Maximizing the Profitability of Your Practice: Value Chain Analysis

Part 1: Inbound Logistics: Cost Reduction

Economic times are tough for all businesses, including many of our medical practices. Our patients are putting off medical treatments for a myriad of reasons, including unemployment and high insurance deductibles. Compounding the issue is the fact that our payers have drastically reduced payments for those we treat.

Since most of us rely on managed care and government insurance for the majority our revenue, we are by definition price takers. In other words, we accept the reimbursement that is contractually available to us and have limited ability to set our prices. Given these challenges, it is essential that we optimize the factors we can control.

Linking Competitive Advantage to Profitability

Let’s examine the concept of the value chain. Harvard professor Michael Porter introduced this concept in the 1980s. The value chain applies to all businesses and can be applied to our medical practices. The basic concept of the value chain is that business processes can be categorized by five primary and four secondary activities, each of which should be maximized to allow for competitive advantage over “rival” companies in one’s industry.

When value chain activities are maximized, so is profitability. Primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and finally, service after the sale. Secondary activities include firm infrastructure, innovation of technology, human resources, and procurement. Here, we will concentrate on the primary activities of the value chain with a focus on inbound logistics.

Inbound logistics deals with the acquisition of the components that we use to run our practices. These include our supplies, vendor contracts, office equipment, and managed care contracts. As profit is the difference between revenue and expenses (costs), it is critical to look closely at the cost component of this equation, especially in light of the diminishing reimbursements we all are facing.

Using the Challenging Economy to Your Advantage

The first thing to consider is that as the business aspect of practicing medicine gets tougher for us, it also becomes tougher for our vendors. You can turn this situation to your advantage by negotiating better deals. Review your contacts with the suppliers and shop around contracts for supplies and services. In order to keep existing customers and attract new ones, these vendors must offer more competitive pricing on their products. Just as we do, vendors currently have to operate at lower margins, but certainly will not proactively give you a break on an existing product; it is up to you to initiate the negotiations.

The Internet is a great tool for discovering and locating alternative suppliers. Because competitors are anxious to generate new business, most will significantly lower their prices. A few hundred dollars per month of savings here and there adds up to several thousands of dollars per year in profit. This could be equivalent to several office visits, surgeries, or procedures.

Next, consider used or refurbished office equipment rather than brand new. For example, computer systems, phone systems, fax machines, copiers and office furniture can be purchased used at significantly lower prices than new, and if procured by a reputable company with a solid track record, these items can perform as well as their new counterparts. It is up to you to conduct due diligence before making such purchases to ensure optimum performance. Also, the service contracts for these products should be put out to bid to find the best value.

Renegotiate with your other vendors, such as linen suppliers, custodial services, and medical waste companies, as well. Many of these contracts were probably initiated years ago before the economic downturn and have not been reviewed in light of the current situation. Over the past year, the author has enjoyed significant savings per month (several thousands per year) simply by changing suppliers of these services.

Become a Bargain Hunter

This isn’t to suggest cutting the quality of our supplies and services, but instead lowering our costs to match current market prices while maintaining good quality. These prices are reflected in the marketplace by simple supply and demand. As demand for these products are decreasing because of the down economy, we as consumers benefit by taking advantage of the lower market prices. However, we have to look for or even ask for the bargains; most will not fall into our laps.

In summary, increased revenue is not the only element of the profit equation. In fact, increased revenue for most of us means higher volumes and longer hours. While this is certainly not always bad, simply reducing costs may be the easiest and most effective way to increase the profitability of our practices in these challenging economic times.


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