Should You Keep That Low-Paying Insurance Contract? With Michael Kelly

PT owners will always have to consider, “Do I take this low-paying insurance or not?” when deciding if they should go in-network with a low-paying insurance company. There are a few parameters to consider when in this situation. In this episode, Michael Kelly breaks down what he believes are the basic financial principles to help you decide if a contract is “worth it.”

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I’ve got a friend who’s joining me in this episode who brought a presentation to our mastermind group a couple of months ago that I thought was super useful and insightful. I wanted to introduce this to the show readers as well. Michael Kelly , who is a consultant, retired. Congratulations, Michael. In traversing the world, he has been willing to spend a little bit of time sharing these concepts that he shared with our mastermind group with the show audience. First of all, thanks for joining me, Michael. I appreciate it.

You’re most welcome, Nathan. It’s a pleasure being able to share this presentation with your readers.

Tell the readers a little bit about you, where you come from and give some of the financial background that we’re going to discuss here.

I’m a businessman with a deep business experience of over 40-plus years. Part of my experience was in financial services and financial analysts, specifically for large pharma companies, pharmaceutical drug companies, and small pharmaceutical drug companies. During that time, on any number of occasions, we evaluated our portfolio of commercial products to determine whether or not we wanted to stop selling either specific products and/or low margin skews in order to improve the company’s financials.

Many companies use full costing systems, much like the average cost you’re going to hear two to see a patient in a PT clinic. Invariably, that was not the right metric to be looking at to make the decision. In almost all cases, companies were going to reduce their financial performance by making decisions of cutting products after you looked at the true costs for those products and took away all of the embedded overhead costs.

In addition to that, many years ago, Andy Michaels was a very good friend of mine. He was a physical therapist himself. He was starting up a physical therapy clinic. He came to me for financial consulting. Over the course of many years, I’ve worked with Andy doing financial consulting for him and supporting him beginning his startup company. He’s now got three clinics. He has been very successful. Our discussions now are more strategic in nature. Although occasionally, we get into financial ones. In fact, he had this discussion about having some insurance companies that were paying him a lower amount than he wanted to be paid.

He wanted to discuss, “At what point do you maybe jettison those companies?” or say, “Thank you, but no, thank you for the business.” That’s how I ended up, after having that conversation with Andy and making the presentation to the group since, as Andy said, “This is something that a lot of PT clinic owners think about and address occasionally.”

It’s an ongoing discussion in the physical therapy world. Number one, they have a desire to renegotiate their contracts with insurance companies. As with a typical case in the physical therapy industry as United Healthcare, as long as I’ve been an owner, the reimbursement rate in Arizona and what I hear from many parts across the country is $65-$68 per visit. That hasn’t changed for decades.

At what point do they account for inflation? If you try to negotiate with them, then you don’t get very far. Typically, you don’t, especially with the major players. The question comes up, do we keep taking these or should we consider like Andy did? Maybe consider dropping at one point. Do we do that? I think the other part of it , in order to cover expenses and have some profits, then you have to see a significantly higher volume.

Burnout is a significant issue in the industry for a physical therapist. To see 15, 16, 18, 20-plus patients per day to make a significant profit is a real issue in many cases. The consideration was on, “ Maybe I see fewer patients and increase that average reimbursement per visit.” That is a lot of the discussion that’s going on in the physical therapy owner’s mind.

It’s understandable. Ultimately, it’s about revenue and cost in order to drive your bottom line in your livelihood.

Michael presented this presentation to our mastermind group, which Andy is a part of. He’s kind enough to share it with us.

Our topic is what is the real incremental cost to see patients and how do you use that information to make decisions regarding your lowest-cost paying insurance companies? The ones that you’re getting the least revenue on a patient basis. We’re going to start with a few financial terms. According to my discussions with some physical therapists, there are two primary models. The model that’s not as significant as the fixed cost model is what we call a variable cost model.

This is where you’re paying your PT and assistance on a per-patient treated basis. In variable costs of very specific their salary. They’re going to be your FICA, SUTA taxes that you pay on salary that are yours specifically or the PT clinics and other benefits that might be calculated in associated specifically with that visit. The fixed cost model, which is much more typical here in the United States or a salary cost model, is where you’re paying the PT and the assistance in annual salary.

