Can You Afford To Discount?

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By Randy Schmitke, CPA, MBA

"Yes." Now that is an answer that will get some folks' blood boiling. Immediately, your thoughts might be...

"How does he know what I can or can't afford to do? He doesn't know my company. He doesn't know the difficulties I have had in getting paid by insurance companies. I can't give away any more of my revenue dollars, because I won't be able to pay for components, overhead, and other expenses. This discounting thing is crazy-it just leads to poor-quality patient care."

You're right . I do not know what your practice is experiencing. Nor do I know the financial position of your company: how much debt you have, your payer mix, or the volume and type of business you do. However, what I do know and what I think you will agree with, are three fundamental principles of business. These principles have stood the test of time in our free-enterprise economic system and today influence almost every industry.

The principles are:

  • Business is about perspective;
  • Change is imminent;
  • Competition always produces something better.

Beauty Is In the Eye of the Beholder

Beauty is about perspective. Business is about perspective. Each of us looks at inward and outward beauty with different results. Each of us looks at business methods, processes, approaches, etc., through unique eyes. Often there isn't a right or wrong answer, but there are methods and approaches that produce better results than others. These results are influenced greatly by the people involved, the technology used, governmental restrictions, customer needs, and many other factors. A company's view on the influencing factors and the challenges involved, combined with its ability to execute business strategies and decisions based on this view, can ultimately be the deciding factor in success or failure.

'Change' Is Not a Four-Letter Word

We talk a lot about "change" and the fact that we need to do a better job of accepting it, but it seems that most of us are still resistant to it. What really happens is that we are willing to accept change on a selective basis.

If we think that change is going to affect us negatively, then we become less willing to allow it or facilitate it. We commonly do this without considering why the change is occurring, what the intended result is, and how it might positively affect others involved.

The O&P industry is changing. Although the changes occurring in O&P and in healthcare as a whole do not always leave us where we want to be, the intent of these changes is logical. We need to improve our healthcare system by providing more patients with high-quality care in the most efficient and cost-effective manner possible. To accomplish this, change is required.

Don't Whine-Compete!

Competition remains a pillar of the free enterprise system. The logic has been proven time and again that when there is plenty of competition in the marketplace, true competitors will figure out how to do things better, faster, or cheaper because that is what they must do to survive. Why should the business of healthcare be any different? The focus of the O&P industry should be on competing, not on making excuses as to why we should not have to compete.

If you consider any other industry, you'll see that similar forces are at play. How do we think progress is made? My father, who is now retired from General Motors, used to say that foreign cars were junk compared to American-made automobiles. However, the Japanese figured out how to make cars more efficiently for a cheaper price and with the same or greater quality. After the Big Three realized these competitors were here to stay, they had to raise their own bar and compete harder.

I am not suggesting that, both individually and as an industry, we shouldn't push back against the tide of legislative issues or make our case to insurance companies, vendors, government officials, or others - because I think we should. We should make our best arguments to position our industry to offer the best patient care possible. We should support our

associations who present our position. And we should not be naive in thinking that all competition is fair competition. But let's focus on competing, not on making excuses.

There are practical actions that a facility owner can take to prepare his business for providing services at a reduced fee.

Consider your business model.

Have you consciously talked through what your business model is and how you intend to leverage it for success? Are you making decisions that are consistent with the structure of that model?

For example, are you a "boutique" provider? If you are, then you probably are very small and operate without accepting contracts. Most of your work is done through Medicare, complemented by a smattering of individually negotiated work with third-party administrators or cash-basis patients. If you are considering adopting this business model, then you need to be sure that your geographic market can support it and that your expenses can handle low-volume and possibly fluctuating work.

Should you consider growing through merger or acquisition? Geographic coverage through size often positions you to handle greater volume - and to attract greater volume through contracting - which may allow you to spread your fixed costs over more sales dollars. Increased volume may allow you to leverage an investment in technology, which can perhaps make your business more efficient in the long run.

Are you actively leveraging or pursuing an alliance or network relationship? Is there a way you can maintain one office location with limited staff, yet achieve the presence of a larger facility?

Reporting, reporting, reporting.

Are you getting good reporting on your business? You need to become intimately knowledgeable about what is happening in your business beyond your "gut feelings." Do you know what percentage of your business is from Medicare, managed care payers, or VA? Have these numbers changed over the last couple of years? Do you know what percentage of your gross sales dollar you write off as a "contract allowance" on average each month? Do you know what percentage of your sales dollar goes to the actual production of prostheses or orthoses?

If you don't have solid information that takes you only minutes a month to digest and analyze, then take some time to ask your accountant or software provider to help you put a plan together to accurately gather this information. If you don't have someone you already know who can help you, call your colleagues for references until you find someone who can.

Good information provides the knowledge necessary to make good business decisions.

Leverage technology.

Technology is not the solution to every problem, but it is a tool. Are you using technology to its optimal level in your practice? Are you minimizing the number of administrative staff involved in operations because you have implemented an efficient patient scheduling, patient registration, and medical billing system? Have you analyzed how collections might be improved by utilizing the system to organize information or produce automatic follow-up letters? How are you handling purchasing and payables? Have you considered CAD lately?

Researching technology and how it might affect your practice takes time, but so does everything worthwhile in life.

Minimize fixed costs and maximize variable costs.

Fixed costs are those costs that exist no matter what the volume of business is. A practitioner earning a fixed salary of $60,000 annually will earn this salary whether he/she generates $300,000 in sales or $750,000 in sales. A variable cost is one that fluctuates in the total amount, depending on volume, but which generally remains the same for each individual unit. The cost of the components in a device is normally variable in character because it is incurred per unit.

When you are evaluating your financial statements and analyzing your costs, are there any costs that you could shift from fixed to variable? Have you considered shifting some fixed compensation to incentive-based compensation? Under incentive compensation, the staff members are sharing in the risks and successes of the company, and thus often have greater motivation to make productive changes and push harder on a day-to-day basis.

Have you considered lately how central fabrication might be used in your operation? Do you really need all your satellite offices, or can you reduce these fixed costs through office-sharing arrangements or alternative scheduling of practitioner time?

The reality is that I cannot tell you if you can or cannot afford to discount. Nor can I tell you ten magical steps to make your business more successful and more profitable. But I hope that I have challenged your thought processes and your perspective. I hope I have encouraged you to be a better business person - because you are in the business of patient care, and discounting is a business issue.