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Progressive Focus© Newsletter

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Volume 6, Number 2 Summer, 2005
Helping You Manage the Expectations of Managed Vision Care

In This Issue:

Benchmarks: Are You Comparing Apples to Apples? Or Apples to Oranges?

Benchmarking is a great way to evaluate your practice's strengths and weaknesses. But it's essential that any comparisons against other practices are made based on reliable, analogous data.

I get just a bit apprehensive when doctors and others in the business start talking about national benchmarks as a great way to evaluate a practice's performance. Frankly, I think too many make too much of national benchmarks, and gravitate toward these numbers as if they're some sort of Holy Grail that reveals the path to "practice Nirvana."

There are many sources to data that purport to represent performance benchmarks of the nation's best practices. And certainly every practice can do better, and always should strive to achieve the excellence demonstrated by the extraordinarily successful.

However, before embracing anyone's benchmarking data you should question whether performance targets gathered from across the land really have relevance to your practice. And you should think carefully before making moves based on a concern that your numbers aren't up to those of the "star performers."

Unfortunately, national benchmark target numbers can be misleading, particularly if they're reviewed and analyzed in an unsuitable context. And if that's the case they certainly could cause a practice to wrongly prioritize efforts and, thereby, misallocate precious resources, time, and dollars.

Quotables

The sky is falling! The sky is falling!

Chicken Little

Over the years I've encountered a number of practitioners who've attended a lecture on benchmarking or read a journal article, and then brought in a consultant who pulled a detailed report from his/her briefcase or laptop and told the doctor that "... based upon this extensive database that we've built over many years working with hundreds of clients across the nation, your practice needs a complete overhaul to get to the next level."

Well maybe those numbers do indicate that there are problems. And then again, maybe the numbers are mostly irrelevant as applied to that practice. Benchmarks (statistics) are only as good as the comparative validity of the source data and one's ability to properly quantify and qualify that data for meaningful analysis.

Now, before going any farther and ruffling too many feathers let me make clear that I am not discounting the value of benchmarking - far from it. Benchmarking can be a very valuable tool for measuring a practice's performance over time and/or for comparing it against demonstrably similar practices.

But I also think that as an industry, particularly given the increasingly onerous financial and administrative pressures of managed care, we've started fixating on larger volumes of data without spending enough time analyzing its validity for our individual applications.

Data, Data - Who's got the data? And is it valid?

Quotables

We won't get fooled again.

Pete Townsend
The Who

There are many areas where one can look at practice numbers and compare them to national benchmarks only to be deceived by the results, or drawn to the wrong conclusions. Cost of goods sold (COGS) is an obvious example of where reviewing non-comparable numbers or considering fragmentary information can mislead.

National benchmarks from many sources indicate that cost of goods sold for an optical dispensary (acquisition costs ÷ sales price) should be somewhere in the range of 25-35%, perhaps a bit narrower. Now, suppose your practice is a typical one drawing mostly from middle class working families. Suppose also that your markup on frames is a typical 2.5X. Thus, a frame wholesaling for $60 would retail in your dispensary at $150.

What is your COGS on that frame? Why it's 40% (60 ÷ 150). But that's considerably above the top end of the national benchmark. Does that mean you should raise your price (increase the mark-up) on this and similarly priced frames in order to get COGS back into the "recommended" range? Or to achieve a similar net result, should you instead mark-up less expensive frames to that same $150?

Neither action is automatically correct and, perhaps, neither is correct at all. There are multiple factors here that have not been considered.

For example, COGS on eyewear more accurately needs to take into account the entire package - frames, lenses, and lens treatments (and should also factor in fabrication, occupancy, and staff costs if you have a lab). COGS should also recognize inventory and inventory shrinkage.

Obviously, the markup and percentage margin on inexpensive single vision lenses is going to be much higher than on more expensive progressives or other specialty lenses. Thus, the COGS on a frame with clear, single vision lenses will be lower than the COGS for that same frame with premium Panamic lenses and Crizal anti-reflection coating.