Those costs you incur, regardless of how many patients they treat in a month. Whether they treat a hundred or they treat 350. Those are base costs. Other than those direct costs for treating customers, all the rest of your other costs, we lump under overhead costs. The lease of the facility or if you own it, mortgages you’re paying on it, electricity, equipment, accounting, IT, all of those are important costs.

Regardless of patient number, those are fixed costs that sit in there and they’re not going to vary based on patients. They’re not a direct cost, certainly for each of the patient visits. Now, another concept we’re going to talk about which has significant importance, as you’re thinking about these low revenue patient insurance payers as your capacity. Can you treat more patients? Do you have capacity available or are you at full capacity where you’re totally built? In fact, you are turning patients away.

There are many PT owners who have multiple clinics. You might have both situations and we’ll discuss the actual strategic opportunity when you have multiple clinics and you have both situations. In terms of your financial drive, your goal is to maximize the cash produced per clinic on a daily, weekly, monthly and annual basis. That’s what you’re doing with your business. It’s the cash you produce ultimately after all expenses. That is what you use to live on. You can look at P&Ls. You can talk about taxes and all those. Those are all very important, but at the end of the day, your cashflow is the most important thing you should think about.

Let’s take a hypothetical clinic. They’re being reimbursed per patient visit anywhere from a hundred dollars per visit down to $60 per visit and obviously, your situation’s going to be different than this. There’s a certain percentage of patients they see at $100 level of certain percentage at each of these various payment or revenue levels.

For this specific clinic, the average treatment cost is $73 per patient. That is determined by taking total operating costs, excluding interest in taxes and dividing it by the patient visits over a certain timeframe. Average revenue generated is your total revenue also divided by your total patient visits over that specific timeframe. In this case, the average revenue generates $80. The question you would ask yourself would be, “Why am I accepting patients from insurance companies that are only paying me $60 and $70? When in fact, my average cost to treat a patient is $73?”

If you take a look at all of your costs now or over this timeframe, it is $73, but the very specific incremental cost for seeing a patient is different than that. By the way, I will know that this is where averages, let’s say sometimes averages can be deceptive. As an example, I took my wife to Acadia National many years ago. It was a blistering hot day. It must’ve been 90 degrees. After hiking up the mountain, we decided we needed to go to the seashore to cool off. We walked into the ocean.

The ocean temperature was like 40 degrees. If you take 40 and 90, the average is 65. That’s from an Alaskan standpoint. That’s probably fantastic. That’s not bad at all. The Upper West Coast may be great, above LA, but I was boiling. One part of me was boiling and the other, the cold was painful. I was in a cold waterway. My legs were on pins and needles. I was like, “I’ve got to get out of this water as soon as possible.”

You got to watch out for averages. I’m going to add some more of what you think about the total cost per visit. When you start to think about taking maybe eliminating your lowest cost provider, if you look at the variable model, the incremental cost is simple. It is, what are you paying to the PT and the assistance per patient that they see and treat? This would be a blended cost, but you have that cost information. You know the amount of patients they are treating. That’s an easy number to arrive at. You can add to that your FICA and SUTA, which are clearly cash payments you’re making on top of that. Let’s say you arrive at this number. In the case of this hypothetical clinic is $45.

Michael, in a variable cost model, to break it down for PT owners who are reading, this would be a situation in which you pay PT owners a flat rate per patient team. Am I right? We have an agreement, you’re not necessarily getting a salary or maybe you’re getting a very minimal salary, but on top of that, you’re getting a flat. I pay you, like you have here, $45 per patient theme, you can see ten of them a day. You can see three of them a day, but you’re going to see $45 per patient. Am I right?

You’re correct.

That’s the variable cost model?

Yes. As I mentioned, that’s not as popular in the US with PT clinic owners as the fixed model, but maybe 5% of clinics are doing that. The advantage is that that’s maybe another set of questions. The fixed model is interesting because, as I mentioned, whether or not the PTs and PT assistants are seeing in servicing and treating customers. They’re getting paid a certain amount. Certainly, PT clinic owners are not going to go a long time with a significant reduction in patients being seen before. They’re going to have to make changes to the amount of staff they have on hand. The reality is that in that model, there’s no incremental cost per patient per se because you’re paying that monthly salary period, regardless of the number of patients you see.

