The Healthcare Entrepreneur Blog

Consider the cost of doing business

by Bridget Morehouse PT, MBA | April 3rd, 2009 | No responses

In determining whether you should sign a contract with a third party payer, it is imperative to know your cost of doing business. Often clinicians sign contracts with third party payers to gain “in-network” status, hoping to increase their patient volume.

However, if the contract does not reimburse at a rate higher than the cost of providing the care, the “in-network” status and accompanying patient can actually drive the clinic out of business. Increasing the volume of care delivered only adds value to the practice if the care provided has a healthy profit margin. The additional patients that are gained by having “in-network” status will actually take away from the clinic’s profit if the reimbursement does not cover the cost to provide the care. Therefore, before a contract is signed, the first step is to understand your cost to provide care. Incorrect assumptions about your costs or an inability to accurately calculate your cost of providing care will result in poor business decisions.

When assessing the cost of care, consider the difference between fixed costs and variable costs. Fixed costs are those costs that remain constant in total dollar amount within a relative range of activity. Examples would include your facility’s rent expense or the cost of a piece of equipment. These costs have a total fixed dollar amount. Regardless of the amount of care delivered the cost stays constant. It is important to understand with fixed costs the per treatment cost of business decreases as the number of treatments performed increases. The more treatments that are performed, the more the fixed cost is spread over those treatments. For example, if your facility’s rent expense is $5000 per month and your clinic performs 500 treatments per month there is a $10 cost per treatment for rent. However, if your clinic increases the number of treatments performed per month to 1000, the rent expense decreases to $5 per treatment. All other variables equal, profit per treatment increases by $5 per treatment.

Contrast this to variable costs, which are costs that vary in direct proportion to the number of treatments performed. A clinic’s laundry expense is a variable cost. With variable costs the per treatment cost of business remains constant, and the total expense of the variable cost increases with an increase in the number of treatments performed. Variable costs can not be spread out over more treatments to increase profits. If more treatments are performed, total variable costs will increase as well. For example, if your clinic’s laundry expense is $2 per treatment and you perform 500 treatments per month, the total laundry expense for the month is $1000. If your business increases to 1000 treatments per month the total cost would increase to $2000 per month. It is important to allow for an increase in these costs when budgeting for growth or expansion. With variable costs, profit per treatment does not increase with an increase in treatments performed.

Understand your cost of care before signing a contract with a third party payer. More patients does not always mean more profit.

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Bridget Morehouse PT, MBA is a consultant with Steffes and Associates, a rehabilitation consulting firm based in Wisconsin.

Bridget Morehouse PT, MBA