There's nothing wrong with that. It simply reflects the fact that we can't look at isolated numbers, especially fragmentary numbers, and make comparisons in an information vacuum.

But I've spoken with ODs who've done just that - re-pricing all of their frames or lenses (or both) to comply with some recommendation. And, frankly, that's absolutely the wrong conclusion to draw and action to take based on a cursory analysis.

Quotables

Fool me once, shame on you. Fool me twice, shame on me.

Chinese Proverb

How non-comparable data can lead one astray

It's easy to find examples of how non-comparable data can confuse the benchmarking process and possibly lead one to consider or make counter-productive changes.

Suppose you're concerned that a competitor's advertising demonstrates his prices are significantly lower than yours. Suppose also that your COGS seems to be above the recommended range in national benchmarks you've obtained and, therefore, in addition to the perceived pricing disparity between the practices you're also worried that your dispensary is not generating profitability as the national numbers say it should.

Assume also that your competition has built his practice promoting "2-for-one" deals at seemingly absurd prices. How is he doing it? Is he buying at much better prices than you are able to negotiate? Are his COGS significantly better than yours? And is changing your prices an appropriate competitive response?

His COGS likely is better than yours, but so what? It's likely - probably a certainty -- you're not selling the same or even somewhat similar stock obtained at vastly different acquisition prices. Instead, while you're selling well-known brand name frames, he's probably selling closeouts or discontinued models, or knock-offs from the Orient purchased for around $3 each, and marked up to maybe $35 or $40.

While your COGS on frames may be 40%-ish, his may be around 7.5 to 8.5%. And his 2-for-one special promotional pricing may also include only high margin, low COGS single vision lenses, or low Rx flat top bifocals.

All of that allows for huge percentage profit margins on his "2-fer" sales. But does his below-national benchmark COGS on such sales have any valid comparative relationship to your above-the-range COGS on what you dispense?

Absolutely not, and it's clear that by selling that sort of product with that advertising emphasis he's not targeting the same clientele you are. More likely he's pursuing patients who only shop price, not value, and care about little else.

You can be certain that his COGS on the entire eyewear package is not around 30% if he's offering 2 complete pairs of glasses (and perhaps an exam??) for $99! And unless you were determined to get into the low price game and move from your core patient base it would be utterly inappropriate and financially disastrous to respond to such a competitive challenge by altering your practice buying and pricing practices. You would drop your COGS toward this perceived competitor's benchmark, but at what long-term cost to your practice?

In truth, when practices are so dissimilar who cares what the other's COGS (or various other benchmarks) might be? It's comparing apples to oranges. But national benchmarks taken from a magazine or lecture likely won't differentiate two practices so fundamentally dissimilar.

Bozeman is not Boston; Minneapolis is not Miami

The biggest reason national benchmarks aren't reliable practice measuring sticks is that they don't do a good job accounting for dissimilar practices (or conversely, aggregating similar ones). And one only has to look at the granddaddy of all health care claims databases, Medicare, to see how important this is.

Medicare data tell us that per-capita spending in the Miami area is approximately two-and-a-half times that in Minneapolis even after the data have been "massaged" to account for age, sex, and racial factors. Why is that, and does the variation tell us anything about the quality of care in Miami vs. that provided in Minneapolis? Most clinicians likely would say "no."

If the cost of care in Minneapolis is profoundly less than in Miami, and somewhat less than several other cities in between, does that mean Minneapolis is the "best in class," or even any better than Miami? Well if all you're looking at is fewest dollars spent then maybe, but in truth the raw data only indicate that there are profound differences. The data don't tell us the nature of those differences. And the Medicare "bean counters" understand this.

Unless one were interested in aggregate data for the entire United States, for example, the number of cataract surgeries performed in 2003 vs. 2002, the Medicare national database and benchmarks derived from it are not particularly useful to individual practitioners. Recognizing this fact, Medicare makes internal, local adjustments (geographic indexing) - for example, to its payment schedules.

