Our firm, Health Care Economics, Inc., has worked with many leading refractive practices over the past 22 years. During that time, we've observed that surviving in today's increasingly competitive marketplace necessitates setting appropriate fees, tracking economic factors such as net income and market share, and carefully managing overhead.

Knowing your practice's numbers is important. But seeing where your practice stands in relation to other successful practices can be even more valuable; it can help you pinpoint areas in which your practice may be in need of attention. (Having too many employees, for example, can be a major financial burden, yet the problem may be invisible if you have nothing to compare your current staffing arrangement to.)

Unfortunately, few clearcut benchmarks for a successful refractive surgery practice have been available. And the average successful refractive surgeon is far too busy to do an extensive economic comparison of his practice to others.

Setting the standard

We decided to remedy this problem by generating a set of benchmarks representative of a successful refractive practice in today's market. To do this, we surveyed more than 100 practices to determine what financial and marketing numbers a healthy, thriving refractive practice usually displays.

Many of the practices we chose to survey were taken from our own pool of clients; others were selected by asking outside companies, such as laser manufacturers, which practices were performing the most procedures. Our primary criterion was that the practice had to be making at least 90% of its income from refractive surgery.

The result of our survey is a measurement tool we call the Retained Earnings and Market Share Calculation, or REAMS-CALC. Using this tool makes it easy to compare your practice financial information to that of a successful refractive practice. (To the best of our knowledge, this is truly the first comparative database in the refractive business.)

Getting the whole picture

In this article, we're providing a simplified version of the REAMS-CALC tool that you can use in your own practice.  Key categories you'll need to compare include:

• fee structure

• net income

• accounts receivable

• overhead (broken down by category)

• staffing (full-time equivalent employees per physician)

• asset/income ratios

• marketing budget (percentage of gross income)

• market share penetration analysis (number of likely patients available in your market).

As you can see, the REAMS-CALC tool is designed to provide a complete measurement of the economic status of a refractive practice.

Data required

To fill in the sample REAMS-CALC chart on page 46, you'll need to assemble some key information, including:

• 1 or 2 years of profit/loss statements, balance sheets and income statements or financials

• information about your current accounts receivable

• current marketing budget figures

• a list of other high-volume refractive surgeons in your marketplace (within a 100-mile radius), including estimates of how many eyes they treat per month or year. (Note: To determine this, you can ask them directly, send someone to their offices to inquire at the front desk, ask laser manufacturers, check media records via the Internet, or contact the FDA.)

• your current fee schedule for unilateral and bilateral procedures

• current staff and salary information.

Using the REAMS-CALC chart

You'll find a sample of the REAMS-CALC chart below, filled out by a hypothetical doctor. Some key information about this doctor:

• His yearly gross income is approximately $4,950,000.

• He practices in a city of about 1 million people.

• He performs approximately 2,900 procedures per year.

Here are some comments to help clarify the meaning of some of the categories and how the numbers are calculated.

Net income and expenses. Having too high a level of expenses is a common problem, particularly in the areas of marketing, staffing and fees paid for laser access.

Global fee structure. The most successful refractive practices don't try to compete by lowering price. Instead, they sell their services on the basis of their skills and experience, and the quality of care and followup they offer.
If your fees are lower than the benchmark, you should consider raising them.

Accounts receivable. If your accountant uses the accrual system, this number may be misleading; the accrual system allows some existing debt to be omitted from this number. If your accountant uses the cash system, your accounts receivable figure should be representative of your true current situation.

Laser access royalty. This figure will vary, depending on volume. However, 8% is a good average figure, and if your percentage is significantly higher, you should look for the reasons.

General miscellaneous expenses. Usually an additional 5% to 10% is added for expenses such as insurance, janitorial, depreciation and laundry.

Full-time equivalency. When calculating the number of full-time equivalent staff, don't count any staff twice. (An M.D. and an O.D. should each be represented by two business staff members, for example.)

Ratio of assets to liabilities. Generally, anything higher than 5 to 1 should be considered excellent. However, a lower ratio may simply indicate a major recent purchase. If your ratio is lower, consider it cause for investigation, not alarm.

High-volume competitors. To complete these calculations, you'll need to take into account the number of people living in your market area.

In our experience, a current population of 1 million people represents (on average) about 35,000 eyes likely to be potential candidates for refractive surgery. Most successful surgeons perform about 3,500 procedures per year. (Obviously you should adjust these numbers to more accurately reflect your market and practice, if possible.)

By finding out the number of procedures your high-volume competitors are performing, you can determine an approximate number of potential eyes that are available to you. Our sample doctor works in a city of 1 million people, meaning about 35,000 eyes should be available. Because he has only two competitors, who perform about 1,750 procedures a year, he should have an ample supply of potential patients.

Succeeding with your eyes open

Filling out the REAMS-CALC tool on page 46 will take a little bit of time and effort, but I think you'll find it to be well worth it. After all, the first step in making things better is finding out where there's room for improvement.

Good Luck!

Link to Retained Earnings and Market Share Calculation chart for a sample practice.

Link to blank REAMS-CALC chart.

Does This Really Apply to Me?

Some of you may be skeptical about comparing your practice to a hypothetical ideal practice. Many doctors feel that their practices are unique, justifying significant financial differences uncovered by REAMS-CALC.

In my experience, however, refractive practices are universally competitive; these numbers apply to most successful practices. The cost of doing business, for instance, tends to be consistent from practice to practice. Lasers have similar access fees, and refractive surgery is primarily a cash business.

Admittedly, some factors, such as rent, may vary. However, we've found fairly consistent percentages and ratios among successful practices, regardless of size, marketplace, physical location and other factors.

In short, these figures are a reliable series of benchmarks for a refractive practice. If your figures are significantly different, focusing your attention on the area (or areas) that aren't up to the REAMS-CALC standards should make a real difference in the economic viability of your practice.

---Michael Brown

Michael Brown is president of Health Care Economics, Inc. He's been a consultant in the healthcare field for more than 20 years. You can reach him at (317) 845-5100, or via e-mail at mdbrown@ameritech.net.