It can be useful, however, to say, “Take a look at your salaries that you’re paying and also these other costs, FICA, SUTA, 401(k) and medical vacation if you give those benefits.” In order to get a sense of what your patient costs at this level is, I’m saying for this specific clinic, it’s $42. It would generally be less than you’d seen the model in clinics that have been around for years.

Only because in the variable model, the actual PTs and PTAs are taking on the risk of patients showing up and probably taking on their own medical vacation benefits, etc., so a higher payment would be made. That’s pretty typical. Anyway, now you have other numbers to look at. It’s not the $73. You’ve got the $45 or perhaps no cost, but you might dig in a little bit further to see what you’re specifically paying for your PTs per patient service.

Ultimately, it's about revenue and cost in order to drive your bottom line and livelihood.
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Some advisors that I’ll have on would say part of the fixed cost model should include a built-in profit. You should include profit as part of your expense and build that into your financials.

Some might say that, but from purely this exercise of looking at cost, I would not build that in. There may be rules of thumb about building in cost for this, that or the other thing. As I said, you’re trying to get a sense of what your costs are as a patient service to post to all of these overhead costs. It muddies the waters and it can cause you to make decisions that are not necessarily beneficial for maximizing cashflow, which is what it’s all about.

As we think about the $60 and $70 revenue-generating patients, if you have additional capacity, this is a tough hurdle. As you see under the variable model, again, assuming you’re seeing, in this case, 10,000 patients and 10% of them, you’re getting paid $60 per patient visit. At $60, that’s $15 over the cost of your blended cost of your PT/PTA. The incremental costs of $45. $15 times 1,000 patients is $15,000. That’s additional money put in your pocket. That’s serious money too.

Under the fixed model, again, we’re talking about eliminating 1,000 patients. There, since you’re getting paid the $60 and we’re assuming no incremental costs, that’s $60 times 1,000, $60,000. If you think back to this other term that I was using of maybe a direct cost of $40 or $42, you’re still making $18 or so per visit.

Compared to the variable model, which was only fifteen.

In this case, it makes no sense for you to eliminate the provider, the insurance companies, patients at $60 or $70.

Also, for those who can’t see the screen, the caveat is if you have additional capacity and most donors do. Most owners aren’t running at 100% capacity because they’re so full and booked. They’re turning patients away, but if you have the additional room to see more patients, this is where you should consider taking those lower payments because the fixed cost. Otherwise, they’re the thing. That’s what you’re saying, right?

That is correct. Now, only to a certain level. If a company comes to you and offers you, in this case, $45 or less, then you don’t want that deal at all because now, you’re destroying cash. That’s why it’s good to have a beat on what your incremental cost is to see a patient so that you don’t get trapped into because you’re driving for additional patients that you sign up for something that’s below your real cost.

The PT owner and most of them don’t have a lot of financial experience. At least for me, it was years before I finally sat down and spoke with my CPA and asked them to show me what a profit loss statement was and balance sheet and get some education on it. An owner would need to and what you’re pushing from the very beginning of the conversation is make sure you know what is the fixed costs per patient on a routine basis.

Yes, what you say fixed, it’s what’s your incremental cost? What truly is your cash out of pocket? This gets mixed up with overhead costs because immediately, the PT owners are going to say, “I have a lease on this building. I’m paying for the equipment. I have heating costs, lighting costs.” Those are fixed overheads. You don’t cover those. You’re looking for what’s the true cash costs of treating this specific patient.

As you’re assessing this model, you do not look at the overhead included. It’s just simply what it takes to give that care to that singular patient.

Correct. That is why I’m talking about PTs, PTA’s and the taxes that you pay on top of that in any other service cost, but you might have a small amount of cost. For example, let’s say you’re using a lot of bandaging material. Let’s say you’re treating patients and you’re using a lot of bandages. In hospital’s situations, this is all the time stuff. Other stuff is being used in the PT clinic but not as much of that. If you have some of those disposables, you might say, “Yes, then it’s another dollar of disposables that I’m using to treat a patient,” but there’s not a lot.

Bring me along slowly here, Michael. Why do you dismiss the overhead costs and considering the contract?

