Utilizing chair cost to evaluate health plan contracts

Article Outline

 

With the proliferation of third-party medical insurance and prepaid vision plans, most optometrists are frequently facing a decision: whether to sign on as a participating panel provider with a plan. This is not an easy decision to make. Often emotions dictate decisions rather than sound business principles. In fact, many optometrists join every plan panel out of fear of being locked out or losing patients. This can have potentially devastating results for an optometry practice.

To evaluate participation in an insurance program, an optometrist must first determine how much it costs to provide care for each patient. Here is how to calculate chair cost in an optometric practice.

As noted by Mark J. Hennen, O.D., in the lead article for this month's Practice Strategies section, before entering into a contract as a participating panel provider, an optometrist should consider many issues. One should consider how much penetration the plan has in a geographic area. In other words, how many patients can potentially be gained through participation in the plan? One should also consider what services and materials are covered by the plan. How arduous is it to bill the plan? Can the practice balance bill the patient for costs the plan does not cover? Does the provider contract spell out how long the plan can take to pay for provider services? If the plan covers materials, will the practitioner have control over the quality of the materials supplied to the patient? How easy is it to get out of the contract? Are there any other demands placed on panel providers like quality assessment and improvement plans?

Another key issue that must be considered when evaluating a health plan contract is reimbursement. Does a proposed plan fee schedule provide sufficient compensation to cover the optometrist's overhead necessary to provide the covered services? Understanding how to calculate chair cost is a critical part of this assessment.

Simply stated, “chair cost” is the amount an optometrist spends to provide care for the average patient. This is a fairly simple calculation once the necessary financial data have been collected and a formula for calculating chair cost has been selected. Because there are numerous data sets and variations on the chair cost formula, individual optometrists may take slightly different approaches. The key is to understand what is being measured and apply the cost figure appropriately when evaluating a plan's participating panel provider contract. The purpose of this article is to give the reader an understanding of how to collect pertinent data and how to calculate a chair cost figure that can be understood and used effectively.

Determining total overhead expenses is the first requirement in determining chair cost. Basically, all practice expenses except cost-of-goods and owner profit should be considered in calculating total overhead. If a practice has a lens fabricating laboratory, the laboratory technician compensation as well as lens laboratory equipment and supplies should not be included in determining total overhead. These expenses are considered part of cost-of-goods. If the practice produces a profit and loss statement, it would be an excellent source of information. The expenses a practitioner will want to consider should include, but are not limited to:


•Staff wages


•Staff benefits


•Payroll expenses


•Rent


•Maintenance and repairs


•Utilities


•Telephone


•Postage


•Supplies


•Marketing


•Accounting


•Legal


•Banking and credit card fees


•Business insurance


•Education, dues, and licenses


•Information technology and Internet expenses


•Amortized equipment costs


•Amortized leasehold improvement costs.



There is debate whether doctors' salaries and benefits should be included in total overhead. Although there is no right or wrong answer, this author recommends including the average estimated cost of salary and benefit for an employed doctor. If total overhead expenses are examined from the perspective of a business owned by someone other than an optometrist, these expenses would be considered part of the overhead. If an optometrist is looking at the decision of plan participation from a business owner perspective, the optometrist should then include this expense. The average employed optometrist's compensation can be obtained from numerous sources including the American Optometric Association (AOA) publication Caring for the Eyes of America (www.aoa.org/caring08.xml). If an optometrist chooses not to include professional salaries when calculating total overhead, the practitioner should understand that the chair cost does not make an allocation for optometrist income.

There is also debate as to whether the expenses associated with the optical dispensary should be included when calculating total overhead. These expenses would include optical staff salaries, optical staff benefits, and a percent of total facility costs. If one is determining chair cost related to a prepaid vision plan in which both examinations and materials are covered, these optical costs most surely should be included. On the other hand, if the practitioner is determining chair cost for a plan that contracts strictly for medical eye care services, the practitioner may choose not to include these optical expenses. When determining whether to include the optical expenses in the latter scenario, a practitioner should consider the following question: Is there independent revenue being generated by the optical while the doctor is providing medical eye care or is the optical overhead sitting idle waiting for a refractive patient? If the optical is generating an independent revenue stream, the optometrist would not include the optical expenses when calculating chair cost. Conversely, if the optical is sitting idle and generating no independent revenue stream while the optometrist is providing medical eye care services, the optometrist may want to include optical expenses as part of the practice's total overhead.

