Following up on a recent post, one of the most frequently asked questions we receive is “if I do increase my volume with a lower monthly payment, won’t the increase in cost from servicing these additional patients consume any potential profit?” The answer is no. The reason is because most of your largest costs are fixed in nature.
As we examine this more in depth, let’s look at the definition of “fixed cost.” In standard economics-speak, a fixed cost is a cost that does not vary with the number of transactions or volume in a given practice. To see how this affects your practice, I will take you through some of your major expense line items:
Let’s start with one of the simplest and most obvious examples: rent. In the significant majority of cases, your rent is set at a fixed amount. If you see 0 patients in a month, you will pay your standard monthly rent. If you see 1,000 patients in a month, you will pay the exact same rent. That is because rent is a fixed cost.
Now to employee costs. If you are staffed up for a given day, that staff will generally stay for the entire day. If you have 5 patients seen or 50 patients seen that day, the staff will be there working the same number of hours and getting paid the same amount. It does not matter if the staff are seeing patients, cleaning, marketing or just sitting around waiting for something to happen, they are on the clock and getting paid the same relatively fixed amount. On top of that, to hire and retain quality staff, you generally need to guarantee them a certain minimum number of hours so if you guarantee them 32 hours per week and only 10 patients come through the door in that week, you are still paying them that minimum amount. Outside of the United States, the costs are much more fixed because staff are generally paid a fixed salary. So no matter how many patients come through the door, that cost is absolutely fixed. With employee costs, you can make some changes on the margin. For example, if the day is slower than expected, you may be able to send some staff home. If things get busy, you can have staff work overtime. However, for the most part, employee costs, your largest cost, is mostly fixed.
Marketing costs are generally fixed as well. You decide on your spending for the month, quarter or year and it is generally set in place. If that marketing generates 10 new patient consultations or 50, you cannot go back and change what you spent. And yes, if you see the month developing in a certain way, you may be able to add to or pull back on spending for the month, but again, by and large, you are dealing with a fixed cost here.
Other costs are fixed as well. Consider other material items like telecommunications, utilities, insurance and your monthly practice management software fee. In most cases, no matter what the volume in the practice, the cost is the same.
Clinical supplies and lab expense are generally variable in nature. The more patients you see, the more supplies are used. On a per patient basis however, these costs are usually not overly significant, especially after the initial banding. Other costs are variable as well: credit card charges, accounting fees, etc.
Other than the exceptions noted in the last paragraph, you can see that the costs in a practice are largely fixed. So, how does that tie in with a lower monthly payment? Let’s take a look at a pretty standard example:
Let’s take a typical practice with a 5 person staff making an average of $15/hr (20% burden), $3,000 monthly rent, $1,500 monthly marketing spend and other standard costs. Clinical supplies and other variable costs come to $4 per patient. If we break this down to a daily cost (assuming 20 days per month worked at 8 hours per day), the fixed cost comes to about $1,000 per day (fixed costs divided by 20 plus another $55 of fixed standard costs).
Now, let’s look at a typical patient day. Assume that you have 30 patients coming in under the old model with a $200 monthly payment. The total collected will be $6,000 (30 patients * $200). The fixed costs for the day are $750 and the variable costs are $120 ($4 per patient * 30 patients seen). The total operating profit for the day is $6,000 - $1,000 - $120 = $4,880.
Now assume that you are on the lower monthly payment plan so your volume is now up to 50 patients in a day. This translates to 50 patients paying $125 per month from our earlier post. The total collected will be $6,250. Fixed costs are the same because they are fixed. Variable costs increase to $200 ($4 per patient * 50 patients seen). Profit now becomes $6,250 - $1,000 - $200 = $5,050. Costs remain under control because the practice is now spreading more revenue over mostly fixed costs.
So, with a higher volume at a lower monthly payment, profit actually INCREASES by $170 per day. That’s per day. If you extrapolate that over the 20 days in the month, that’s $3,400 per month of profit, aka money for you to use as you see fit.
Not everyone deals in profit numbers so you may want to discuss this in other terms. We’re happy to do that. Talk to us.
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