Normally writing this column doesn’t require the use of the MBA side of my brain, but since a large portion of what I do is practice appraisals, I thought it would be useful to discuss the way your net income can impact your practice value.
Map Out a Strategy
Business planning can be a tedious process, but one that can yield great results if you identify strengths, weaknesses, opportunities and threats to your business model and set an appropriate timeline for achieving performance milestones along the way. Most independent practitioners want to successfully transition their practice ownership at some point in their career and, hopefully with proper planning, they look at what maximizes value long before they plan on selling.
Many factors can affect practice value, but one of the most significant is your free cash flow, or adjusted net income. You can certainly grow this number by recommending and prescribing premium optical products and the often-overlooked area of coding and pricing your professional services properly.
The average optometric practice still generates approximately 61% of its gross income from retail sales and 39% from professional services (and 2% from other sources).1 Thus, barring outside Rxs being filled in your optical, for each dollar of gross income generated, professional services would generally have a higher net percentage, provided chair costs remain constant since there really isn’t a separate cost of goods sold component associated with professional services. With so much riding on your professional services, it’s imperative that you handle the economics of them appropriately.
One of the purposes of this column has been to help clinicians navigate the CPT system and understand the value of properly diagnosing and treating ocular conditions that frequently present in your practice; understanding not only the short-term but also the long-term impact on value is critical.
Short-term = Long-term
While it is crucial to your success to understand the prevalence of common ocular conditions and the clinical care protocols surrounding them, you must also know the proper CPT codes for the type and level of office visit and know how to properly price your services. Understanding the time value of money is a basic economic principle that all of us should be familiar with. Making it work to your advantage by tying together all of these principles should be part of your business plan.
As an example, let’s discuss incorporating dry eye diagnosis and treatment into your practice. This condition, conservatively, affects 25% of the US population, and the average practitioner sees a dry eye patient three times a year, in additional to their annual comprehensive eye exam.2-4 Each of those additional visits will bring in approximately $74, which can generate approximately $172,500 annually in office visits.5 That’s not bad for a short-term return in exchange for your professional services, but that’s not the whole story.
The significance of that additional $172,500 in net income per year could increase your practice value by more than $1,000,000 in the long-term. Yes, you read that correctly. Even small increases in your net income can add significantly to the value of a practice. The important thing is to recognize these opportunities and act on them during all phases of your practice lifetime.
Your practice value is ultimately a multiple of your adjusted net income. Incorporating strategies to increase this value can come from many sources, including simple additions to your professional services. Understanding the prevalence of common ocular conditions and their proper coding, proper pricing for your services and the time value of money are some of the simplest ways to execute on this very important, but often overlooked, approach to maximize your practice value.
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1. Management and Business Academy for Eye Care Professionals. Key metrics: assessing optometric practice performance 2015. Essilor. http://ecpu.com/media/wysiwyg/docs/paa_keymetrics_0415.pdf. Accessed August 29, 2018.
2. Stapleton FJ, Alves M, Bunya V, et al. TFOS DEWS II epidemiology report. Ocular Surf. 2017;15(3):334-65.
3. Yen JC, Hsu CA, Li YC, Hsu MH. The prevalence of dry eye syndrome’s and the likelihood to develop Sjögren’s syndrome in Taiwan: a population-based study. Int J Environ Res Public Health. 2015;12(7):7647-55.
4. Shah S, Jani H. Prevalence and associated factors of dry eye: Our experience in patients above 40 years of age at a Tertiary Care Center. Oman J Ophthalmol. 2015;8(3):151-6.
5. Centers for Medicare and Medicaid Services. Current CMS national average maximum allowable for CPT code 99213.