PTPN Insights

Why you should know your cost of doing business: A Q&A with Michael Weinper, PTPN CEO and President, part 1.

May 8th, 2013 |

Why you should know your cost of doing business.With personal taxes having been filed and spring around the corner, it’s a good time to take a look at whether your business is fiscally healthy. We recently sat down with PTPN CEO and President Michael Weinper, PT, DPT, M.P.H., to discuss calculating the cost of doing business. Michael is also the owner of Progressive Physical Therapy, a private practice with four locations in Southern California. He gave us so much information that it will be published in two posts: today’s discussing why you should know the cost of doing business in your clinic, and our next post on how to calculate your cost of doing business.



Why is it important for a practice owner to know the cost of doing business?
Every business has a necessary primary goal: To make a profit. If a business doesn’t make a profit, it can’t stay in existence for very long. Furthermore, most small businesses spend all the money they make every year, so they don’t have any reserves to fall back on. It’s keenly important to know what your cost of doing business is, as you make multiple decisions in your practice that have an impact on profit.

It’s also important to know the real cost of doing business when considering contracting opportunities. As practice owners, we need to ensure that as contract offers come our way, we make good decisions and don’t get ourselves into situations where we’re getting less money than the cost of providing care. No clinic should accept a contract that doesn’t clearly spell out exactly how much they’ll get paid. Illustrations are not good enough; you have to have a contract that details what you’ll get paid per service provided. This applies to both in-network and out-of-network payments.

This is hard for some people to understand, but sometimes it’s better to say “no” to a contract. It may result in less business, but if that business means losing revenue per patient, you’re actually ahead of the game. As Dan Mills, treasurer of the APTA Private Practice Section, recently wrote in Impact magazine, “when we work for less than it costs us to stay in business, we devalue our service.”

With managed care contracts, therapists need to be careful and read all of the fine print, unlike the agreements we all scroll through and approve before installing software updates on our computers. Owners need to make sure they understand all of the conditions laid out in the contract, especially how much they will get paid, and they need to confirm that there is a way to exit the contract, should it no longer work for their business. Any contract you sign should have an escape clause, at least once a year, allowing for termination. This is why PTPN gives its members the option to opt out of any contract negotiated for our network. As Dan points out, “a single [poorly paying] payer agreement can destroy a practice.”

What are the major expenses for rehabilitation therapy clinic?
The largest expenses in most service-oriented businesses are labor and rent, with insurance costs close behind. It’s absolutely necessary to keep track of your labor costs, your rent costs, and then other costs.

Costs are typically categorized in two ways:

  • Fixed costs, or costs that don’t vary month to month as a function of the volume of business, and
  • Variable expenses, which do fluctuate with business volume.

Rent is an example of a fixed cost; it won’t vary — whether you see one patient or 100 in a day, it’s going to be the same cost. Once you have a lease, it won’t vary much over time, except for pre-negotiated annual increases and possible pass-through landlord expenses, if not a gross lease.

The cost of salaries and staff health insurance would be considered variable, as they are based on the staffing levels at your clinic. If your business volume starts to drop off, you may have to cut people’s hours or lay people off, because your revenue is not going to be there to support your expenses.

What about income? How should that be measured?
Remember that income is not what you bill, it’s what you collect. It’s what goes in the bank. As you know, in this era of managed care and lower reimbursement, we don’t get paid what we bill, but rather what the insurance companies decide to pay us (and we agree to accept).

Why do I need to track such things?
Too many therapists operate on the principle that if they have money in the bank, they’re OK. The reality is that there are some expenses that only hit your practice once a year, like malpractice insurance, PTPN or professional association dues, or large supply orders placed only a few times a year. By tracking these expenses, you can see how things will vary up and down over a 12-month cycle. Also, income will vary monthly depending on patient mix and volume.

Furthermore, that doesn’t mean that you have to show a profit every month. Sometimes a clinic’s profit margin is so small that they will have some months where their expenses exceed their profits, but overall for the year they need to be profitable.

What goal should therapists have as a healthy profit margin?
Profit margins will vary from state to state as a function of both income and expenses. Some states have low rents or pay their therapists less, and some states have higher malpractice or health insurance costs, or higher reimbursement for workers’ comp business.

Usually the profit margin is no higher than 25%. It used to be that we could see a 40% profit margin and that a healthy profit margin was between 25% and 40%. But now, as costs have gone up and income has gone down, we’ve reset the bar, and a healthy profit margin is now 15% or more. States like California, New York and Florida (three states where PTPN has a large concentration of members) have a very small profit margin, due to such factors as high rents, salaries and low reimbursement rates.

What is profit as compared to profit margin?
Your profit is a simple math equation, where you take your income for a period of time, minus your expenses. Profit margin is typically expressed as a percentage, where you take your net income (profit) and divide it by your expenses. For example, if you have $50,000 of income and $40,000 of expenses, your profit for that month would be $50,000 – $40,000, or $10,000. The profit margin would be calculated as ($50,000 – $40,000) divided by income = $10,000/$50,000 = .20, or 20%.

Are there any situations or triggers that are a sign you should ask a consultant for help?
Essentially, consultants can help with analysis of your finances, without any emotional ties to your clinic. If you see the following trends in your financial statements, it may be helpful to have a consultant to come in and look over your expenses, to make suggestions to you about what to do with your practice:

  • If you’re losing money.
  • If your margins are so minimal that you don’t know whether you’re spending too much.
  • If you find yourself in a situation where your profits are very minimal, close to breaking even or trending downward.
  • If you don’t focus on finances until it is too late.

If you’re a PTPN member, talk to your Provider Services Representative or Regional Director; they may have some suggestions on how to improve your bottom line. PTPN and PTPN Nexus members can also take advantage of special rates on consulting services like HCS Consulting, one of our preferred vendors. Members can get more information by logging in to the members-only section of our website at www.ptpn.com/provider/index.php.

Printable version.

For more information:

Mills, Dan. The question of money. Impact magazine, February 2013.
Note: Scroll to page 9 for the editorial.