Grow Your Bottom Line by Reducing Costs

Understanding which costs are fixed and which are variable is important for O&P businesses.

As the O&P profession is faced with increased expenses and shrinking reimbursement levels, reducing costs can significantly impact a company’s bottom line. Following some basic business concepts with an eye to areas unique to O&P facilities can help practitioners identify ways to reduce costs and maximize profits.

Basic business concepts

One of the first steps in being able to reduce business costs is to use general business concepts to identify areas where costs can be contained and reduced. Key among these is to understand your company’s cost structure, said Mike George, vice president of operations for Hanger Prosthetics & Orthotics.

“Before you can begin to discuss or look at reducing cost, you have to understand what your current cost structure happens to be,” he said. “To do that, you really need to set goals and targets, and the best way to do that is to have an annual budget.”

Formulating an annual budget helps determine the various relationships between costs and revenue, which is crucial in identifying a company’s cost structure. Once a company has set goals, the annual budget then becomes a tool to monitor its performance.

Money pots“That is really the first step in being able to reduce your costs is to know how you are performing against some type of benchmark,” he said.

Another important aspect of understanding business metrics and cost structure is for a company to measure and monitor its progress.

“We spend a lot of time measuring, what we call measuring and monitoring, which simply means that we use the technology we have available to provide us with the information to analyze our businesses, and by doing so, we can find anomalies and findings,” George said. “The key is the setting of goals and targets and then measuring and monitoring against that.”

In addition, understanding which costs are fixed and which are variable is important. For O&P businesses, one of the biggest variable costs is labor.

Reduce labor costs

Because every orthotic and prosthetic device is one of a kind, the labor required to fabricate each item represents a large portion of an O&P facility’s variable costs, especially for orthoses.

“By far, probably on the order of 70% or 80% of the cost of any orthosis is the labor,” said Steve Hill, CO, a technical consultant in orthotics for Delphi Ortho. “With orthotics, there is no question about it – the only way to cut the costs of making braces is to cut the labor.”

Labor costs can be reduced by hiring cheaper and usually less skilled labor or by finding more efficient ways to manufacture.

“Everybody has to concentrate on labor, and you can not just get rid of your expensive labor,” Hill said. “You have to find ways of making that expensive labor more efficient, so that means streamlining processes.”

Flexibility and lateral thinking can help O&P practitioners identify ways to streamline fabrication. Always being on the lookout for innovative ways to improve efficiency – even while going about activities such as shopping – can help practitioners find ways to streamline processes and lower labor costs.

“The one thing that a good lab manager has to be is flexible and lateral in his thinking because you could be at the grocery store and see some new thing. Maybe it is the way that the grocery store does business. Maybe it is a product the grocery store has or maybe it is somebody in the grocery store you see who has some tool like a Palm pilot that they are using in a way that makes what they are doing more efficient,” said Hill. “Maybe you are at the mall, or you are at the park or wherever you are, a person has to have the kind of freedom of mind to view what they are seeing with an eye toward using it in their own application – lateral thinking.”

Examining the work flow also can identify ways to lower labor costs. By analyzing how the work flow proceeds from the patient’s initial contact until delivery of the orthotic or prosthetic device, potential bottlenecks can be identified and addressed.

“If you can deliver a device to a patient more quickly, it is better for the patient, it is better for the referral source and it is better for you because you have minimized waste,” George said. “We spend a fair amount of time looking at that kind of thing.”

Benefits of practices networking
Another way practices can realize cost savings is through networking, which allows practitioners a way to work on their business rather than just in their business.
Image reprinted with permission of Dennis Clark, CPO.

Use central fabrication

Practitioners can use central fabrication services to realize cost savings in a variety of ways. For example, using central fabrication services can help a practice contain its labor costs. Practices that rely on central fabrication facilities to complete the majority of their work pay a predetermined amount for each device, so they know up-front how much a device costs, said Hill. In contrast, when a practice fabricates a device in-house, a technician is paid the same hourly wage regardless of how many devices are fabricated.

The use of central fabrication services also can help contain operating costs. Using central fabrication can allow a practice to reduce the square footage needed to house a lab. In addition, less equipment may be required, furthering reducing expenses.

“Rent is a big fixed cost that you have that you really cannot control in any other way other than making sure that you have the right amount of space for the business that you have, so central fabrication is helpful in that respect,” George said.

Another way that using a central fabrication facility can help free up cash flow is by decreasing the amount of inventory that a practice must maintain. The use of central fabrication also can enable practices to embrace new technology at much lower costs by absorbing the bulk of the equipment and training costs as well as decreasing the learning curve associated with implementing new technology.

“As we move into new technologies, both in orthotics and in prosthetics, and the new technologies are just exploding onto the scene, the utilization of central fabrication absolutely reduces your learning curve,” said Dennis Clark, CPO, president Point Health Centers of America (Point), president of Clark and Associates Prosthetics and Orthotics, president of O&P1, and executive director of Orthotic Prosthetic Group of America (OPGA). “In our field, the learning curve really relates directly to expense because you have a learning curve in terms of new equipment, new materials and new techniques and technology utilization. So if you can shift that monkey if you will onto the central fabrication center, they have to perform and create the new type of prosthesis or orthosis with that new technology, and they assume all of the risk.”

Finally, cost savings that can be recognized by using central fabrication facilities is achieved through speed. The quicker a practice can deliver a device, the sooner the practice can bill patients or their insurance companies. Narrowing the time lag between paying for the components and being reimbursed by the third-party payer decreases one of a practice’s biggest intangible expenses, Clark said.

