Understanding Your Practice’s Profit Drivers

With Medicare rebates frozen until July 2018, medical practices need to look at ways to maintain profit (if not increase it). The Medical Journal of Australia calculates that by 2018, the freeze will cost GP doctors an average of $384.32 per 100 patients or approximately $31,000 a year for a FTE doctor.

Paradoxically, reports from the Federal Department of Health suggest that the number of bulk billing services and practices has actually increased since November 2013 when the freeze first came in.

Specialists too are not immune to changes in rebates for item numbers. With continuing talk about reductions, some of my existing specialist clients are looking at potential drops in income of over 20%. This income will either be lost or will need to be replaced with more out of pocket fees by patients.

While Medicare rebates are being reduced or frozen, competition is mounting.

The Australian Bureau of Statistics has calculated an 18.8% growth in the number of GPs from 2001 to 2011.  This represents a ratio of 1 GP per 495 people in 2011.  Over the same 10 year period the number of specialist doctors grew by 38% to 1 per 847 people.

Since 2011, the number of doctors has progressively grown as universities continue to pump out medical graduates. Many see this as a deliberate strategy on behalf of the government to make health costs cheaper. It is simple supply and demand economic theory; the greater the supply of doctors, the more choice the patient has and the cheaper the service should become (or so the theory goes).

For those of you reading who doubt this is the case – consider the dental industry. Dentistry has a large number of graduates and is facing an over-supply of dentists in many areas. How are practices contending with this? Many choose to compete on price, reducing their out of pocket fees for patients and minimising the cost of high end work.  From a business point of view one might ask, if revenue is falling and costs remain the same – how do these practices maintain profitability?

With increasing competition and mounting pressure on profit, practice owners and operators need to seriously focus on the business side of their practice. This is not usually an area where doctors are either skilled or comfortable.

Undertaking a strategic planning session is great starting point for understanding your practice as a business.  This should involve identifying where you are now, where you want to be and (most importantly) how you’re going to get there. This process can help align all the elements of your practice as you work towards the common goal of sustainability and profitability.

Understanding your business model is fundamental to this process. All service businesses fit into four basic categories;

  • The Rocket Scientist – Providers of highly specialised work needed in a crisis or specific situation. Rocket Scientists are very experienced providers with high prices.
  • Grey Hair Provider – Well respected experienced professionals whose work is sought after. Reputation and experience are the keys to this. Grey Hair Providers charge well but not as highly as Rocket Scientists.
  • Procedural workers – think tradies. The Fridge or the dishwasher is broken,  you need a good job and you need it done now. This style of work is more price sensitive but reputation is still a consideration.
  • Commodity workers – think petrol, bread, milk. These are all products which market themselves based on being the cheapest.

A major question for general practices to consider is why a patient comes to your practice? The answers can be varied but usually include: quality of care or location or early and late opening hours.

Many practices still choose to differentiate themselves from their competition based on price. When driving past a GP practice, how many have a sign out the front saying “BULK BILLING.”

By choosing to differentiate on price, doctors position themselves as commodity workers rather than Grey Hair providers. This area is highly price sensitive and quality of service is not often considered.

If you are interested in a William Buck strategic plan for your practice or a complimentary health check please contact your local advisor.