These adjustments take into account various factors such as the higher cost of doing business in one part of the country as compared to another. Thus, an office visit or surgery delivered in Bozeman, Montana will pay a practitioner rather less than paid to a colleague in Boston for the same care, not because of any quality difference but, rather, because occupancy costs and staff salaries are lower, malpractice costs are lower, etc.

Medicare says (politely) that even though the services are identical, a doctor's services in Bozeman do not warrant the same payments as are made to the doctor in Boston no matter that the Bozeman practitioner might be the guru of all surgeons, and the Boston surgeon might be doing his first case out of residency.

"Same size" or "equal size practice" - another yellow flag

Quotables

All animals are equal, but some animals are more equal than others.

Animal Farm
George Orwell

"Same size" practices is a stratification term commonly used with national benchmarking databases. Yet in my opinion it's wrong to measure one's practice against a national database of "same size" practices since it's quite possible that the database contains a lot of practices more dissimilar than similar to yours. If that's the case I prefer not to rely on these numbers for designating "best in class."

In too many ways "same size" simply may not be the same. Think about comparing 3000 square foot homes in Palm Beach, Florida and Muncie, Indiana. "Same size" they might be in living space, but they're not close to the same or even remotely comparable if you're talking purchase price, property taxes, monthly heating/cooling, construction/remodeling costs, etc.

In the same way how can one reliably benchmark a two-OD ("same size") practice, let's say in Hattiesburg, Mississippi, against a national database that also includes lots of two-OD practices in cities such as San Francisco, Aspen, and Manhattan?

One might reasonably compare the number of patients seen per doctor-day in any number of practices. After all, the speed at which the doctor could work certainly should be independent of city or state, and would instead depend more on the number of exam lanes, effective use of support staff, etc. (though it could as easily be complicated to some extent by cultural differences -- for example, a slower pace to life in the deep South than in New York City).

Or you could look at breakage and redo rates in on-site labs anywhere in the nation - those numbers certainly should have no connection to east coast/west coast, big city/small town. And you should be able to look at new patient ratios (new patient visits/total patient visits).

But how can "same sized" practices be measured against a national benchmarking database on such things as general office overhead, occupancy costs, or staff salaries and benefits? No OD in San Francisco is going to be able to hire staff at the rates paid in Hattiesburg. And whether renting or buying an office building, the Hattiesburg ODs are in another world when comparing occupancy costs to those of their San Francisco colleagues.

If the Hattiesburg practice's salaries and benefits as a percentage of gross are much, much lower than those of the San Francisco practice, does that make the Hattiesburg practice a "better" performer, and does it then deserve better marks when compared to supposed "best of class" practices?

I think not. Both two-OD practices could be "best of class" yet have very different numbers in many or most of the critical areas. I believe these practices fundamentally are not comparable and should not be dumped into the same database even if both have 2 ODs and appear on the surface to be "same sized."

Independent optometric practices simply do not have the common economic characteristics of a business entity such as Walmart that probably pays about the same for Kleenex or Pepsi for its stores anywhere in the country. Thus, in many key economic and operational areas a Walmart store is a Walmart store, and it's not out of the question for a Walmart in Iowa to be compared to (benchmarked against) Walmarts in Georgia or Utah. But it's not that simple for independent optometric practices.

So how can one benchmark a practice?

My first suggestion would be to downplay the importance of national and even regional numbers. If you're in Pensacola, Florida, for example, it really doesn't matter one iota whether your practice sizes up well against practices in Miami. Physically they're in the same state, but in reality they're worlds apart. Pensacola is much like South Alabama, while Miami is practically an extension of Central and South America.

And even within the city of Miami, a "business-smart" practice drawing most patients from middle class, conservative Little Havana is likely to have dramatically different operational numbers from another, "same sized" and equally well-managed practice just a few miles away on wealthy and trendy, "image is everything" South Beach.