What you’re doing is you’re destroying value if you take out $60 per patient visit revenue and you haven’t changed your patient base at all. In other words, you’ve taken 1,000 patients out. That’s a great leading question. If you eliminate the $60 patients and you have excess capacity, you now move from 10,000 patients to 9,000. The 1,000 patients at $60 reduce your revenues by $60,000.

In the case of this fixed cost model, where you’re paying the PTAs and the PTs an annual salary, let’s say over the course of a few months, you don’t change your cost at all, but your average cost per payment now per patient jumps from $73 to $81, which is about what your average revenue per patient is. If you have a variable cost model, which back to that, you’re paying your PTs, PTAs a very specific amount per patient treated, now, there you reduce your costs by $45,000, $45 per patient visit at $685.

You don’t get nearly the bump in terms of average cost per patient, but you’ve sacrificed your $60,000 revenue. You are worse off by eliminating the $60 customer as opposed to where you were. That’s because you have excess capacity. That’s where incremental costs come in. Think of it this way. “This is the way it works.”

Let’s say you have $50,000 of base cost to open your doors on an annual basis. We’re talking about a variable cost model. You want to see as many patients as you possibly can, anything above $45, assuming that is what your incremental cost is to see a patient, because that’s all going to cover that $50,000 block that sits there whether you see 10 patients or 10,000 patients.

I’m thinking there’s something to be said about having a variable cost model in terms of paying your providers on a per visit basis. In that case, you can justify the lower payers as long as you set it up appropriately.

As long as you don’t go below your incremental cost per hour.

Once you know your incremental cost and you know what you can charge and you can pay them, then you know where your limits are as you negotiate. The variable cost model is super cool. I want to do an episode about it. It gives me an idea. The incremental is five years and you wouldn’t get rid of those lower payers in that situation. The other thing being if you’re going to stay with a fixed cost model and you’re going to have PTs that are on salary, then you are considering possibly losing a percentage of patients and revenue and decrease your cashflow.

You better have plans in place to make up for the contract that those patients that you’re losing. Simply do it for the sake of doing it because it doesn’t cover my “expensive.” To speak PT owner language, you’re losing money like you’re showing. If you do get rid of that 10% and are able and have done certain marketing strategies or maybe open up a greater number of appointments to patients whose insurance pay more, you better have that strategy in place to make up for those lower payers that you might eliminate.

Nathan, you’re right and we’ll go to that. That’s the next case where you don’t have excess capacity. When you have excess capacity, it’s useful to know at what point you’re willing to take revenue down to. Obviously, you don’t even want to get probably less than $5 per patient visit. There is some minimum that you’re going to say, “No, I’m not going to take less than $50 because it’s costing me $45.”

By the way, consumer goods companies, Procter and Gamble and Colgate do a form of this when they’re selling. For example, P&G selling, I think Tide is one of their brands. The everyday price you go into the store, you’d pay this price, but then all the time they have these promotions ongoing. Those promotions are always relative to their profit. That’s eating their profit, but they’re still making decent money. They’re using promotions to gather more customers and do more incremental business because another $10 of Tide, even if it was discounted 50%, still nets them another $5 on that product.

They’re not going to go below their cost of goods, which is what we’re talking here. What’s the cost of providing this function of treating a patient? In the industrial world, they’re not going to go under their cost of goods, but every incremental dollar they can get above that, they’re going to take. In the PT world, these various providers are similar to what the consumer goods companies are also dealing with.

If a PT owner maybe doesn’t have a lot of experience with looking at a profit loss statement, they could get to some of these numbers by using the cost of goods sold line on their QuickBooks.

Maybe. I didn’t think there was much of a cost of goods line. I thought they dropped down.

Maybe that’s my bookkeeper. My bookkeeper does that.

They do that. I didn’t realize. For example, a lot of companies that provide services don’t truly have a cost of goods. It’s not typical, but I’m not saying they don’t have it.

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That’s how my bookkeeper set it up. I know that my salaries are up there and the other stuff is below.

I think the key thing that every PT owner can do between his or her account is to say, “What are my labor costs, just purely my PTs and PTAs to service a patient? What is the FICA, SUTA cost to see a patient too that I can add into that?” That, any owner could do or could have their accountant do. Now let’s talk to the actual example, which makes a big difference. That is when you have no excess capacity.

