Article

Financial Factor

Should I stay or should I grow…

My version of Econ 101 could help you decide.

The costs to run your practice seem obvious. Your accountant can produce balance sheets and profit/loss statements reflecting on the last year or quarter. A budget can be created to allocate costs and plan for the year. These tools give you a snapshot and allow some forecast of your current practice.

However, analyzing your practice through an economic lens may change your view, as well as your management decisions. Employing an economic approach first requires defining and understanding the impact of concepts such as marginal utilization and opportunity cost as they relate to delivery of health-care services. Once these concepts are established, my future columns will use them to help readers better understand use of staff, space and equipment.

LET’S START WITH THE TERMS

Utilization. Definition 1: The action of making practical and effective use of something. The something could be happiness, money, office space or staff and so on. Definition 2: The proportion of the available time that a piece of equipment, person or system is operating.

It is the goal to maximize our utility. However, limits exist that often prevent achieving complete utility; the result is called marginal utility. An example is my 2:00 craving for peanut M&M’s on a clinic day. Fulfilling that craving results in “happiness” (See figure on page 52). A handful of M&M’s is terrific, giving me the boost to finish off the afternoon of patients. However, on occasion I keep going and accidently finish off a new, large bag. This excess quickly turns my “happiness” into “feeling sick” and looking for a couch.

Thus, the goal of maximizing my utility of happiness is marginalized by the excess of M&M’s. Simply put, there is a sweet spot. Use this example to identify some areas in your office where pursuing maximal utilization and marginalization would apply.

Economics. Definition 1: The study of infinite wants and finite means. Definition 2: The study of constrained choices. Relevant to this is the economic principal of “opportunity cost.” This concept, instrumental to practice growth, obligates one about what could be versus what your practice is consciously, deliberately not.

Opportunity cost. Definition: The loss of potential gain from other alternatives when one alternative is chosen. One example is choosing to become an ophthalmologist; the opportunity cost is not becoming another type of doctor, such as a cardiothoracic surgeon. A more abstract example: Recall the last time you were treated to a free meal at a nice restaurant. Even if you do not plan to treat the person to a meal in the future, you still have an obligation to listen to your host or you incur some emotional expense, such as guilt.

TIME TO DIG DEEPER

Opportunity cost has a practical application in health-care decisions. It allows a practice to make a conscious choice to not do something in order to create a benefit or advantage. One approach to addressing the opportunity cost of an issue in your practice: Gather a core group to discuss a possible strategy of growth or a purchase. Then brainstorm a list of options and play out each scenario. A discussion would include identifying strengths, weakness and alternatives of each.

For example, I decided to not have an optical in my reception area, and I no longer refract for glasses. Countless colleagues urged me to reconsider, telling me an optical revenue would help pay for my kids’ college education. But I did not enjoy refracting and “bounce back” patients discussing the retail aspect of my medical care. This opportunity cost was not having revenue from selling glasses in my practice.

However, my decision allowed me to fill my clinic with only medical and surgical patients, which increased my professional satisfaction. It also increased my referrals from other providers, including optometrists who could be sure I wouldn’t sell glasses to their patients.

MIXING IT UP

Opportunity cost and utilization are not mutually exclusive. Say you’re considering expanding the office to include more exam rooms. There’s the obvious cost of new equipment for the additional rooms and construction, so a plan would need to demonstrate that the new space would be utilized and not remain empty. An opportunity cost to consider is that if the space is not expanded, then the office may not be able to add a specialist clinic twice a week, generating new revenue while adding to the overall growth of the office.

SET UP FOR SUCCESS

Borrowing some language from an economics textbook allows a physician to take a novel approach to practice management. Setting up the problem is half the solution. My kid’s middle school math word problems are harder than my office considerations, but solutions for both require a similar approach.

First, you must slowly and carefully set up an equation, as I’ve outlined above; only then do we have a chance of solving it. Even in my children’s term papers, the instructors emphasize it is critical to dedicate a few paragraphs to establish the thesis one is about to prove. It is no different in approaching your practice’s issues. Consider the utilization principle and opportunity cost; doing so will provide the outline for successful solutions.

In future columns, I will demonstrate how the terms I’ve defined above can lead to practice growth or help solve real practice problems. They will be applied to considerations such as staffing, expanding practice size or locations and investing in more equipment for patient care. OM