There's simply no comparison. Except as noted above, in most key categories practices such as these, even in the same city, can't be benchmarked reliably against each other.

I believe a more meaningful way to benchmark practice performance is to measure how you're doing today against how well you've done in the past, and then to use that information as a means to strategize getting to where you want to be. This means comparing the current month against last month, the current quarter against last quarter, the current quarter against the same quarter last year, and 2004 against 2003 against 2002, etc.

Benchmarking in this manner looks at the practice's individual, short-term performance statistics and at longer-term trends. It allows the doctor and office manager to make educated, strategic business decisions based on the data that matters most - the practice's own.

What to benchmark?

Glance through at a few issues of most optometric business journals and you are certain to find articles discussing benchmarking. Therein will be listed various metrics such as:

  • ross and net revenue
  • overhead as a percentage of...
  • cost of goods sold as a percentage of...
  • staff expenses as a percentage of...
  • productivity (collections) per OD per day (or year or session)
  • productivity (collections) per FTE staff person
  • exams per OD per day (or per session)
  • number of FTE staff per OD
  • marketing/advertising as a percentage of...
  • rent/occupancy costs as a percentage of...
  • average $$ sale per pair of eyeglasses
  • average revenue per patient encounter
  • days in Accounts Receivable
  • number of vision plans
  • number of new patients by vision plan
  • number of established patients by vision plan
  • capture rate
  • etc.

And, typically, you'll be given the author's recommended ranges. Obviously these are all important areas for inquiry, but I don't think there's a lot of directly actionable knowledge to be gleaned from this data if it's national. Rather it's more useful as an overview measurement of how optometry as a profession seems to be doing regardless of practice size, location, or other factors.

Instead I recommend each practice build its own benchmarking priority totem pole - a list of self-assessment metrics based on what's of greater or lesser importance to the owner(s). This list can change over time. Start out by asking a few, key questions:

Given my current information and staff resources,

  • What might I measure and benchmark?
  • What should I measure and benchmark?
  • What can I measure and benchmark?
  • How much information can I extract from my practice management software, in what detail, how quickly, and at what logistical and resource costs?
  • What areas of inquiry have the greatest potential for immediate and meaningful change to my practice?
  • What areas can I reasonably defer for later analysis?

In my opinion a few areas of inquiry stand out as worthy of high placement on any practice's benchmarking priority totem pole. While this is not an all-inclusive list, certainly every practice should be tracking this information, and should consider benchmarking the following right from the start. Improvement in any area(s) should mean a corresponding increase in profitability:

  • Cost of goods sold (no matter how good a job you're doing there is always room for improvement),
  • Days in Accounts Receivable (unless you see only cash-paying patients and collect 100% of amounts owed at the time of service, there is room for improvement.),
  • Average $$ sale per pair of eyeglasses (especially looking at impact of sales upgraded to premium lenses, lens treatments, frames beyond basic vision plan coverage, etc.),
  • Average revenue per patient encounter (measuring the comparative financial return when seeing patients from different insurance plans),
  • Doctor and staff productivity (are the doctor, staff, equipment, and facility resources being used efficiently and effectively)
  • Capture rate (if patients are walking out with Rxs, you can be doing better)
  • New patient ratio (is the practice's patient base growing, and how much?)

Areas of less immediate concern for benchmarking, analysis, and possible action might include:

  • Marketing and advertising expenses,
  • Rent/occupancy costs,
  • Numbers of new and established vision plan patients.
What's most important?

Readers may be tempted to ask: What's the most important thing or things to measure? What do I have to get right, and get right immediately?

Remember that any benchmarks a practice builds must garner a key piece of data indicating performance. Number gathering simply for the sake of number gathering is a useless exercise. Always ask yourself: What do the numbers tell me, and why am I looking at them?

I would recommend thinking of benchmarking as a multi-faceted approach toward realistically maximizing two, grand goals: the highest possible gross combined with the highest possible net. I say realistically because, for example, achieving a significantly higher gross (without adding another doctor) might require that you work evenings or weekends, and that might be something you're not prepared to do. So your goals must be lofty, but down-to-earth.

