Eyeworld

OPHTHALMOLOGY BUSINESS 102 February 2015 by John B. Pinto Your practice's profit margin company "OEC Optical" makes $300,000 in profits on $1 million in collections. The 2 owner-MDs each generate half of the core practice's collections—$2 million out of the $4 million total—and each makes $450,000 in wages/taxes/benefits. They also split the $300,000 in annual profit from OEC Optical. The associate MD makes $180,000 including his bonus, benefits and taxes paid on his behalf. The 2 associate ODs have a combined income of $250,000, including their bonus, taxes and benefits. So we have at least 3 possible (and very different) ways of looking at the profit margins in OEC: A. You could calculate the "Profit margin available for owner MDs." This would be $900,000, plus the $300,000 in optical profits, divided by $5 million in total collections, or 24%, which sounds pretty anemic and is hard to compare with others on a practice- to-practice basis because of the unique nature of OEC. B. You could look at the "Profit margin available for all MDs." This would be $1,080,000, plus the $300,000 in optical profits, divided by $5 million, which is not much better at about 28%— and only slightly more useful as a comparative metric from one prac- tice to the next than Option A. C. You could also examine the "Profit margin available for all providers, both MD and OD." This would be $1,330,000 plus $300,000 in optical profits, divided by $5 million equals about 33%. But if you think about it further, looking at OEC through the eyes of its owner physicians, what really counts is the profit that they enjoy as a percent of the collections they generate. Said another way, "How much do I earn in relation to the amount of work that I do?" Applying this more interesting and perhaps more useful measure of profitability, we come to Option D: The "Profit margin available for owner MDs AS A PERCENT OF THEIR PERSONAL COLLECTIONS." Here's the calculation for OEC: • The 2 MD owners have combined personal collections of $2 million, which is a proxy for the work that they actively perform, although Contemporary profit margins in the typical general/geriatric practice now range from 30% to 45%, with a bias toward the lower end of that range. But let's get back to basics be- cause surgeons and their managers commonly get confused about this fundamental practice benchmark and how it should be measured differently based on the kind of practice you run. What's the convention for measuring profit margins in practices today? Let's cover a simple example first, to help define terms. Imagine a modest solo, subur- ban eye surgeon, "Ruth." Ruth has 5 staff, 3 exam rooms, and performs 350 cataract surgeries a year. Ruth's practice charges out $1 million a year and collects $700,000. Ruth pays herself a monthly draw of $15,000, which she pays taxes on regularly. She also gets $18,000 a year in health benefits and another $15,000 in pension benefits. After all expenses have been paid, Ruth makes $180,000 in draws, $33,000 in health and pension benefits, and at the end of the year she gives herself a $25,000 dividend—all of the leftover profits. All up, Ruth en- joys a $238,000 pre-tax income on $700,000 in collections, for a 34% profit margin. This is pretty typical for a suburban soloist: You have no one to share fixed costs like a com- puter system or administrator with, and you are not really large enough to drive ancillary income from a sur- gery center or employee providers. As you can see from this example, the convention is to include both direct earnings as well as benefits and so-called "officer entitlements" in calculating profit margins. So much for small practices, where just about everyone can agree on what constitutes the "profit mar- gin." Things get a lot more complex as a practice gets larger and starts to employ associate (non-owner) optometrists and ophthalmologists, in addition to owner-MDs. Here's a second example. Imagine "Orbit Eye Care (OEC)," an urban practice with 2 MD owners, 1 associate/non-owner ophthalmologist, and 2 associate optometrists. OEC has annual collections of $4 million. A second B ack in the Pleistocene Era, when I first started as a cub consultant, normal profit margins for a com- prehensive ophthalmolo- gy practice were 50% and up. And cataracts were reimbursed at $1,500. This was at a time when you could buy a pretty serviceable automobile for about 8 cataracts worth of work. The ophthalmic business scene was pretty forgiving then. You could make 25% business errors all year long and still earn a more-than- living wage. Not so much today. What should it be and how should it be measured? "A business absolutely devoted to service will have only one worry about profits. They will be embarrassingly large." –Henry Ford "In the end, all business operations can be reduced to three words: people, product, and profits." –Lee Iacocca

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