Our financial statement analysis case study rolls on unabated. If you haven’t read it, you may want to check out part 1 first. Today, we discuss our approach to the clinical supplies and employee costs portion of the income statement.
The problem: Clinical supplies cost regularly ran roughly around 12% of revenue when we would normally expect something in the 7% range (or less given the solid volume in the practice). When we evaluated the process, we discovered no controls over the ordering process. Doctors, the clinical supervisor and clinical staff were allowed to order as they saw fit. Orders were placed via phone and individual supplier websites instead of consolidated into one place. Like office supplies, shelves were overflowing with clinical supplies.
If you read this site regularly, you know that we’ve beaten you over the head about the benefits of a group purchasing system to improve pricing and service and gain a more direct connection to the leading vendors in the system. If you haven’t read about our system for that yet, the link is here. Needless to say, we set this practice up on the same system to enable them to get the same products they normally purchased -- just at a substantially lower price.
The problem: Employee costs were running as high as 43% of revenue and were trending higher. Despite the one office model, the office had 14 well-paid staff people and the great enemy of employee costs – idle time – was prevalent throughout each patient day that we observed. People were sitting around waiting for something to happen or to be assigned a task. Our first reaction is never to fire people unless absolutely necessary. We didn’t want to do that here. Reassigning people to productive tasks – like the accounting and receivable tasks that we discussed in our last post-- did not occupy all the idle time. Marketing, especially with the changes we made, was already in pretty good shape so moving all of the idle time on to marketing efforts would probably generate diminishing returns. Assigning people to menial tasks like cleaning the office generally do not generate much of a return on investment.
The solution: Because people with whom the doctor had developed a close working relationship were involved, we had to look at the big picture. A few facts jumped out at us: we had a staff with idle time, an associate doctor looking for more days and a practice that had a good marketing model in place. Here, the best solution was to move in the opposite direction of cost cutting or consolidation. The best solution was to build a second office for this practice. Staff would be put to a productive use, the associate doctor could get his extra days and with the good name of the practice, referral base and marketing strategy, a new facility could be profitable in short order. With our other changes and some creative thinking, the stream of cash flow from the practice could finance the new facility.
We analyzed the demographics related to the existing patient base, did our competition analysis and came up an area for the second location. If this worked out, why not expand to a 3rd and 4th location or even beyond that?
How does all that work? What kind of practice do you need to have to become a practice with a substantial number of facilities? What kind of support do you need? How does the financing work? How do I find areas? How does staffing work? All these questions and a whole lot more are going to be answered in a set of posts coming right after Labor Day. There, we will lay out a roadmap for going from a single or two office practice up to one with 10-12 offices and beyond without damaging your reputation. We’ve done this a number of times before and it is not terribly hard to do if you have excellent organization and the right support systems. So tune in to My Practice Engine. We’ve got a big series on the way!
As always, if you have any questions, comments or discussion points, please do not hesitate to contact us. We love hearing from you.
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