You are turning patients away or you’re booking them way out. You have $60 patients that you could get rid of and you could substitute $70, $80, $90, $100 patients. If you’re in this situation, it’s a great situation. What you have to be careful about is nobody easily cuts off customers. The insurance companies, you may have many years of experience, it might be a few years, but you were always very careful as business people to cut off customers. It’s not a smart thing generally to cut customers off. It can be but it’s generally not. How do you handle this situation?

The first thing you can do, we discussed this a bit in our meeting, Nathan. If you have multiple clinics, it’s likely that you have a clinic or other clinics that don’t have access or have excess capacity. You may have a couple that are loaded. I’m sure those clinic owners have said, “If I could move some of my $60 patients overdose other clinics or, for that matter, any of my patients. I would increase my cashflow.” The first angle on that is to try and move your $60 and/or other patients to these other clinics.

Free up as much capacity as you can in this clinic where you’ve got constraints. By the way, I’m talking about strategic moves. Not what I call operational strategic moves, where you could expand hours. Maybe you can’t bring in more PT because you don’t have enough beds but you could expand hours. There are things that you might do. The second thing that I would say is, again, because you don’t necessarily want to fire a customer. You never know when the economic situation might change and you might find, “I wish I had those $60 customers back.”

The next strategy is to push off the appointment. Say, “I can’t see you in this clinic for six weeks, but I could see you over at clinic X in two days.” That’s another angle. You might have a series of those customers if they can’t make it to the other clinic because it’s out of the way for them. Drift off to other PT clinics. That’s probably fine because what you’re going to do is you’re going to now bring in other patients and you’re going to control this process yourself if you’re giving them timelines that are far enough out there. You can control this process so that you continue to be at full capacity.

What you’ll do then is you’ll fill it up then with people that the average revenue now $82 once you take out the $60 customers or take out a portion of them. In all cases, you’re going to make $22 more per patient you’ve seen in this clinic times a thousand patient visits. That’s $22,000 more than you’re going to put in your bottom line. $40,000 more in cash, but the best of all worlds is if you can swing one of the patients from this clinic with no capacity over to a clinic with capacity because now you pick up the entire $82. If you did that on a thousand patients, that’s $80. That’s big money.

That’s four times what you’re making here. Now, once you start moving, let’s say, a combination of moving some of these patients or if you’re a solo clinic, you don’t have that capability. Let’s say you start by giving four and six weeks. You’re starting to continue to drive your average revenue. Your patient costs incrementally are staying the same. No change there, then you might eventually get yourself down to where the $60 customers. Maybe representing 1% or 2% of your patients. It’s a very different situation where you might say, “I need to send a message to these providers or at least one of them that your number is too low for me. I’d like to service your patients, but I can’t. Not at these costs.”

As you said, you never want to turn away customers, so the messaging has to be good if you’re going to, number one, restrict. What I hear in some circles is maybe we restrict the flow of those lower payer, insurance patients so that we only give one or two new patients slots per week instead of having five or six available to them during the week. They don’t come in as we spread those out. Maybe there’s a two or three-week waiting list to get in for their appointments compared to other insurance payer appointments.

I don’t know if you can do that or not. You do see some doctor’s offices that will temporarily not accept new patients. Obviously, there’s something to it, but the messaging around that has to be super clear and understandable. You’re going to offend a couple of people here and there as you do that, but it is something that you do have to deal with and when you’re out at capacity like you are.

In the law of supply and demand, you made a very interesting comment when you said that the average revenue per patient had not changed in, did you say 10 years, 15 years?

Twenty years or more.

That means that PTs and PT clinics are being set up that are putting pressure, allowing insurance companies not to increase pricing. Allows them to keep their pricing static because there apparently are enough PTs out there that they’re going to take the business at $68.

You’re right. That’s what I’m hearing from that because, in the world of economics, you’re pushing away patients to $60 because you’re servicing the others. At some point, some clinics are going to say, “Nobody can serve us all these $60 customers. You’re going to have to pay higher in order to service.” The insurance providers are not going to find the people to service them. Apparently, they are currently.