Another debate when calculating chair cost is whether to calculate cost “per patient” or “per hour.” If a practitioner is calculating per-patient chair cost there is the question of whether to count actual patients that were seen during the prior year or count the total number of examination slots that could be filled if the office was operating at 100% of capacity. If a practitioner is calculating per-hour chair costs, there is the question of whether to count all of the hours the practice doors are open or only count the number of hours that doctor time is available. Once again, there is no right or wrong way to approach this issue. Whatever method of calculation the practitioner uses, it is important to understand what is being measured. For purposes of demonstration, this author chooses to calculate per-hour chair cost because of its versatility. Once the per-hour chair cost is calculated, a practitioner can divide this by the number of patients seen per hour to determine the per-patient chair cost. A practitioner can also use the per-hour chair cost and work backward to determine how many patients per hour the practice would need to see in order to break even under the terms of a specific plan contract.

Following are 2 examples of determining chair cost.

Example of chair cost for a prepaid vision plan


Total overhead expense $50,000


Divided by total available doctor hours 5,000


Chair cost per hour $10


Divided by number of patients seen per hour 5


Per-patient chair cost $2



Example of chair cost for a medical health plan


(Note: This example excludes expenses related to the practice's optical.)


Total overhead expense $50,000


Minus the overhead dedicated to the optical $20,000


Divided by total available doctor hours 5,000


Chair cost per hour $6


Divided by number of patients seen per hour 6


Per-patient chair cost $1



Once a practitioner has calculated per-patient chair cost, he or she can compare that figure with the fee schedule being proposed by the contracting health or vision plan. If the proposed fees exceed the practice's per-patient chair cost, the balance would be profit to the optometrist. However, optometrists should consider whether they can live with the rest of the terms of the contract as well. If the plan's fee schedule does not cover the practice's per-patient chair cost, the practitioner should consider whether the practice can reduce overhead to meet a lower chair cost target. The practitioner can also work backward and use the per-hour chair cost to determine how many patients per hour the practice would need to see under the plan to achieve the targeted per-patient chair cost. After doing these calculations, if the practitioner can not get per-patient chair cost in line with the proposed fee schedules, the practitioner should consider whether it makes economic sense to sign on as a participating provider for the plan.

To make the process of calculating chair costs easier for optometrists, the AOA Eye Care Benefits Center (AOA-ECBC) has developed an interactive chair cost calculator, perhaps the first of its type for optometric practices (see Figure 1). Practitioners can simply enter practice data, and the calculator will automatically determine chair cost. AOA members can access the calculator on the new AOA Web site “Evaluating a Plan” page (www.aoa.org/x9268.xml). Because chair cost varies from one practice to another, it is critical that an optometrist know the raw expense data for an individual practice to input into the chair cost calculator tool. The calculator tool is useless if the optometrist using it does not know the necessary data to input into the calculator. The calculator is confidential and personal to the optometrist who uses it. No data are retained or maintained by the AOA.

• 
  • View Large Image
  • Download to PowerPoint

• Figure 1. 

  The AOA Chair Cost Calculator is an interactive feature on the AOA Web site “Evaluating a Plan/Making a Business Decision” page (www.aoa.org/x9268.xml). It is designed to help an optometrist determine how much an ”average” patient visit costs. Data on the number of patients seen each year and various types of expenses are entered in appropriate windows. A cost figure is automatically calculated and appears in the bottom window. The cost information can then be used to evaluate insurance plan participation. Practitioners can vary the amounts entered in any category to determine how increases or reductions in expense might impact total chair cost. AOA members can log onto the Chair Cost Calculator directly at www.aoa.org/x9619.xml.