BUSINESS

  FINANCIAL FOUNDATIONS

REVENUE PRODUCTIVITY

THIS METRIC CAN PROVIDE INSIGHT INTO THE HEALTH OF YOUR BUSINESS

EVER WONDER how much revenue per hour an O.D. needs to generate to keep the practice profitable? Calculating the amount of adjusted gross revenue per hour allows the business manager to set benchmarks to ensure the practice generates sufficient income to offset expenses. In addition, this calculation becomes vitally important when assessing the “value” of additional hires or contemplating expansion of services.

It is important to note that calculation of the expenses per hour is different from chair cost. Chair cost captures operational expenses per hour. Said another way, how much does it cost per hour to keep the “lights on?” By calculating the total expenses per hour, you get a more accurate measure of all costs incurred in the practice.

HOW TO CALCULATE

Follow these steps to calculate your revenue per hour, which should be done quarterly.

1. Determine the adjusted gross income for the period in question. The adjusted gross income is the income the practice expects to collect after all insurance adjustments are calculated. If the practice has multiple providers, consider calculating this value on an individual basis. Remember to include ALL product sales attributed to the provider.

2. Calculate the number of hours each O.D. delivered patient care during the period. Do not use the number of hours the O.D. is in the office.

3. Determine the expenses incurred during the period. Some expenses occur only a few times during the year. For example, you may pay accounting fees only once or twice a year. To get the most accurate measure of your expenses, use the TOTAL expenses for the year, and then calculate the period expenses. If you are using quarterly data for steps one and two, take the total year’s expenses and divide by four. As it is very time consuming and often not accurate, do not allocate expenses on a per-provider basis. Instead, use the total expenses in the period, and divide by the number of providers to calculate a close estimate of expenses per provider.

4. Divide the total adjusted gross income by hours to determine the adjusted gross income per hour for each O.D. Using the same logic, determine the expenses per hour per O.D. as well as expenses per unique patient.

STEPS TO FIX

If the revenue per hour is less than the expenses per hour, immediate corrective actions must be taken.

• Thoroughly investigate all expenses. This is typically where the problem lies. For example, look closely at the larger expense categories, such as employee salaries, as well as associated optical expenses, including inventory. Perhaps you are overstaffed, or the optical is overstocked with product.

• Examine your revenue sources. When was the last time you evaluated your fee schedule?

• Evaluate the patient insurance mix. Do you rely heavily on managed care programs? Revenues per patient typically are lower, causing an immediate lowering of the revenue per hour. Also, explore different strategies to increase revenues within the patient mix by expanding service offerings.

SETTING GOALS

When setting goals for the future, use the O.D. revenue per hour as a benchmark rather than setting an overall net profit increase. For example, setting a $20 per O.D. hourly increase in revenue as a goal is much more measurable and easier to track than overall net income increases. In a properly managed business, if the revenue per hour increases, the net will increase as well. OM

DAVID MILLS, O.D., M.B.A. practices at Ocean State Eye Care in Warwick, R.I., and holds an M.B.A. from Providence College. Email him at millsd@neco.edu, or visit tinyurl.com/OMcomment to comment on this article.