That’s the conundrum that, as an industry, we’ve gotten ourselves into. I can assure you 99.9% of the owners haven’t taken on these contracts, having gone through the numbers like you’re recommending. They’re not taking them because they figured out the members and they can still make a profit with appropriate cashflow according to the fixed costs expenses. They’re simply taking it because that’s what everyone else is doing.

Look it, in that model and I’m going through the business stuff that I’ve done over my career. Don’t think you’re going to be able to change. I’m not talking about an excess capacity now or any of that. I’m simply stating if you think your average payment’s going to be $68 and you have capacity and you’re working to get more patients, it’s all about productivity in terms of how efficiently do I run my operation and how can I reduce overhead costs. Your incremental costs of seeing the patient, you want to be as efficient as you can with those, but that’s tough.

Other than moving to a variable model where you now set in place a set of other drivers, which can help you drive more patient throughput for various reasons. Including the fact that the PTs and the PTAS are highly incentivized in order to make sure all of those patients show up every day that they’ve got scheduled and that they don’t lose any of them. They’re willing to work more hours than normal, all of those things.

That’s the tough part nowadays because there’s a huge demand speaking of supply and demand. There’s a huge demand for physical therapists. You’re seeing new grads out of PT school who were getting $55,000, $65,000. Maybe just under $70,000 per year in salary are now asking for $75,000, $80,000. Sometimes $85,000 and above. That fixed price model or fixed cost model is starting to squeeze owners. They’re saying, “I need a therapist, but I don’t need a therapist at that cost.”

I think we’re seeing in the industry that there’s one group in particular named OnusOne. Other owners are presenting and considering the variable cost model because now the therapist says, “Maybe I can pay you $90,000 a year, as long as you share in the risk, yet the patients don’t show up. I can pay you more if that’s the case, but on the fixed cost model, the squeeze is coming hard and fast.”

As a note, Nathan. If you’re seeing a trend of higher compensation for your PTs and PTAs, that’s going to bleed through both models. The variable model is going to be more expensive too. The variable model may be more efficient ultimately for getting your revenues, your total revenues generated, filling excess capacity, whatever, but both models are going to increase. It truly becomes a game of driving down overhead costs, keeping your operation hyper-efficient. That’s the only place you can go anymore once you have filled capacity, with the exception of then maybe starting to limit the $60 customer patients. That’s the next place.

I think the owners are drawn. The therapists who are on salary aren’t necessarily drawn to it, but the owners are drawn to the variable cost model situation where they pay their providers per patient because cancellations are a real issue. Patients falling off and not completing their full plans of care is a real issue. When they get them on that variable cost model, they are incentivized to share some skin in the game and work harder to keep that patient in, not cancel, and to see more patients. Maybe even take a little step into the marketing direction to support there. You’re starting to see a little bit more of that.

The most driven PTs will be those wanting to be in a variable model because they know they can make more money in a variable model than in a fixed model. That’s where they’re going to want to go. Those people are also the most incentivized to drive business for the owner. They’re the ones that are most interested if there’s profit sharing. All of those things trigger those individuals. It goes beyond that. It’s very small, subtle things. Even when they’re treating a patient, it’s not that a normal PT clinic doesn’t do all of these things, but these little things that you might do with this patient, even to the point of, “What improvement are you seeing?”

It’s not that you wouldn’t normally do that, but when the person says, “I feel like I’m making progress here.” The variable PT, the incentivized one, is going to say, “That’s why you need to be here twice a week. I noticed you were only here last week once. We need you in here this Thursday. Thursday, I need to see you.” Those people will drop all those little hints and pushing along. “Thursday morning, I’ll call you. Make sure you come.”

You are starting to see more of that. The hard part is the personality of most physical therapists is not a “driven personality,” but more of a caring, compassionate personality. They prefer the security of the fixed salary.

Most Americans do. Even you take a look at salespeople. There are those maybe 20% to 30% of them that are purely on commissions and the rest have some base that’s pretty significant. Maybe it’s only 5%, 10% that are pure commissions, but those pure commission ones are driven. They are the driven people. In a variable model, those are the PTs you want.

