With physician compensation shrinking, governmental regulations tightening, and the cost of just about everything skyrocketing, more ophthalmologists are taking a second look at office visits as a source of increased profits.

Why office visits? One reason is that Medicare hasn’t decreased reimbursement for office visits as much as it has for surgery. Another is that large automated offices can absorb increased patient volume without increasing staff. Increased office visits mean increased ancillary services, such as providing contact lenses and eyewear, which translate into increased profit potential.

Before you make the shift toward more office visits, however, you must consider how much it costs you to provide the service. Knowing the cost of your services can help you assess cost effectiveness and streamline operations. It can also enable you to assess whether any managed care contract will be a money-maker or money-loser.

Here, we’ll explain a cost accounting method known as the Activity Based Cost (ABC) approach, and demonstrate how to use it to determine the cost of an office visit using a hypothetical ophthalmic practice as an example.

To compute the cost of providing a service, the ABC approach calculates the direct and indirect costs associated with each service. These costs include:

• Labor.
This is the most costly expense associated with an office visit. To arrive at labor costs, determine how much time each procedure takes, on average. Then determine the cost of participation by each person involved, based on his hourly salary plus payroll taxes and benefits.
• Supplies.
These include charting and other office supplies, as well as all clinical items. For most routine services or procedures, you can determine the cost of supplies per service by dividing the annual costs of supplies used during the typical rendering of this procedure by the number of times you render the service in a year.
• Capital resources
. These are fixed overhead costs, which include rent, equipment, depreciation and interest. Allocate equipment costs for procedures based on use of particular equipment.
• Allocated overhead.
These are variable expenses, such as administration, legal and accounting services, insurance, telephone bills and business taxes. Consider allocating these costs equally across all patient encounters.

Here’s an example of the direct and indirect costs associated with a new patient ophthalmic office visit (CPT 92004) at "I Care Associates" (ICA), a hypothetical ophthalmic group practice. The numbers we use are fictitious, however you can use our calculations as a template and insert your own hard data.

The physician directly involved in the patient care in our hypothetical office visit is Frank Mulvey, M.D., co-owner of ICA. Dr. Mulvey earned $225,000 in income last year, and also received $25,000 in retirement, insurance and other benefits, for total compensation of $250,000. He worked all 52 weeks (including compensated vacation and sick time), 50 hours a week, for a total of 2,600 hours. This gives him an hourly rate of $96.15 (250,000 ÷ 2,600), which converts to a rate of $1.60 per minute ($96.15 ÷ 60).

The ophthalmic technician in this case is Helen Gallagher. She received $26,000 in total compensation last year. She worked 52 weeks, 40 hours a week, for a total of 2,080 hours. This gives her an hourly rate of $12.50, which converts to a rate of $0.21 per minute.

• Indirect costs. These include both capital resources and allocated overhead. The easiest way to calculate indirect costs is equally across all patient encounters. We’ll start by calculating the total compensation for ICA personnel not directly involved in patient care.

The breakdown is as follows:

• practice administrator: $68,000 per year
• senior billing/collections clerk: $36,000 per year
• junior billing/collections clerk: $27,000 per year
• full-time receptionist: $21,000 per year
• part-time file clerk: $12,000 per year

The total cost of indirect-expense personnel is $164,000. Other indirect expenses ($429,000) include the following fixed and variable overhead costs:

• $30,000 for malpractice insurance per year for the physicians in the group.
• $148,000 for occupancy expenses, such as office rent, utilities, telephone, business insurance, janitorial services and miscellaneous business equipment.
• $80,000 for equipment costs, including rental fees (or depreciation and interest), maintenance and repairs, and laboratory costs, along with clerical supplies.
• $31,000 for dues and seminar fees.
• $140,000 for legal and accounting fees, business taxes, professional promotional fees, marketing expenses and all other expenses of doing business.

The total indirect expenses equal $593,000 ($429,000 + $164,000). We can apply this number across all patient encounters by dividing it by the estimated annual number of patient encounters. ICA typically has 45,000 patient encounters per year. Thus, each patient encounter costs ICA approximately $13.18 ($593,000 ÷ 45,000) in indirect costs.

Now, let’s look at how to calculate the total cost of an office visit based on ICA’s indirect and direct expenses. The chart below shows the compensation rates we calculated earlier for Dr. Mulvey and Ms. Gallagher, as well as an $0.17 per minute compensation rate ($21,000 per year, $10.10 per hour) for the receptionist involved in the patient encounter.

When we apply these compensation rates to the activities associated with a patient encounter, such as check-in, taking the patient history and performing the exam, the total direct cost equals $27.58. Adding the total direct cost to the total indirect cost ($27.58 + $13.18) equals $40.76 as the total cost of a new patient visit.

Does the practice make or lose money on a new patient visit at this cost? It depends.

If the recipient is a self-pay patient and the practice charges and collects $120 for this visit, then the practice makes $79.24 ($120 - $40.76) by delivering this service.

If the patient is a health-plan enrollee who pays a $5 co-pay and whose discounted fee-for-service plan pays the practice $85 to provide the service, for a total of $90, the practice makes a profit of $49.24 ($90 - $40.76).

You can use the ABC approach to determine the cost-effectiveness of other services, too. For example, consider the per-use cost of obtaining a photo of a retina. Whether the cost is $15, $30, or $45, you can try these calculations to get a feel for when to use this particular technology. You may find that you need to redefine the medical necessity of using this imaging modality.

If your practice is heavily capitated, it may be cost effective to use the original photo whenever possible, as opposed to taking new ones when no change in the patient’s condition is evident.

