THE LOST ART OF CALCULATING CHAIR COST

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Determining the value of your time is the financial key to increased profitability and strategic decision making.

Although most optometrists have heard about or seen calculations on chair cost, many do not appreciate that this is the most effective method of establishing professional fees or evaluating participation in third-party plans. This concept of calculating costs and deriving an appropriate profit margin is used in many industries, yet it is seldom done in our field due to lack of comprehension, misunderstanding results and the fear of change. However, it may be regaining some of its cachet due to the changes in carrier compensation models inspired by the Affordable Care Act.

Using a simple approach of both top down and bottom up analysis can truly help remove the emotional distress of deciding whether to join (or quit) a managed vision care plan  and restore some objectivity for this critical process.

CALCULATING CHAIR COST
Chair cost is a formula based on analyzing a practice’s overhead as it relates to professional services and the number of doctor production hours involved in generating service revenues. Despite our reliance on revenues from the retail side of the practice, with nearly 65% of the average OD’s income generated by the sale of glasses and contact lenses, in these changing times we must be knowledgeable about what it actually costs to produce our service revenues only, without the sale of retail items. True profitability from the service portion of a practice could then be accurately analyzed and prices charged for services performed accurately determined.

In the very simple example below, assumptive percentages are used in each of these categories for illustration purposes. To calculate your actual chair costs, you would use figures derived from your incomes or profit-and-loss (P&L) statement in place of these assumptive percentages. Simply pull the data from your P&L and calculate where you share labor, rent, etc., and what percentage of the total cost would be related to optical vs. professional services.

Chair Cost Analysis
Single Practicioner Scenario
Annual Gross Revenue
(Total Receipts)
$650,000.00 100%
Monthly Gross Revenue
(Total Annual Receipts divided by 12)
$54,166.67 100%
Cost of Goods Sold
(28% of Monthly Receipts)
$15,166.67 28%
Gross Margin on Sales
(72% of Monthly Receipts)
$39,000.00 72%
Operating Costs
(45% of Monthly Receipts)
$24,375.00 45%
Pre-Tax Net Income
(27% of Monthly Receipts)
$14,625.00 27%

CALCULATING SHARED COSTS
Most practices, in addition to the cost of goods sold, have a good portion of their operating costs associated with their optical (items such as shared labor, rent, utilities, etc. that can be backed out of the calculation). Now, if the practice was planning on eliminating its optical or running it as a distinct and separate operating division within the practice with a separate P&L, then this proration would not be necessary. See the chart below.

Prorated Optical Costs
Shared Costs Within
Practice for Optical
Reduction of
Operating Costs
Prorated Share of Operating Expenses such as
rent, labor, utilities for Optical
(30%)
$7,312.50
Net Operating Costs Due to Professional Services
(Operating Costs minus prorated optical costs)
$17,062.50
Total Doctor Hours Per Month Allocated To Patient Care
(Assuming 8 hours per day, 5 days per week, 4.3 weeks per month)
172 Hours
True Chair Cost Per Hour (Professional Operating
Costs divided by Doctor Production Hours Per Month)
$99.20

With an actual chair cost, how is it applicable to determining whether or not a managed vision care plan should be added or dropped from the practice? That depends on the fee per examination that the managed vision care plan is offering or has negotiated with the practice and, most importantly, how many patients per hour the doctor can see. Today, we see many optometrists blindly joining managed vision care plans without doing any analysis at all, or banking their analysis on what they are going to make on the retail side of operations. Proper analysis of both sides of the equation can help stem the practice of using our professional services as a loss leader to get a retail sale. To put it simply, we have to understand the relationships among three key elements that are so very important to our profitability. There is a clear and distinct relationship among what we are paid per exam, the number of patients that we see per hour and our profitability from professional services.

PLAN PARTICIPATION ANALYSIS
This certainly isn’t rocket science, but we as a profession have become somewhat complacent when it comes to doing the math. Let’s examine just how significant these relationships actually are when it comes to seeing patients.

The approximate national average reimbursement for a comprehensive eye examination (920X4) is $55.00. Since optical sales are not a factor here, let’s examine how efficiency can impact your profitability.

The chart below shows how your net profit per hour changes based upon the volume of patients that you see per hour. We used both the average rate of $55 and a rate from a plan that pays $45.

Managed Vision Care Plan Participation Analysis
Patients
per Hour
Revenue
per Exam
Net Profit
Per Hour
Revenue
Per Exam
Net Profit
Per Hour
2 $55.00 $10.80 $45.00  -$9.20
3
$55.00 $65.80 $45.00 $35.80
4 $55.00 $120.80 $45.00 $80.80
5 $55.00 $175.80 $45.00 $125.80
6
$55.00 $230.80 $45.00 $170.80
Net Profit Per Hour = Revenue Per Hour minus True Chair Cost Per Hour

ANNUAL NET INCOME
More importantly, how does this translate to your pre-tax net income on an annual basis. When extrapolating the figures to an annual basis, it is fairly apparent that the “upside limiter” in this equation is the reimbursement and the number of exams that you can see per hour. Which one do you have control over? The truth is both. You can say no to a managed vision care plan or try and negotiate your reimbursement rate. You don’t have to say yes to every plan at every rate. In fact, I would counsel you to know your number so well, that you know at what rate you must say no to a carrier because it simply is not going to be profitable.

The chart below shows the impact on your annual pre-tax net income of accepting a plan that pays $55 and one that pays just $10 less per exam, or $45.00. We simply multiplied the net profit per hour by hours worked in a week (40). Then multiplied that figure by 4.3 for the average weeks in a month, and 11.5 for the average months worked in a year.

Annual Pre-Tax Net Income*
Patients
per Hour
Revenue
per Exam
100%
Booked
80%
Booked
60%
Booked
50%
Booked
2 $55
$45
$21,362.00
-$18,198.00
$17,090.00
-$14,558.00
$12,817.00
-$10,918.00
$10,681.00
-$9,099.00
3 $55
$45
$130,152.00
$70,812.00
$104,122.00
$56,650.00
$78,91.00
$42,487.00
$65,076.00
$35,406.00
4 $55
$45
$238,942.00
$159,822.00
$191,154.00
$127,858.00
$143,365.00
$95,893.00
$119,471.00
$79,911.00
5 $55
$45
$347,732.00
$248,832.00
$278,186.00
$199,066.00
$208,639.00
$149,299.00
$173,866.00
$124,416.00
6 $55
$45
$456,522.00
$337,842.00
$365,218.00
$270,274.00
$273,913.00
$202,705.00
$228,261.00
$168,921.00
 *Assuming 2-week vacation per year

The results are shocking if you carry this through to forecast what this does to your annual income.

Chair cost analysis is a very valuable tool that will provide you with the objective data based upon your individual practice costs and characteristics that allow you to make rational unemotional decisions on which plans you want to participate in. Again, fees charged, fees accepted and schedule changes must all work harmoniously within your office structure to allow maximum efficiency and profitability. If you accept a third-party contract fee that is very low but think that you will make the profit difference up in volume, then you need to be open to changing your schedule to allow more appointments to fit into one day, even if this means delegating more tasks to your staff.

With increasing third-party involvement in our field, chair cost analysis becomes the tool to use when evaluating our professional service fees for profitability and for determining whether or not we can accept a particular exam fee from a third-party carrier and can afford to participate within the plan’s parameters. Don’t let fear or greed drive your strategic planning and tactical implementation. Use simple math”¦and use it to your advantage.

John Rumpakis, OD, MBA, is a leading authority on medical coding and compliance issues in eyecare.

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