Can You Afford To Discount?
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. 
Table Of Contents - April 2003
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