MANAGED VISION CARE & YOUR PRACTICE

LOOK AT MANAGED CARE THROUGH A NEW LENS

CALCULATE CHAIR COST, REIMBURSEMENTS AND VOLUME TO EVALUATE THE PROS AND CONS OF EACH PLAN

John Rumapkis, O.D., M.B.A., Lake Oswego, Ore.

OPTOMETRY IS a fantastic profession. In nearly all 50 states we can treat nearly all eye disease that occurs. And according to the AOA, the American public has entrusted us to be its primary entry point into the eye care health system, with nearly 78% of all first time eye care visits and 66% of all enduring care being provided by an optometrist. As an extension of our clinical care, we have robust retail operations where we prescribe the very best lens technology to protect our patients’ eyes, while simultaneously providing the best performance for any specific task. So successful are our retail operations that they provide about 65% of a practice’s total revenue. It certainly sounds like optometry is hitting on all cylinders — a virtual economic engine of prosperity. Then why are so many optometrists unhappy with their economic status? A great question, but perhaps one to which we won’t really like the answer once the analysis has been done.

PLACING BLAME

There is not a day that goes by where I don’t get a text, email or call from a colleague who is concerned about his or her financial wherewithal. The source of the angst is multifaceted. It is the fault of the Patient Protection and Affordable Care Act (PPACA), the insurance companies, managed vision care companies, changes in the practice environment, new alliances changing the competitive landscape, changes in carrier policies, where loyalty is rewarded and non-loyalty is punished, increased regulations and the burden of compliance, meaningful use, PQRS, etc. ad nauseam. You see, what I have learned through the past 32 years is that, as a profession, we have a primary tendency to place blame outside our four walls for our latest issue, rather than looking within. And that, my friends, is where our journey begins today.

NAVIGATING THE WATERS

With the passage of the Medicare Access and CHIP Reauthorization Act (MACRA), and other alphabet soup of health care reform, has come a brand new methodology and payment system that will determine the compensation of physicians of all disciplines for the care that we provide to patients for their medical care. Managed vision care plans (MVCP) are still covering more and more lives across the country as well and are integrated many times now into the fast-growing Medicare Advantage (Medicare Part C) plan market. It is the convergence of all of these factors that now forces us to really take a hard look at the financial structure of our practice, analyze it as we have never done before and restructure the way we deliver care to the consumer.

With respect to MVCP, there are good plans and there are bad plans ­­— as there will always be. Plans we hate, but have to participate in; plans where we like some but not all aspects; low paying plans, and plans where reimbursements seem to be on the downward slope of a scary roller coaster ride.

IT IS OUR FAULT

But it is not the MVCP’s fault. It is ours. MVCP providers design and sell plans in the marketplace based on true competitive forces. Benefit managers can easily dissect a plan’s benefits and translate them into a PMPM (per member per month) fee that is added to a medical insurance plan’s premium or as a stand-alone plan premium. A company is either going to buy it or negotiate a lower PMPM to make it fit within its benefit cost structure. The MVCP translates that lower PMPM fee to O.D.s as a lower reimbursement, a change in policy of coverage frequency or a change in policy of integrated purchases. So the question really isn’t about whether a plan is bad or good; the question really is, “If I decide to take a plan, how can I make the plan work in my practice?”

You may be in a community where you participate because of the large market share that a plan has. Now make no mistake about it — MVCPs do put patients in your practice. These patients grow and benefit the medical care and retail aspects of the practice, so quitting a plan may not always be the best answer. While quitting a plan may be the final decision for some, I would always prefer that whatever action is taken, it is the result of a thorough and objective analysis rather than a knee-jerk reaction. Let’s look at the basis of this analysis through a simplistic business paradigm. See Figure 1.

FIGURE 1

UNDERSTANDING DYNAMICS

Based on Figure 1, it is pretty easy to see the direct impact income, volume and profit have on each other. If income is high and volume is constant, then profit will remain constant. However, if income falls and volume remains constant, the profit has nowhere to go except for down. Now, let’s look at the same diagram a little differently. See Figure 2.

FIGURE 2

If a MVCP reduces its reimbursement per exam and you don’t increase your volume of patients per hour, then your profit from your services will decrease as well. Let’s show you two scenarios (see Figures 3, 4, 5 and 6) that assume your practice has a chair cost (more on this in minute) of $99.20 (or about the national average).

FIGURE 3

FIGURE 4

FIGURE 5

FIGURE 6

You can do the math from here, but assuming your practice did nothing but MVCP exams, ~$121 per hour profit translates into $160,930, assuming you saw patients 38 hours a week, 50 weeks a year, and were booked 70% of the time. This is before you fit a single contact lens, sold a box of lenses or prescribed and filled a single spectacle prescription!