Start tracking various metrics, and begin measuring how you're doing over time. It won't take long before you'll see trends emerging -- both good and not so good. After careful analysis, perhaps with an advisor, jump on them as quickly as possible so as to maximize those you do well and minimize those metrics that pull the practice in the wrong direction. And then cascade the good performances onto other metrics.

Get both the gross and net moving in the right direction. Those are the keys to the kingdom, and little steps can make a noticeable, positive difference.

Ideally the two should run in parallel, with net profits rising proportionately as practice revenue grows. But don't make the mistake of thinking that a higher gross and/or a lower overhead automatically means you'll take home more money each year. That's not necessarily the case.

Certainly an inefficient practice with higher gross can be less profitable and have a lower net than a smaller but more efficient practice. And it's also possible for a practice that has invested in all the bells and whistles and is staffed-up to have a higher overhead percentage and lower net percentage than a smaller practice yet still achieve better total return for the owner.

Consider which you'd prefer for your practice:

  • 60% overhead and netting $180,000 or
  • 72% overhead and netting $275,000?

Now of course both practices likely have a good bit of room for improvement, and each has issues that could be identified through internal benchmarking and analysis. For example, by investing in technology or staff could the practice netting $180,000 see more patients and, thereby, return more to the owner at the end of the year? Could the practice netting $275,000 add to that by reducing its Days in AR or, without changing its pricing structure, by increasing the percentage of patients upgrading their eyewear, or purchasing multiple pairs?

Only regular, internal benchmarking will indicate the best options to achieving greater productivity and profitability. And that internal benchmarking will help each optometrist determine what's best for his or her practice no matter what target ranges might be indicated by national benchmarks, and no matter what those benchmarks may indicate is "best in class."

Your improved performance is the bottom line, period.

Quick Quiz

1) Benchmarking:

  1. will reveal any practice's operational weaknesses.
  2. allows accurate comparison of any two or more practices.
  3. can be a means of measuring practice performance over time.
  4. will produce flawed results absent the collection and analysis of reliable, analogous data.
  5. both c and d.

2) National benchmarks:

  1. are excellent performance "measuring sticks" for any optometric practice.
  2. may be useful for reviewing certain, aggregate utilization data.
  3. are highly accurate since they’re based on enormous data bases.
  4. both a and c.
  5. none of the above.

3) If Practice "A's" cost of goods sold (COGS) on eyewear is less than Practice "B's":

  1. practice "A" must pay less for frames and lenses than Practice "B."
  2. practice "A's" clientele must be substantially different than "B's."
  3. practice "B's" markup and margins must be less than "A's."
  4. none of the above.
  5. all of the above.

4) The purpose of benchmarking a practice against itself is to:

  1. measure performance change both short and long term.
  2. allow analysis into specific areas of interest to the owner.
  3. use the data to strategize operational and financial growth.
  4. both a and b.
  5. e. a, b, and c.

Answers to Quick Quiz

1 e

2 b

3 d

4 e

Education is what you get when you read the fine print.

Experience is what you get when you don't.

Copyright © 2003-2007, Gil Weber, MBA. No part of this newsletter may be reproduced or distributed in any form whatsoever without the author’s prior written authorization.

These materials are intended to provide useful information about the subject matter covered. The author believes that the information is as authoritative and accurate as is reasonably possible and that the sources of information used in preparation of the materials are reliable, but no assurance or warranty of completeness or accuracy is intended or given, and all warranties of any type are disclaimed.

The materials are not intended as legal advice, nor is the author engaged in rendering legal services. The materials are not intended as a replacement for individual legal or professional advice. Information contained herein is presented only for illustrative purposes, and it should not be used to establish any fees or fee schedules, nor is it intended and it should not be construed as encouraging any user of the materials to take any actions that would violate any state or federal antitrust laws, tax laws, or Medicare or Medicaid laws.

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