When many people talk about medical terminology, they are rarely talking about “COGS,” net profit margin, or other financial metrics, but these are still important concepts for any successful practice. You might know the anatomy of the eye in your sleep and the typical diagnoses in an ophthalmology setting, but perhaps financial terms are foreign to you. While a deep understanding of financials isn’t critically important on a daily basis for most staff and providers, developing a good working knowledge of the business side of your practice can help you to understand the impact of your decisions and enhance your ability to continue to grow your practice effectively.
To start, it is helpful to understand where information for generating metrics comes from and the basic terminology of financials. Here are some key terms:
Income/revenue: Income and revenue can be used interchangeably to describe money that comes into your practice from your operations. This will consist mostly of payments from insurance companies and patients.
Cost of goods sold (COGS): COGS are your expenses that directly relate to generating income. These can be general clinic supplies that you use for patient care, devices (such as plugs, membranes, applicators, etc.), or drops/medications that you dispense in your practice.
General and administrative expenses (G&A expenses): G&A expenses are pretty much any cost or expense other than COGS that are necessary for running a practice. These can include such expenses as rent, support staff wages, office supplies, and insurance, just to name a few.
The sources for all financial information and metrics are your basic financial statements, one of which is your income statement (also known as your profit and loss statement). While there are other relevant statements, such as balance sheets and cash flow statements, the income statement is where you will find the majority of your data pertinent to day-to-day operations.
The income statement will provide you with information on how your practice is doing within a specific time frame, including by month, quarter, or year. Income will be listed first followed by your COGS and your G&A expenses. Income after subtracting your COGS is called gross profit, and income after subtracting both COGS and G&A expenses is called net profit:
Income - COGS = Gross Profit
Gross Profit - G&A Expenses = Net Profit
A “margin” is represented as a percentage of total income. By using a percentage rather than dollar amounts, it becomes much easier to contrast different practices or time frames without making mental adjustments for differences in top-line income.
For instance:
If Practice A, which has one provider, makes $80,000 a month, and its COGS are $20,000, then Practice A will have a gross profit of $60,000, which is a gross profit margin of 75% ($60,000 ÷ $80,000). | If Practice B, which has two providers, makes $170,000 a month, and its COGS are $42,500, then Practice B will have a gross profit of $127,000, which also is a gross profit margin of 75% ($127,500 ÷ $170,000). |
In the above example, both Practice A and Practice B are operating at the same efficiency and are likely utilizing their resources similarly, even though Practice B makes significantly more income. Net profit margin can be calculated the same way: You simply take the net ordinary income and divide by the total income.
Many practices will focus on their gross profit margin (GPM) and net profit margin (NPM) as ways to measure how they are doing. For example, a practice can compare against its historical data to see how it is doing compared to previous periods or can compare to industry standards to see how it is doing compared to other ophthalmology practices.
Generally, when we talk about margins, we discuss how efficiently a practice can generate income. The more efficient a practice is, the higher the practice's GPM and NPM will be. Efficiency of a practice can be affected by a variety of factors within and outside of a practice’s control. To truly use the power of the data provided in calculating the GPM and NPM though, a practice can focus on factors within its control to change and create goals to measure how well it is meeting those goals.
Say you have calculated your NPM and it is averaging 25%, which you feel is low compared to other similar practices and you want to set a goal of a 30%. How does the practice leverage decision making and actions in day-to-day operations to create these efficiencies? Here are some examples.
Efficiency of time: The old saying of “time is money” is still true. By ensuring that staff and providers alike are using their time in the most efficient way possible, a practice can help reduce unnecessary waste in work time. Take, for example, running diagnostic testing: If a provider orders a diagnostic test, it generally takes the time of a technician to take the patient to the testing equipment, conduct the test, and enter the test in a chart. It also requires provider time to create the order for the test and interpret the results.
Now, let’s assume that the tech was in a hurry and didn’t get the most accurate results from the test. The test now must be done again, wasting both tech and provider time, during which the tech and provider could have spent testing or treating another patient. It is important to give techs the time they need to properly conduct a test and that they have sufficient training to test accurately.
Efficiency of resources: The easiest area of focus for creating change in a practice’s margins is usually found in the COGS section. Make sure that resources such as clinic supplies, devices, and medications are being used efficiently and that the clinic is using only what resources and supplies are actually needed. Wasted resources don’t do the patient, the practice, or staff any favors. Aside from the obvious cost of the supplies themselves, using more supplies than necessary creates other inefficiencies such as additional time to reorder the supplies more often, and the possibility of running out of supplies before an order comes in.
Efficiency of space: When we talk about using space efficiently, we are generally referring to flow; workflow and patient flow. Spaces that are too crowded can be inefficient since staff will constantly be running into one another or waiting to use a space. Spaces that are too far apart can also create inefficiencies since staff will spend unnecessary time walking back and forth. Taking the time to evaluate your practice’s layout and determine whether there are ways to better structure task areas that make sense with work and patient flow can immensely help reduce waste and costs.
A world of opportunities
By understanding the basic financials of your practice, evaluating financial metrics, creating goals, and implementing change to meet those goals, your practice will be able to utilize its time, resources, and space to its best advantage. In turn, this opens a world of opportunities to benefit patients and the practice, such as being able to purchase new technology or increase staffing to reduce burden on the existing team members.
Investing some time to gain an enhanced appreciation of financials will certainly help to ensure your practice is in a strong position to continue to serve patients well and withstand a constantly changing healthcare industry. OP