In Part 1, we discussed how NOT to set your fees. As we mentioned, most chiropractors admittedly have no strategic process or logical reasoning in how they arrive at their fee schedules. And we perhaps painfully commented on the not-so-wonderful ways that chiropractors typically set their fees.
Now, let’s turn that around and discuss three strategic tools to improve the process of setting your fees with the target of boosting your bottom line.
1) Know Your Model – one of the most dangerous mistakes too many chiropractors make in setting their fees (and in running their practice) is not aligning their business model. In short, how you practice should determine how you set your fees – if you want to be profitable. Outside of chiropractic, this is obvious when we see examples of big companies like WalMart vs WholeFoods. Both sell groceries. WM is at the low end of the cost spectrum and features the most common and bargain brands; WF is at the higher end of the price spectrum, but features organic, locally grown, and hard-to-find speciality items. If either of these stores tried to imitate the other’s pricing scheme, they would fail.
In chiropractic, we basically have three dominant business models that work:
High volume, low fee; Medium volume, medium fee; Low volume, high fee. Once you blur or cross those lines too much, things don’t work so well in terms of profits. The low volume, low fee doc has one major problem = low profits. Similar mismatches of other models produce similarly bad results. So rule #1 of fee setting is to know your market and your model.
2) Know Your Costs – while rule #1 focuses on external factors that affect price, rule # 2 takes into consideration internal factors. In this respect, one of the most important things to keep an eye on is your cost per patient. Put simply, cost per patient (CPP) is how much it costs (on average) for you to process a patient through your doors.
This figure can be obtained by taking the number of patient visits and your overhead. For example, if your overhead is 20K/mo ($240,000 per year) and you see approx. 100 patients per week (5000/yr), your cost per patient would be $48.
There is no “ideal” CPP number, as there are many factors that affect this different for different style practices and different models. The obvious answer to a “good” CPP is lower is better. In other words, if your CPP is $48 and most of your payers reimburse you $25 per visit, you’re in trouble.
3) Don’t Lose Money – the CPP brings us to the third rule of fee setting which is to keep one simple principle in mind: don’t lose money. If we continue the above example and our CPP is $48 and the majority of our payers reimburse us less than $48 and our cash/TOS price is less than $48, then we will find ourselves in the rather unpleasant position of losing money on most everyone that walks in the door. If you don’t think this is possible, do the math. Several years ago, I began working with a busy practice that never quite seemed to profit as much as they though they should. When we looked at their patient numbers (visits, NPs, PVA, etc), everything seemed good – except the bottom line.
I soon discovered a big problem – their fees were way too low. As we analyzed past data, the trend became clear. On months that they had a lot of PI patients who paid 100% of the full fee, they would be profitable. As soon as their PI cases dropped off, so did the profits.
What To Do Next
For most practices, there is homework to be done applying the three strategies above to your own fee schedule. While some may raise the objection that payers control their fees, that is only true to the extent that you continue to be in their network and allow them to reduce your fee. Once you do the math as above, you may find that it is not profitable to participate with some of the really lousy payers who will eat away at your bottom line. Sure this will force you to make some hard decisions about your business model, your fees, who you do business with and other important considerations – but the goal is to have a (more) profitable business, so if this article encourages you to look into these areas, I’m glad you made it this far – and your practice will be too!
