff for peak patient volumes. They guarantee 40 hours of work a week throughout the year, even when snowbirds are absent. They grant overtime without justification. They throw people at problems instead of better protocols and training.
New client practices commonly are found to only be using about 60% of their available exam room capacity because the surgeons only want to work during prime time.
Most practice owners are undisciplined in their approach to acquiring new equipment. Rather than performing a financial analysis of how the latest gold-plated device will impact their bottom line, most surgeons simply sign off on the purchase order.

The value of zero-based budgeting

A useful catch-all for more effective spending is called “zero-based budgeting.” As is often the case these days, Wikipedia says it best: “In traditional incremental budgeting, managers justify only variances versus past years based on the assumption that the ‘baseline’ is automatically approved. By contrast, in zero-based budgeting, every line item of the budget, rather than only the changes, must be approved. Zero-based budgeting requires that the budget request be re-evaluated thoroughly, starting from the zero-base; this involves preparation of a fresh budget every year without reference to the past.”

You needn’t become a zero-based budgeting zealot to extract value from the concept. Lots of benefits come from simply asking a few unaccustomed, new questions:

Would this purchase improve practice performance in quality care terms, financial terms or both?
What would be the consequence of delaying this purchase?
Can we extract more value from what we already own rather than buying something new?
Is what we are paying for now still working, effective and necessary?
Can we share this cost with someone else?
Are we paying the best price available? Could we negotiate a lower cost?
Should we bundle or unbundle our purchases? For example, buying our own ads directly rather than through our advertising agency.
Are we buying more than we need? For example, excess insurance coverage.

Let’s look at this more closely through the three biggest cost centers: labor, facilities and marketing. Combined, these three line items make up about two-thirds of all practice expenses in the typical setting.

Lay staffing

Fully half of what you spend to support your practice goes out in the form of lay staff wages. This includes not only hourly pay and salaries, but also benefits, payroll taxes, and staff search and replacement costs. Accordingly, small cost-containment efforts in this area can yield significant savings. Space does not permit an exhaustive rundown of how to find and prick bloated payrolls, but here are a few pearls to get you started:

Divide total annual lay staff payroll hours paid (inclusive of vacation and sick leave time) by annual patient visits (inclusive of postoperative visits). The resulting figure should be 2.5 hours per visit or less in a general/geriatric practice. The figure is 2.8 or less in a retinal practice.
Determine total lay staffing costs as a percent of collections. If the figure is higher than 32% in a general practice (or 28% in a retinal practice), you may be overstaffed, overcompensating the staff you have or both. Realize that excessive percentile staffing costs may not be completely due to too many staff, but to too little revenue per patient visit, which in turn may be due to an adverse payer mix or overly conservative testing and treatment protocols.
If by either of these gross metrics you are spending too much on staffing, pull together a right-sizing task force to look at the numbers in more detail and by department. For example, a general practice should have no more than 1.0 tech/scribe/testing staff hours per visit, no more than 0.5 reception/phone/records staff hours per visit, and no more than 0.3 billing staff hours per visit.

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Office facilities

This includes rent or mortgage payments, taxes, maintenance, repairs and utilities, which can usually succumb to a set of cost-containment questions:

Would it be possible to bring in a compatible outside provider to share your space? Add a Mayo stand to an eye lane, and you have an ENT exam room.
Can you expand into an adjacent suite, paying off your adjoining neighbor-tenant, rather than relocate to larger quarters?
Should your next expansion be temporal rather than physical, expanding office hours into fringe time rather than adding new space?
Could the space you have be used more intensely (ie, seeing more patients per hour) simply by speeding up your clinic flow?
Would you be better off owning than leasing? Vice versa?
Can some nonessential repairs be deferred?
Have you shopped around for competitive office cleaning and facilities maintenance within the last 2 years?
Can you negotiate a mid-lease-cycle rent abatement? Surprisingly, if your practice’s financial performance has faltered, some landlords would rather reduce your rent than lose you as a tenant — it never hurts to ask.
Can you give up some of your square footage now or at least in the next leasing cycle?
Can you negotiate a lower property value basis with local taxation authorities?

Marketing communications

It is notoriously difficult to evaluate the cost-effectiveness of your marketing dollars. Even in practices in which we strictly account for each new patient’s referral source, patients are generally poor at reporting what or who brought them to your office. So the best approach to budgeting is still quite fuzzy but clarifies somewhat applying three steps with the acronym “GST”:

Goal: What is your practice growth goal? Most patient-friendly practices will grow at about 3% or 4% per year without really trying because that is the natural demand growth rate for eye care in America today. Practices that want to grow faster must invest more in marketing.

Spending percent: What percent of cash flow is it reasonable to be spending on marketing communications? The answer flows from your growth goals above. If you are happy with a 3% or 4% growth rate, then spending just 1% or so on external marketing should be sufficient as long as you are attending to internal marketing: customer care, continuity of care and recall systems. If you want to grow at 6+% per year, you will probably need to spend 3+% of cash flow on external marketing.

Tactics: Last, you need to decide how to spend your external marketing budget. A $4 million practice with material growth goals and a 3% marketing budget would reasonably spend $120,000 or so on marketing. But on what? The old boardroom refrain is, “We’re probably wasting about half of our advertising budget — we just don’t know which half.” Current guidance is to spend about half of your budget on web-based “new” media and the other half on legacy tactics: referral source outreach, screenings, signage and — in the right settings — “old” media such as newspapers, billboards and broadcast outlets.

The buffest body builders will commonly “cut down and lean up” before competition, shedding a few more percentile points of body fat. So even if you are trim and do not have a fat practice today, a periodic “cutting” may still be in order.

For more information:
John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. John is the country’s most-published author on ophthalmology management topics. He is the author of John Pinto’s Little Green Book of Ophthalmology, Turnaround: 21 Weeks to Ophthalmic Practice Survival and Permanent Improvement, Cashflow: The Practical Art of Earning More From Your Ophthalmology Practice, The Efficient Ophthalmologist, The Women of Ophthalmology, Legal Issues in Ophthalmology, Ophthalmic Leadership: A Practical Guide for Physicians, Administrators and Teams and a new book, Simple: The Inner Game of Ophthalmic Practice Success. He can be reached at 619-223-2233; email: pintoinc@aol.com; website: www.pintoinc.com.