"I didn't go to optometry school to settle for being average." This sentence was the first of many that quickly let us know that Dr. Natasha Davern wanted more than "okay."

Taking pre-emptive action

Dr. Davern had been out of school for eight years, worked four days a week and had a net of 19%, or $109,250, in 2002. According to the American Optometric Association annual report, Caring for the Eyes of America, 2004, the mean net income of an optometrist with less than 10 years experience was $117,857 in 2002. An employed O.D. working for an optometric practice earned $90,438 (mean net income).

Consequently, Dr. Davern was earning less than other O.D.s with her same experience and only slightly more than an O.D. employed by another O.D. Given her low net income, she wondered if it was really worth it to be in private practice. She also said that her biggest fear was that she'd wake up one day and realize that she was 50 and was still doing things the same way she'd done them five years out of school.

Looking back to go forward

A historic look at her financial growth showed a practice that had stalled. Let's look at Dr. Davern's revenue growth rates:

When she opened her practice, she had signed up for a lot of managed care plans. She said that she'd done this because she wanted to fill the books and thought it would be better to be busy than limp along with three or four patients a day.

While it was true that she was now booked two weeks in advance, she was afraid that her average patient mix was pulling her into a cycle of mediocre net. Her Profit and Loss Statement for 2002 is shown above.

Calculating costs

Could Dr. Davern be more profitable if she changed her mix

of managed care plans? The solution lies in the answer to the question, "How much do you have to charge to stay in business?" A quick financial evaluation to determine if a plan is profitable is to calculate chair costs — as in, "What is the cost incurred each time a patient sits in the exam chair?" You can calculate chair cost per patient or per hour.

Dr. Davern was considering eliminating one of her poorest paying plans. To maintain anonymity, let's call the plan the ABC plan. Because Dr. Davern was considering eliminating 25% of her patients or 718 patients, we calculated chair cost per hour and per patient.

• Chair Cost per Patient = Fixed Cost ÷ # of Complete Exams
• Chair Cost per Patient = $258,750 ÷ 2,875 = $90
• Chair Cost per Hour = Fixed Cost ÷ # of Hours
• Chair Cost per Hour = $258,750 ÷ 1,176 = $220

To determine chair costs per patient, we divided her fixed costs (all expenses except Cost of Goods Sold) by the number of comprehensive examinations she saw in 2002. Chair cost per patient was $90.

We also calculated chair cost per hour by dividing total fixed costs by the number of hours she was available to see patients during 2002. Dr. Davern's office was open from 9 to 5, she took one hour for lunch and spent one hour per day on management. In addition, she took three weeks of vacation per year, which meant that she was actually available to see patients 1,176 hours in 2002. Chair cost per hour was $220.

According to the sampling we did of ABC plan patients, the total average fee collected was $152. Her average cost of goods (COG) on ABC patients was higher than her overall practice average of 36% — this patient group had a COG of 47%. Therefore, her gross profit (revenue minus cost of goods sold) was only $81. Dr. Davern's gross profit on ABC plan patients was not high enough to offset the chair cost per patient of $90. Quite obviously, she was losing money on her ABC patients.

Don't forget compensation

Remember, the formula for calculating chair costs is the same as the formula for calculating the break-even point. This means that the doctor's compensation is not included in chair cost. If you want to calculate chair cost per patient including reasonable compensation for yourself, you would add reasonable O.D. compensation to fixed costs before dividing by the number of complete exams.

Create the right image

There are ways to attract and keep patients that aren't price driven. Consumer research confirms that offering the lowest prices in town and trying to be all things to all people creates a patient base that may think you're okay, but won't be willing to spend money with you on premium products or non-covered testing. In essence, trying to be all things to all people confuses your patient base.

To survive and thrive, it's essential that today's eyecare practitioner achieve what marketers refer to as top-of-mind awareness.

Radical image makeover

Before Dr. Davern agreed to a radical image makeover that included shedding a managed care plan that was weighing her down, she wanted to know how switching from a managed care practice to private pay would impact her bottom line.

During the prior 12 months (2002), the practice saw a total of 718 ABC plan patients, which totaled $109,136 in revenue. With an average cost of goods sold of 47%, or $51,294, her gross profit was $57,842 ($109,136 x 53%). Without the ABC plan, total revenue would have been $465,864 ($575,000 total 2002 revenue minus $109,136 ABC plan revenue) and total cost of goods would have been $155,706 ($207,000 total cost of goods in 2002 minus $51,294 ABC plan cost of goods) or 33%. That's a three-point drop in cost of goods.

The potential "side-effects" of this makeover were that if she didn't make any other changes to her overhead structure, her net would decrease from $109,250 to $51,408 or 11% ($465,864 revenue without ABC plan patients minus $155,706 cost of goods minus $258,750 fixed costs).

We repeatedly emphasized to Dr. Davern that if she eliminated 25% of her patient base without proper strategic planning and implementation, her net would plummet.

Watch out for COG

Our analysis of the practice's participation in such a low reimbursing managed care plan was that her average revenue for this patient type of $152 was low compared with her practice revenue per patient of $216 ($575,000 total 2002 revenue minus $109,136 ABC plan revenue divided by 2,157 non-ABC plan patients) without the ABC plan.

Typically, when a practice is doing too much managed care, it has high Cost of Goods. Cost of Goods Sold of 36% was significantly higher than the recommended range of 27% to 33%. And, her Cost of Goods Sold for ABC plan patients of 47% was extremely high. This is because fee changes don't impact patients with plans who have set reimbursements.

Is it worth the risk?

Was the risk of extreme change worth the possible benefits?

Because raising fees does not impact higher cost of goods associated with managed care plans, we suggested she drop the ABC plan. We estimated that if she did this without implementing our other management suggestions, her net would decrease from $109,250 or 19% to $51,408 or 11%. Simply put, this business decision had to be supported by re-evaluating other business expenses, including staffing levels.

To improve her net while possibly decreasing her gross, her radical makeover involved implementing the following, with careful consideration of the implications:

• Maintain staff salaries and benefits at 21% of collections
• Maintain general office overhead at 9% of collections
• Selectively raise fees by 15% overall
• Drop the ABC insurance plan
• Implement internal marketing tactics
• Execute staff training that focused on professionalism and VIP service.