Whether we're running an ophthalmology practice or an oil company, we're all looking to build our businesses. Growth is recognized as a sign of progress and success. So it's understandable that we equate expansion with higher profits.

In ophthalmology, the opportunities to add new products and services have never been greater. Rapid technological advances, an aging population and greater public awareness of the importance of regular eye care have combined to make ophthalmology one of today's "hot" areas of medicine.

At what price growth?

However, plunging into what appears to be a promising new product or service without adequate evaluation is a recipe for failure. Many of the world's largest companies have expanded into what they believed were exciting new areas, only to find that they would have been wiser to stick to the businesses that they knew the best.

Know what you already have

Before venturing into any new products or services, it's crucial to make a comprehensive assessment of all the elements in your practice's existing business mix. This means working with your office manager/practice administrator, business office manager and accountant to break down the financial performance of every product and service that you currently offer.

Compiling the relevant figures regularly allows you to accurately determine how each product and service contributes to the overall profitability of the practice and how adding new products or services would help or hurt.

Most practice management computer systems either have the built-in capability to organize that data, or can be set up to categorize your services into "product lines." (For a method to use that capability see "What Numbers to Analyze" on the following page.)

Organizing your practice figures in that manner also gives you the information you need to understand how your practice's products and services inter-relate with each other. Your contact lens business might be breaking even on its own (not uncommon), but it can still be a valuable business if your contact lens patients are also buying eyeglasses.

You can also evaluate how a specific payer, such as an HMO or an Independent Physicians Association (IPA), is contributing to your practice's profits. You can create similar tables for any relevant time period, from one month to a year, matching products and services provided against charges, collections and Relative Value Units (RVUs).

Once you've completed this thorough evaluation, you should know the most profitable element of your ophthalmology practice. And the least profitable. You should also be able to identify services you provide that -- while not particularly profitable in themselves --generate additional income in other areas of your practice. And you should be able to identify "gaps" in your business mix that could be addressed by adding new products and services.

Making informed decisions

Having an ongoing, clear picture of the financial contribution of all elements of your existing practice (and how they fit together) is a critical tool for practice management. The evaluations may even reassure you that your current business mix is perfect -- needing only fine-tuning for greater profitability.

Once you're sure how much each of your current products and services is contributing to the practice's overall financial performance, you can more easily determine how adding new services, or doing away with underperforming ones, can improve the mix.

To evaluate the profit potential of new services you're considering, use the figures derived from your existing practice to develop reasonable projections for the new services. And make sure to take into account the following factors:

• Practice capacity.
Is your practice at its productivity capacity? Are there unused appointment slots? Are the physicians busy during all of their scheduled office hours? To add services to a practice at full capacity, you must either add providers or discontinue some present services. Conversely, a practice operating at less than full capacity can add services that provide lower reimbursement, as the incremental overhead cost will be minimal (excluding services that require additional equipment).
• The local marketplace.
When you examine potential new services, learn how many practitioners in your community are currently providing that service. If there isn't a real need, you may want to reconsider.
Similarly, if you're thinking of investing in the training and marketing for LASIK, you should know your market. What facilities do you have available to you? What is their cost? Is the competition intense? Are the demographics of your practice even conducive to offering LASIK (younger patients with disposable income)?
• Sources of patients.
How good are your referral sources? Do you have an optometric network willing to refer LASIK patients? If you are subspecialty trained, will general ophthalmologists refer their subspecialty cases to you? If you have an optometric referral network, will adding an optical dispensary to your practice diminish those referrals?

Another factor is the investment needed for providing a new service.

• Is special training required?
An example is the training required for LASIK. This skill can't be hired or purchased -- it must be learned. But optical dispensing can be added without personal training. You can simply hire a good optician.
• Is special equipment required?
If you are going to do cosmetic laser skin resurfacing, a laser may be required. LASIK, on the other hand, can be done with shared equipment, or in a facility "rented" per procedure.
• Will the service require marketing to be successful?
If you have to market externally, what type of marketing will it be? Will you have to recruit referring providers to send you patients for this new service? This is the least expensive marketing in terms of dollars, but the most time-consuming. If you use advertising professionals, as is common with LASIK, it can be quite costly.
On the other hand, optical dispensing can be marketed inside the practice almost exclusively.

Arriving at the right mix

The key to determining the best mix for your practice is accurately assessing the current and potential performance of each current line of business, as well as the potential performance of each line of business you could add.

By thoroughly examining the profile of your own practice and understanding the key factors that determine success in any specific area of the local eyecare marketplace, you'll be able to add those new products and services that provide the greatest returns.

What Numbers to Analyze

The chart on page 99 of the September issue of Ophthalmology Management illustrates how you should be organizing your practice financial data each month so that you can evaluate the profitability of each of the products and services that you provide. The data comes from your billing computer system, but no systems that we've seen can generate this table automatically. It will generally come from the system's "Production Report," "New Services Summary" or similar report.

You should instruct your office manager/practice administrator or the business office manager to compile these numbers. If you outsource your billing, the vendor should generate the data.

 

TIPS FOR WORKING WITH YOUR DATA:

• Categorizing

. Many practice management computer systems allow you to break down your services into categories. If yours doesn't, or the categories are limited, you can work around this limitation by establishing separate physicians and/or separate locations to distinguish the categories. For example, you could have "Dr. Smith M" for medical-surgical services, "Dr. Smith R" for refractive surgery, "Dr. Smith C" for cosmetic surgery, and "Dr. Smith D" for optical dispensing.

RVUs.

You can find a table of relative value units (RVUs) for each CPT code on the Health Care Financing Administration's Web site (www.hcfa.gov). For services that don't have assigned RVUs (those generally not covered by Medicare) you can create "proxy" RVUs. To do that, estimate how your practice fee schedule relates to the Medicare Fee Schedule for your local area. Let's assume your fee schedule is two times Medicare. Because Medicare generates its fee schedule at about $35 per RVU, you could divide your fee by $70 (twice Medicare) to calculate a proxy RVU.

One caution.

Some computer systems, including some used widely in ophthalmology practices, can't match payments to the specific months in which the charges were generated. If yours can't, you won't be able to fill in the "Income per RVU" section of the chart. This is because the RVUs are procedure-specific. However, even without that column filled in, the chart is a valuable tool.
If your system can match payments to the specific months in which the charges were generated, you should calculate the "Income per RVU" 4 to 5 months after the date of the charge, allowing time for all collections to be made. Simply divide the total RVUs into the total collections to get the collections per RVU. You can then compare the income per unit of work between service categories. The non-covered services, such as refractive and cosmetic surgery, will pay at the fee-schedule amount, and will, therefore, show a much higher earning level per RVU than insured services.

Ron Rosenberg, PA-C, MPH, is president of the Practice Management Resource Group, a full-service practice management consulting and outsourced billing and receivables management firm, with offices in the San Francisco, Chicago and Philadelphia areas. He has led programs on practice financial performance for many medical professional organizations, and has written books on financial performance and capitation contracting. You can visit the PMRG Web site at www.medicalpmrg.com.