Strategic Cost Containment
Spend to create practice growth and build profits, but eliminate unnecessary expenses.
BY JOSEPH CARROLL

The ophthalmic industry continues to be a tremendously competitive marketplace, requiring practices to look again at those ever-so-tedious day-to-day operations. In my experience, I've found that the most successful practices in the country share common goals for clinical service and financial activities. Moreover, such practices exhibit great elasticity in the ability to modify their goals to accommodate the market as it changes.

Your practice goals must include, but aren't limited to:

• well-defined core values supported by a short- and long-term plan
• a high-quality product that produces great outcomes
• a first-rate staff that's passionate about customer service
• a diversified revenue base
• effective management-information systems
• leading-edge technology
• a plan for controlled growth
• proper measurement of all clinical activities and financial procedures.

With these fundamental goals in place, a practice manager can focus on implementing cost reductions in daily operations. In this article, I'll focus on combining the achievement of sound business goals with cost reductions in ophthalmic practices.

Coordinating a series of goals for a practice can be a task in itself. To achieve success, it's important to have proper leadership and management in place for your practice, starting with the top and working down. In business, many have a tendency to confuse leadership and management. People too easily assume that managers are the leadership, and vice-versa. We've discovered that practices achieve their goals when they understand that management and leadership coincide, but that they must be performed and implemented independently of each other.

History is littered with corporate giants that became dinosaurs because they failed to adapt and properly position themselves for the future. The same is true for smaller businesses. Therefore, when we look for the qualities that lead to stability and corporate success, we see an overwhelming need for a combination of effective day-to-day management and visionary, long-term leadership.

Spend to Build Profits

Webster defines cost as: "The amount of money, time and effort to achieve an end." First and foremost, a practice must dictate this desired end result. Secondly, it must reject the connotation that all costs are negative. Many times in business, it's necessary to spend money to make money. Spending on a specific person, product or tool is creating a bridge for success, as long as those persons or products are functioning effectively and to maximum potential. If the investment is going to produce a profit, that particular cost is worthwhile. Such costs should be viewed as assets, working to benefit the success of the company. The key to determining which expenditures will be profitable is by distinguishing assets from liabilities. And the most effective way to make this judgement is by developing budget and business plans.

To effectively budget expenses, formal business and market plans should be developed annually for the practice. The market plan should clearly identify the steps of strategic implementation needed for practice growth and development, including key internal and external marketing tasks.

Once the market plan has been documented, a forecast of units of service to be delivered should be projected to develop a well-defined annual budget. At this stage, the budget will demonstrate desired revenues and respective costs associated with achieving the revenue projections. Costs should be analyzed carefully in respect to opportunity to further determine how much profit will be delivered. Costs for personnel, benefits, physical resources, occupancy and use, purchased services, and other expenditures such as interest payments and marketing initiatives should be benchmarked to national standards for ophthalmic practices. Any variances in costs from the national guidelines should be analyzed carefully to ensure the practice is meeting the outlined goals and objectives or achieving the desired results.

Avoid Cost "Trouble Spots"

Once the market and business plans are in place, revenue production and cost analysis should be monitored on a monthly basis. Other potential problem areas to carefully examine for cost containment include staff productivity, purchasing and overtime. When looking at those areas, keep the following recommendations in mind:

Set benchmarks for productivity. Your support team and staff represent the backbone of success, truly a make-or- break resource factor. Typically in ophthalmology, ideal expenses for staffing are 18% to 25% of total revenue. The revenue produced by each staff member will vary. But strive to ensure that revenue generated per full-time equivalent is greater than $150,000 per person a year.

More than ever, practices are accepting subpar productivity from staff members. The consequences from doing so are excruciating because, again, a person or product not working toward maximum potential is a liability, yielding a cost-ineffective resource. Keep in mind that your staff needs to be results-oriented when focusing on optimal productivity. Management should communicate such expectations and, in return, reward staff for outstanding performance. An incentive program for outstanding customer service and improved productivity is an excellent way to put staff in business for themselves.

It's imperative to let staff members think like owners. If staff are provided an outlet for entrepreneurial and self-directed motives, they'll play a key role in providing ideas to management on how costs can be reduced or eliminated.

Reap the benefits of an internal purchasing agent. One of the best ways to monitor and reduce costs is by creating a purchasing agent within your practice. The purchasing agent is responsible for being the gatekeeper for all products and services. This will eliminate duplication and, most importantly, allow for a single person to be accountable for obtaining the best pricing and achieving inventory control. The purchasing agent should create a "bidding" process and generate the necessary paperwork through an internally developed purchase-order system. Such a system allows the purchasing agent to obtain the lowest price and ensure that all products in their correct quantities are received before payment is made to the vendor.

Put tight controls on overtime. It's crucial that overtime become a last resort in your practice. Overtime not only adds to avoidable costs, it also indicates that the practice isn't operating in a timely fashion. Overtime needs to be closely monitored and justified by the employee's direct supervisor because many practices are losing critical dollars every week in overtime. With correct management in place, reducing unnecessary overtime dollars will enhance net revenue, putting thousands of dollars on the bottom line.

Look for More Savings

A qualified tax advisor should complete a thorough review of the company's corporate structure. Doing so will ensure that the practice entity and its affiliates are properly structured to receive the best tax advantages for the ownership. If you have disability insurance, it may be advantageous to make sure you're paying the premiums on a personal basis. In some cases, if the corporation is paying and deducting the premiums, you could have an additional tax liability if you ever become disabled. Also, consider the cost/benefit ratio of having higher deductibles for property and causality insurance. The same is true for health insurance. It's been beneficial for many practices to raise their deductible to $1,500 or greater and self-insure the first $500 of the deductible. I encourage you to evaluate similar procedures.

It's also essential to apply cost containment in the collection of patient accounts. It's common for patients to require financial assistance in paying their bills. In response to this demand, we recommend that you consider developing a business arrangement with a patient-financing service and we encourage our clients to let this service act as the financing source from day one. For a nominal fee paid up front to the financing agency, the practice gets paid quickly and the patient payment process becomes the responsibility of a third party.

The ideas presented here represent only a small portion of the programs and services your practice should be utilizing on a routine basis. You need to do your own due diligence and determine what cost reductions will work for you. I encourage you to make cost containment a practicewide project. Get your staff involved; share information with them and reward them for their contributions.

Joseph Carroll is founder, president and CEO of Advantage Administration, Inc., a full-service medical consulting company for physician practices and corporate clients across the United States. Assignments range from individual projects to complete outsourcing of practice administration. He can be reached by phone at (800) 320-7409, or via e-mail at jcarroll@advadm.com.