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Calculating the Costs of Opening Your Doors

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"Doing Business" is created in conjunction with the Private Practice Section, American Physical Therapy Association.

Doing Business

Management Issues for PT Practices

Calculating the Costs of Opening Your Doors

by Bob Burles, PT

When I opened my practice on Feb. 1, 1971, my father, a CPA, asked me to send him my first month's data. This included the number of patients, visits, charges and payments. He returned to me a 13-column pad (they didn't have spreadsheets then) that listed all of my expenses and income projected through the end of 1971. He came within $500 of estimating my gross revenues for the year. He accomplished this seeming magic by using common accounting principles to forecast my income and expenses.

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I would like to examine some of those principles and help you develop a plan to estimate your costs of doing business.

First, you must decide what kind of practice you want. This, of course, is why a business plan is important. The cartoon character Dilbert would have you believe that a business plan is a plot by a foreign power to paralyze the U.S. economy. But a business plan will help you create a vision of your future. Do you want to be the next HealthSouth or do you want a small high-end practice that caters to the rich and famous? Your decision will dictate your cost of doing business.

Your next task is to develop a budget, which should include anticipated new referrals, visits per referral and charges per visit. Next split up your expenses into fixed and variable.

Look carefully at your fixed expenses, since they determine the minimum cost of not opening your doors. Are you going to go bare or full bore with major leasehold improvements, equipment that has a five-year payoff and top of the line furniture? I went to a used office furniture place in 1971 and got great desks and chairs that I still use.

Variable expenses are those that change with volume. Payroll is an example. Determine your potential visits, then determine your staffing for those visits. All viable businesses must flex their payroll hours to nearly equal budgeted FTEs per visit. Laundry and supplies are other variable costs that should be flexible with volume.

At the bottom of your budget sheet, make room for the categories of fixed cost per visit, variable cost per visit and salary cost per visit. Below that you should have total expenses per visit, gross revenue per visit and adjusted revenue per visit. Needless to say, your adjusted revenue per visit needs to exceed your total expenses per visit. If you set the above up in a spreadsheet like Lotus, Excel or Quattro Pro you will then be able to print graphs or look at data in ways that will amaze you.

Along with analyzing data on spreadsheets, consider the "run rate," a way to keep score with your budget. The run rate consists of actual numbers totaled weekly. Those raw numbers are visits; new patients; cancellations; no shows; PTs and their hours; PTAs and their hours; aides, ATCs and their hours; and front office staff and their total hours. From these numbers, you will get the following information: Visits per FTE, new patients per FTE, visits per front office FTE, and visits per clinical FTE. Combining the run rate with billed charges and collections will give you data about the charge per visit by gross revenues and net revenues. If you run an accounts payable system, you can also get expenses per visit on a weekly basis. The month-end payable report reflects your true expenses, however.

What do you do with these numbers besides accumulate a lot of paper? They will show you one important fact: Are you making it? Businesses often run with a negative cash flow, but few businesses will run with negative production numbers for very long. That's exactly what the run rate and budget will tell you.

As a result, this data will spur you to ask the following: What are your salary costs? Are they in line with other companies? Some large companies look for a $25 salary cost per visit. Although this is a tough target, it's necessary if your goals are expansion. Your salary cost per visit may be dictated by the market you're in. Heavy managed care or capitated markets require lean salary costs per visit. Fee-for-service, on the other hand, will give you more flexibility.

If you're interested in expanding, then you need to generate excess revenues to fund new services. Remember, banks still charge 11 percent to 15 percent interest, but many practices can generate excess revenue to fund other projects and not need the bank.

If you're running a high-end practice that caters to specific types of people, then your salary costs per visit will be higher as you bring on employees with more experience and varied backgrounds. You will also tend to see fewer patients, but charge more per visit. Your employees will also have more slack time but will work longer during busy times.

Consider the following example. Let's say you charge $100 per visit. You will write off or adjust downward 12 percent for contract adjustments, leaving $88 per visit. This is an average. If you charge $100 per visit, but some companies contract to pay $40 per visit, the difference will give you the average charge of $80-$85, depending upon the percent penetration by that company.

Let's say your salary costs are $45 per visit, rent and depreciation are $15 per visit, and general expenses are $10 per visit. That leaves you with $18 profit per visit. If you do 500 visits a month, that equals $9,000 a month in profit (or $108,000 per year). Is that enough to pay yourself, your bank loans, buy new equipment and start a satellite office? Keep in mind that $108,000 a year will be eaten up faster than you think.

While the run rate will help you analyze profit, it also can help you estimate staff needs based upon new patients. If the run rate shows that your new patients average 7.5 visits, you will generate an average of 750 visits for 100 new patients. If you're doing 500 visits per month, then 100 new patients would represent six weeks of business. (An average of 7.5 visits per new patient yields 750 visits on 100 patients. If you are seeing 500 patient visits per month, 750 represents 1.5 months worth of business.) If your average visits per new patient are 10, then you're looking at two months of business.

If you were to consider new patients on a weekly basis, on a 22-day month (assuming you don't work Saturdays) 100 new patients in a month would equal 4.5 new patients per day or 22.7 per week (100/22 X 5 = 22.7).

We know that the average is the exception, so new patients per day would range from 10 to 0. How much staffing you need boils down to where you're comfortable. If you wanted to see 500 patients per month, that means your therapist--or one full time equivalent--would have to see 22.7 per day. Again, the real load would range from 40 to 5.

Ideally, you want your staff PTs to see from 12 to 15 patients per day by themselves or up to 22 to 24 per day with an aide or assistant. These numbers will see you through even heavily capitated markets. (When I was in the army, six PTs and six techs saw 8,000 patients per month, five days a week, eight hours a day. That was 30 visits per clinical FTE per day or 60 visits per PT FTE.)

If you were to see 15 patients per day, you need 1.5 average FTEs per day to see the load of 22.7 patients per day. (Of course, if you're just getting started, you would probably work 12-hour days and see them all yourself.)

Assuming you're seeing 22.7 patients per day, the clinic would generate $50,000 of gross revenues per month (22.7 visits X 22 days X $100 per visit) or $41,500 of net revenues per month (22.7 visits X 22 days X $83 per visit). If you assume variable and fixed costs per visit to be $70, then you have a profit of $15,000 or 30 percent based on gross monthly revenues ($100-$70 or 15.7 percent based upon net revenues of $83-$70 per visit).

While this amount is OK, it's not sufficient to meet the ups and downs of collections or lean times. The trick is to manipulate the run rate statistics to increase your margins. Cutting costs is one way. Increasing production or introducing new product or service lines is another.

American business has become good at keeping score. We have become the most productive nation in the world. The next step is developing a more human environment that maximizes employee morale and work behavior. Physical therapy is well suited to this.

 

Bob Burles, PT, graduated from Stanford University school of physical therapy in 1967. He ran his own clinic in Portland, Ore., from 1971 through 1995 and is now the regional manager for a group of 16 clinics owned by Eagle Rehab. Burles was the treasurer of the orthopedic section of the American Physical Therapy Association and chairman of the finance committee of the Oregon Physical Therapy Association. He is president of the Oregon Physical Therapy Association.




     

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