So the real key to making a MVCP work is being able to understand the dynamics of what it actually costs to provide the services that you perform — based on dollars per minute — so that you can objectively determine the viability of participating in a specific plan.

CHAIR COST

Although most optometrists have heard about or seen calculations on chair cost, many do not appreciate that this is the most effective method of evaluating participation in third party plans. This concept of calculating costs and deriving an appropriate profit margin is used in many industries, yet seldom done in our field because of lack of comprehension, misunderstanding and fear of change, although it may be regaining some of it cache due to the changes in carrier compensation models inspired by the PPACA. This simple approach of both top-down and bottom-up analysis can truly help remove the emotional distress of deciding whether to join (or to quit) a MVCP and restore some objectivity for this critical process.

Chair cost, by definition, provides the break-even value when one analyzes a practice’s overhead as it relates to professional services and the number of doctor production hours involved in generating service revenues. Chair cost calculations tell us exactly what it costs to produce an hour of services, before a single dollar of profit (owners’ compensation) is earned. In these changing times, we must be knowledgeable of what it actually costs us to produce our services’ revenues only, without the sale of retail items. True profitability in the service portion of a practice could then be accurately analyzed ­— and accurate prices charged — for services performed. As a formula, chair cost looks something like this: Total costs related to providing services only / total number of doctor production hours. (Total costs does not include any compensation to the owner doctor.)

It is neither complicated math, nor is it a one-and-done process. As you add staff or equipment related to providing patient care (services only), or adjust your hours that you provide patient care, then the variables in this formula will need to be recalculated.

There is an important point here that I do not want you to miss: Containing costs cannot be the only factor that you look at. Changing from the traditional model of optometric care you have been performing will be critical in your ability to make a MVCP work; yes, that means changing the number of patients seen per hour.

SERVICES SIDE VS. RETAIL SIDE

Of course, I am making an assumption. I am assuming that you want both sides of your business to be profitable: the services and the retail side. Unfortunately, unless you break your practice into two divisions, services and retail, and analyze them independently, you will neither understand the relationship of reimbursement levels and volume nor the volume you need to generate a profit. Too often, we take a loss on our services but “make it up” with the sale of a spectacle or contact lens prescription. Using this loss-leader approach becomes more unreliable when there are so many alternate retail channels (and more coming) for patients to fill their prescriptions.

My belief? You can have it all: profitable services and retail divisions. But you have to be willing to change your behaviors to get there. It is not going to happen by complaining, whining or bemoaning the MVCPs you join. No one forced you to join them, and while yes, they have changed with the competitive environment, most O.D.s haven’t. In an environment of declining refractive reimbursements, the clearest path to profitability is understanding what it truly costs you to provide your services and increasing the number of patients you examine per hour.

CRUNCH THE NUMBERS

So how do I calculate my actual chair cost? Start by looking at a typical profit and loss statement for an average practice. (For an example of a larger profit-loss statement of a generic practice, visit optometric.com).

Next, remove expenses that have nothing to do with providing services, such as cost of goods sold, a prorated portion of our rent that is devoted to optical, a portion of salaries that is devoted to optical, etc. This is a crucial step to an accurate assessment of your costs and how they are allocated to the two divisions of your practice. See Table 1.

For this average practice, the owner doctor has to generate at least $87 per hour of every hour of every day just to break even. Compare this to Figure 3. If this office is fully booked, doing two exams per hour at $55 per exam, it would yield a $23/hour wage for the owner doctor, or roughly $43,700 — not exactly a robust wage. But, if production was increased to four exams per hour (Figure 5), that would generate an hourly wage of $133/hour or $252,700 per year. Even a scenario of $40 per exam and four exams per hour (Figure 6) would allow a modest level of profitability at $138,700.

UTILIZE THESE TOOLS

I realize this is a very generalized approach, but if you do this analysis you will be much closer to the real answer to the question: “Should I keep this MVCP or should I drop it?” If you are able to make formative change within your practice by learning how to delegate duties, make yourself more efficient and more effective, then, perhaps, you can live with “the devil that is a MVCP” and continue to make a good living.

The bottom line is this: MVCPs are a way of life that is not going away. They exist, albeit providing additional challenges along the way. While it is easy to disguise a poorly run services division of your practice, it is even easier to blame the MVCP for your demise. I know it’s not what we signed up for years ago, but in today’s world, what is?

Change is difficult and change can be frightening. But, more so, the silver lining is that change can bring opportunity by forcing us to look at traditional things in a completely different way, maybe even forcing us to look a bit deeper into our business practices and finding solutions that will allow us to prosper in an environment that is increasingly unfamiliar. OM

DR. RUMPAKIS is founder, president and CEO of Practice Resource Management, Inc., a consulting, appraisal and management firm for healthcare professionals. Email him at John@PRMI.com, or visit tinyurl.com/OMcomment to comment on this article.