Here are some additional ways you can use the ABC approach in your practice.

• Personnel decisions. Make sure that every task is performed by the lowest paid member of your practice who is both capable and qualified of doing the task. This strategy is employed throughout ophthalmology.

It doesn’t make sense, for example, to have a general ophthalmologist — who earns $225,000 a year — performing visual fields or refractions. The ophthalmic assistant — who earns $22,500 a year and is fully capable of performing the refraction — should be doing that work. Why pay 10 times more?

The same can be said of having an ophthalmologist perform a routine eye examination rather than having an optometrist do it.

For example, assume it costs a practice $5 for professional services if the optometrist performs a routine exam and $20 for professional services if an ophthalmologist performs the exam.

Let’s also suppose that the practice performs 1,000 eye exams a year and a health plan pays it $30,000 ($30 per exam). If the ophthalmologist performs all 1,000 of the routine exams, the cost to the practice for the professional component is $20,000 ($20 x 1,000) and the practice retains the remaining $10,000 ($30,000 - $20,000) to cover its overhead.

If the optometrist performs all 1,000 exams, the cost to the practice for the professional services is only $5,000 ($5 x 1,000) and the practice has $25,000 ($30,000 - $5,000) toward overhead. Assuming the practice can keep both providers busy, which scenario makes more sense to you?

• Contracting. Evaluating care contracts is one of the primary reasons for using a cost accounting method like the ABC approach. For example, in the first scenario we described, the cost to the practice of doing an exam would be $40.76. So $30 for an exam in the second scenario would obviously represent a money loser, even if the optometrist performed the exams.

In such a case, you’ll need to decide if it’s worth signing on with the plan and earning a profit on optical revenue, diagnostic testing, ancillary services and surgery. If the plan is not worth the additional revenue it could generate, you might be better off not signing it.

• Equipment. Using ABC can help your practice decide whether to keep the equipment you have, upgrade it or replace it with newer machines or more advanced technology.

For example, consider a hypothetical practice that’s thinking about acquiring an ophthalmic laser. If the "experts" say that whichever technology will replace it as state-of-the-art will appear 3 years after the practice makes its purchase, the practice can safely assume that it will keep the laser for 4 years. Would such a purchase be cost effective?

If the practice performs 250 laser procedures a year, it will perform 1,000 procedures using the laser during the course of 4 years. If the laser costs $92,000, the cost per procedure based on the equipment purchase alone will be $92.

To determine the entire cost of providing laser surgery, the practice must factor in maintenance costs, personnel, supplies and the professional services cost (including any lost time when the ophthalmologist travels to the laser location).

Then, the practice can make the decision to purchase the laser based on whether it would be a money maker or a money loser.

Measuring costs takes considerable understanding of your practice.

To use the ABC approach effectively, you must calculate how many times per year, on average, you render each service your practice offers, plus the other variables we discussed, such as direct and indirect practice expenses.

Procedure costing is a time-consuming process that also requires some skill with numbers. If you don’t have the time or expertise, and you have a practice administrator with an abundance of business experience, get the administrator to do it.

You can also hire an accountant or a healthcare business consultant, or obtain a do-it-yourself computer software package that you — or even your office manager — can use.

Most business people know what it costs them to manufacture a good or provide a service. So should you in your eyecare practice.

Once you determine how much it costs your practice to render each service you offer, you can apply good management principles to improve results — both individually with respect to specific services, such as an office visit, and collectively for all of your services.

Adding a dispensary can generate another stream of revenue for a practice. But, will the profits justify the costs? ABC techniques will be invaluable in helping you make this decision. But before you begin calculating, you must consider the following questions:

• Patient demographics.
Are there enough patients in your practice to support an eyewear shop? What are their needs in terms of lenses, frames and contact lenses? What are the profit margins involved?
• Space.
How much space will you need for lenses, supplies, display racks, eyeglass assembly and repair stations, fitting stations, personnel, customers, and a waiting area? How much space do you have? Will you need to move? Can you get a better deal on an office lease?
• Personnel.
Do you have enough front-office personnel to care for eyewear customers? Will your back-office personnel be able to handle the extra billing, collections, paperwork and records management? Will you need to hire an optician? How many more people will you need?
• Business issues.
What about the competition? Can the geographic area support another eyewear shop? Can you compete with the large chains? Can you compete and still make money? Are managed care companies looking for comprehensive eyecare practices? What about carve-outs? Who will grind and fit the lenses?

One way to expand services without adding a large amount of space or personnel is to offer refractive surgery. To determine the feasibility of this option, you can use ABC to consider the ramifications of everything from moving your practice to a new location, to buying a laser and hiring a new surgeon.

You may need to hire a business consultant to do this intricate, time-consuming work. But know the issues, so you and your consultant can work together well. Some of the issues you’ll need to address are listed below:

• Which modality will you offer?
Radial keratotomy, photorefractive keratectomy, laser-assisted in situ keratomileusis, or some combination of non-laser and laser procedures?
• In what setting will you offer refractive surgery?
In your office or in an ambulatory surgery center? Do you have enough space to bring a laser into your practice?
• Should you lease, lease to own or purchase your laser?
Should you time-share a laser with other practices? Can you borrow the money?
• What about the cost to the patient?
Will the insurance companies pay for the services? If not, will you offer financing options? Are you located in an affluent or less affluent area? What are your patient demographics?
• Do you have a refractive surgeon on staff, or will you need to hire one?
Will the rest of your practice physicians be able to generate enough refractive surgery cases to keep a new surgeon busy? Will you have enough support personnel?