Discounting: By Paul Martin

Managed care and payer pressures have continued to deflate the reimbursement that we are receiving in orthotic and prosthetic practices. Payers will, in many cases, unilaterally cut pricing for products and services that we offer.

How do you, as a business owner, know whether to accept or reject a proposed discount from a payer?

The only chance we have of making an informed, objective decision—as well as creating opportunities from a proposed payer discount—is to have a well-developed game plan and strategy. This strategy must be designed to analyze the impact of a discount on your business, as well as provide a plan for continued prosperity.

I have designed a five-step game plan that will enable you to make well-informed decisions on whether to accept or reject a discount, as well as streamline and improve the overall operations of your business.

Become a cost accountant

The first step in the game plan is to understand the cost basis of your business.

Cost-based accounting allows you to see the variability in the expenses that drive the revenue of your business. These expenses typically fall into one of two categories:

The importance of cost-based accounting lies in your understanding that many of the expenses you incur in your business are variable and can be impacted by improvements in productivity and efficiency.

For example, if your labor expense represents 40 percent of revenue, an improvement in labor productivity can significantly lower this percentage, thereby improving the profitability of your company.

I recommend that you track and monitor expenses as a percentage of revenue within your profit and loss statement on at least a monthly basis. This will give you an understanding of how the variable expense line items will change depending on an increase or decrease of revenue, as well as on an increase or decrease in a specific expense.

Profit and Loss Statement

	Actual	Percent  Of Income	Fixed Vs. Variable
Total Income	$1,000,000
Operating Expenses
Cost of Sales
Purchases	$250,000	25%	Variable
Labor	$250,000	25%	Variable
Total Cost of Sales
G&A Expenses
Rent			Fixed
Office			Variable
Advertising			Variable
Other			Fixed
Total G&A Expense	$250,000	25%	Fixed
Total Expense	$750,000	25%
Income from Operations	$250,000	25%

Develop budgets and goals

The second step in the game plan is to develop operations and financial budgets. Creating these is imperative, as it allows you to track the key areas that will drive the profitability of your business.

Once you identify these areas, create specific targets in each for the upcoming year. Some of the areas include:

 It is also important to set financial budgets that clearly outline the revenue you intend to produce, as well as the expenses that are necessary to create the expected revenue.

The three key expense categories that should be budgeted are:

There are many specific expense items within each, although they should be grouped and displayed in the main categories. See Figure 1 for an example of a profit and loss statement.

Keep your staff in the loop

You can’t do it alone. The only way to have a staff that is eagerly, constantly working toward a common goal is to share with them the financial and operations budgets and targets. This is the third step in your winning game plan.

The old adage that you can’t get somewhere if you don’t know where you’re going rings clear when we create expectations for staff that are subjective in nature and then do not give them access to data that can guide them toward the goals that have been set.

I believe that staff should be heavily involved in setting financial and operations budgets and targets. I also believe they should be provided data to show the results of their performance as it relates to these goals.

Another advantage of sharing this financial information with your staff becomes clear in the event of a discount. It is impossible to expect them to understand how a discount will impact your business if they have not been exposed to financial data previously.

But, a proposed discount from a payer and the impact of accepting it becomes clear to your staff when they have been exposed to your company’s budgets and financial goals over a period of time.

And, in many cases, your staff will be the ones to find solutions and opportunities from a proposed discount—if they have an understanding of what drives the financial and operational success of your business.

Analyze the situation

So, what is the impact to your bottom line of a proposed payer discount?

Step four of your game plan for success is to analyze the impact a proposed discount would have on your financial picture and operations.

First, you must look at how much of your overall business this payer represents. You then need to calculate the amount of revenue that is being generated from this specific payer and decrease this revenue by the proposed discount. Add this revised revenue to the remaining revenue your company brings in, and you will get an understanding of your revised revenue based on full acceptance of a discount, as well as continued historical utilization from the payer.

Place this revised revenue into your current profit and loss statement, and it will reveal an operating margin performance based on a full acceptance of the discount.

You also need to understand the impact of a discount on specific areas of your business: orthotics and prosthetics. This is important as you prepare to respond to a payer, because the impact may be extremely different for each type of business. Therefore, you may be willing to accept a discount for one product and reject the discount for other products.

Talk to the payer

Once you have evaluated your business from a cost accounting standpoint, developed budgets and goals, shared information with your staff and analyzed the effect of a discount on your business, the last step in the game plan is to communicate your decision and its impact to the payer.

You should prepare objective data in order to discuss the impact of a discount from a payer. I know what you are all saying: “Payers don’t care, and I am too small to have any impact on the payer.”

To some extent, I agree with this. But, for a moment, consider a few options:

I strongly believe that you need to do whatever it takes to present your case and get an understanding as to why the payer has proposed the discount.

This profession is in great need of effective and objective communicators who can educate payers and the community as to the level of products and services that O&P practioners can offer.

There are several impacts we need to consider when deciding to accept or reject a discount. A few of those are:

Theses are all questions that need to be addressed prior to making your decision.

Get in the game

The five steps depicted here represent a basic game plan that will help prepare you for a payer discount.

Put each step into place today, and you will be much better prepared the next time you receive a letter from a payer proposing a discount.

Paul Martin is the founder and president of Martin Acquisitions Group LLC, operating out of Mt. Laurel, N.J. His company provides transaction, valuation and practice-building consulting to O&P companies nationwide. Paul Martin can be contacted at (800) 711-7716 or paul@martinacq.com.