Keep inventory down

While the use of central fabrication services can serve to keep inventory down, O&P practices should strive to keep only reasonable levels of stock and not buy products simply because “you think one day a particular type of patient is going to come through the door,” George said. “What is more appropriate is to work from a just-in-time kind of philosophy, which says I am only going to keep on the shelf what I think I can deliver in a certain period of time.”

Because maintaining inventory on the shelves can be costly and eat into profits, working from a just-in-time philosophy, or ordering something when it is needed, can be an important cost savings for a small business. By the same token, working on a just-in-time basis dictates that practitioners must be familiar with their patients’ needs to avoid jeopardizing their ability to deliver services.

“If you have a business that does a lot of trauma work at the hospital, then you need to have what you need available right now. You cannot wait for it to be shipped,” George said. “So you really have to understand your business, just like we do. We spend a lot of time analyzing our businesses and … making sure that our practitioners, and our clinicians, and our field management are in sync and that we are in fact available and able to provide what the patient needs when they need it.”

Networking your business

Another way practices can realize cost savings is through networking, which allows practitioners a way to work on their business rather than just in their business.

“Working in your business cost savings might be stopping people from doing overtime, using a less expensive shipper, changing your technique on something simple in house, or changing your provider of central fabrication or a prefabricated orthotic device,” Clark said. “Working on your business is this networking concept where you become part of a network, and that network goes out and gets contracts that you can get access to patients with, so that you are not constantly out there having to spend marketing dollars and your time to gain access to patients by marketing to managed care organizations.”

Several years ago, Point Health Centers of America and OPGA, two networking organizations for independent O&P facilities, joined forces. In 2004, the provider-owners sold to VGM (Van G. Miller Group of Companies), giving Point and OPGA access to services from other VGM divisions such as Homelink, which is the largest outpatient referral network in the United States for orthotic and prosthetic as well as durable medical equipment services, said Clark.

By belonging to such networks, practices can conduct purchasing under a group contract, receive help with marketing efforts and costs, and gain referrals to patients. In addition, Point is working on an outcomes data collection service, which Clark noted will help in “creating a best practice scenario, and best practice scenarios tend to be more cost effective.”

Practitioners can belong to OPGA, Point or both. Providers who belong to Point are credentialed by the American Board for Certification in Orthotics and Prosthetics Inc.

Track accounts receivable and billing

One area where expenses can be overlooked is in a company’s accounts receivable. Not being able to collect on a sale or even a portion of a sale carries an expense. So if a practice can become as efficient as possible, it is afforded the time necessary to work the collection from either the insurance company or the patient, George said.

“Make sure that you can collect as much as you possibly can from what you have sold. If you do not, there is an expense to that, and if you are a small business where you may be on the cash basis of accounting, everything that matters is how much money is left at the end of the day,” George said. “If you have not collected it, you have less money left at the end of the day.”

For some practices, using an outside billing company could represent a significant cost savings through decreased employee costs and increased collections. In addition, contracting with a billing company can free up office employees and even practitioners to focus on running a practice.

“In many offices, the practitioner is the owner and the president and everything else that goes on with an office. Rather than having to supervise personnel, he or she is able to do what he or she does, which is be an O&P practitioner,” said John Dolza, COE, president and chief executive officer of Complete Professional Office Services. “A practitioner, when working as a practitioner, is worth about $200 an hour, and that is a huge savings compared with what they are paying us.”

Complete Professional Office Services, which specifically handles O&P billing, charges companies a one-time set-up fee, and then companies pay a percentage of the amount collected.

“The advantage to it is we are like an employee you might say in some ways. Cost follows right along with what they are getting. If you get $1,000 this month, my bill is going to be small. If you get $10,000 a month, my bill is going to be larger,” Dolza said. “Secondly, we are after the fact. If you suddenly get a big drop in income, you are not still carrying that employee cost.”

In addition, a billing company staff can specialize in different areas of collections. For example, one department of the billing company can be responsible for putting together the claim and making sure all of the necessary information is included correctly. Denials can be handled by another department, which means that denials are handled by different employees than those who prepared the original claim. Furthermore, all denials are resubmitted rather than being set aside and forgotten.

Dolza said that O&P offices can lose a lot of money because denials can lost in the paper shuffle.

“If I have a prosthesis worth $10,000 and I have a problem with it, I will go fix that. But if I have something worth $100 or $200, I might put that off to the side because I am looking at this prosthesis over here, and I forget it,” he said. “Those [cases] get lost and they lose a tremendous amount of money.”

With a billing company focusing exclusively on submitting claims and handling denials, a practice can realize quicker payment, increased cash flow and a better bottom line, he said. Furthermore, he noted a billing company serves to decentralize cash management, which can decrease the potential for embezzlement.

Use computer-aided design

One final area that can represent a cost savings to practices is computer-aided design/computer-aided manufacturing (CAD/CAM). Recent advances in CAD/CAM technology for the O&P industry have resulted in a greater acceptance and more widespread use of CAD/CAM by practitioners. CAD/CAM may also offer consistency and quicker delivery of devices to patients.

“If you can utilize CAD to reduce the days that it takes between initial evaluation of a patient and final delivery, each one of those days that you reduce is money in the bank,” Clark said. “Then when you are out marketing yourself and you can say this is how fast I am, that is a great marketing tool.”

Another advantage CAD offers is the ability to provide insurance companies with objective documentation of volume changes in prosthetic patients, which can reduce the number of claims that are denied. Although Clark noted CAD/CAM is more widely used for prostheses, he believes that CAD manufacturers are finally starting to narrow the gap between orthotics and prosthetics, and that in the not too distant future, “they will be side by side.”

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Mary L. Jerrell, ELS, is a correspondent for O&P Business News.