I have one more. This was the question, the $70 visit. You have no excess capacity. If you’ve taken care of your $60 patients, then you can start thinking about your $70 per visit patients. It’s quite unlikely that you could take him down, but you walk through the same set of strategies over time if you’re that fortunate. In conclusion, as you debate what to do about your low-paying customers, make sure you’re thinking about incremental patient visit costs. Not your average patient visit cost in order to make good decisions.

I love how you brought it up and how specific you got. If someone wanted to do this and break this down, maybe they could figure it out themselves. The beauty that Andy has with you is that he can confer with you and you can teach him these things. Would any CPA be able and capable of showing a PT owner these same things, but their incremental cost is per visit?

I think if the PT clinic owner went to their CPA or their accountant and said, “Tell me what is my cash cost for having my PT assistants treat patients, including the taxes I have to pay for that?” That would be the one question I’d ask. They should be able to do that. The accountants and CPAs are trained to put together historical data. In that vein, they should be able to do that, but they don’t think about the analytical side.

It’s a game of driving down overhead costs and keeping your operation hyper-efficient.
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Some of them do, but generally, that’s not the way they’re built. I was an analyst. I looked forward and thought about how these numbers would change the P&L looking forward. Not what the historical. I looked at historical P&L, but that wasn’t as important to me. CPAs aren’t trained that way, but they certainly could provide you with that information.

Speaking of that, I’m sure if they didn’t have any other sources or resources, you could ask your CPA to, number one, figure out the incremental cost per visit but also do maybe some performance based on what happened like you showed us. What happens if I lose 5% of my patient load because I dropped this insurance? Not to say that’s the determining factor. Like I said, maybe you have some ways of making up that 5% drop, but what does that look like? Let’s start building out some performance. I’m sure you’d recommend that owners talk to their CPAs or bookkeepers about that as well.

Yes, the CPA, bookkeeper and accountants certainly could do a simple pro forma without getting too detailed. Where people get buried, including probably some accountants, is they lose sight. The average cost is the only thing they might think about. They don’t think of what’s the true cost to very specifically see this patient. They get buried in average costs.

Only the salary. The salary in Texas.

Benefits to the extent that they’re being paid.

Vacation times and medical premiums.

Medical, 401(k), any of that.

All that stuff included.

That’s a true cost to see that patient. It’s all of the PT/PTA stuff. The rest of it is like, ignore that. That’s overhead for this conversation. You probably don’t do this. If you have excess capacity, you don’t usually make this decision. Unless you’re under your incremental costs, then that’s a simple decision. You’re destroying value at that.

I think that’s very possible. When you consider benefits all included, the incremental cost if you have a $48 contract, it’s hard nowadays to see a patient under the cost of $48 per visit.

Based upon what I know, you could be correct. I don’t know across the nation. Higher cost markets, obviously, if you’re New York, LA, Chicago, those are expensive markets. You get outside of those markets into the countryside, the smaller cities and towns, it can be very much different.

A good exercise nonetheless. Is there anything else you want to share with us, Michael, before we take off?

I thank you for this time and wish every clinic owner the best as they think through these issues to remain successful financially.

As a consultant, are you willing to consult with PT owners regarding some of these things?

I would be willing if a PT owner wanted to talk with me. I would be willing to have a quick conversation. I don’t want to make a business of this, but I’m happy to say this. That’s not my intent. I’m happy to have a conversation with a PT owner, but I don’t need a thousand of them calling me.

I don’t think I’m that popular with the show.

You never know.

Thanks again for your time, Michael. I appreciate it.

You’re most welcome, Nathan.

His next position as Strategic Planning Manager for the US Agricultural Division brought him to Greensboro, NC and was followed by an Associate Product Manager Position responsible for selected crop protection products. At the merger of Ciba and Sandoz to form Novartis Kelly moved into the Animal Health Business ultimately becoming the North American CFO and VP and afterwards Global Novartis Animal Health Head of Manufacturing Finance. Michael joined Piedmont Animal Health and served various roles including CFO, COO and President.

Kelly is currently Chairman of the “NC Biotech Triad Advisory Committee” and is also Chairman of the non-profit Professionals in Transition. He married Donna prior to Business School and has two children. Given Donna and Michael’s Animal Health background it is not surprising that he and Donna also have two dogs, two cats and a horse.

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