All audiologists are faced with making decisions about offering specials, discounting hearing aids, matching competitor pricing, and whether or not to participate with various network contracts and third party payers that typically pay below most audiologists' usual and customary fees. Many think, "It is better to collect some money than no money," especially during slow times.

Is that a true assumption? Before participating in contracts that pay below a practice's breakeven fee or discounting services or products, a practice owner should consider the practice's financial needs, the result of discounting on the practice's image and the practice's ability to move forward after discounting. Otherwise, discounting activities can have a devastating result.

A practice's fee structure should be based on that practice's financial needs; the owner's needs, including desired compensation; the desired practice image, e.g., high-end versus discount; time and services included in the specific fee; and consideration for what the community will bear. From a financial perspective, discounting services or products can result in substantial lost dollars for the practice. When a business collects less money, it must reduce expenses and/or spend less time to maintain the hourly fees that are required to breakeven or generate a profit.

Too many look at discounting as a dollar loss off a gross charge rather than at its impact on the bottom line. For example: a gross charge of $500 offered with a 20 percent discount would yield $400 in collections with a $100 write-off, which does not appear too severe. However, discounting is much worse than it appears when you consider its impact on the net profit versus the gross charges.

According to Neil Gailmard of Optometric Management, "The discount should be applied directly to the net profit, not the gross revenue. After all, the usual costs of doing business still apply. If your usual net income is about 30 percent of gross revenue, then that $500 gross revenue transaction would typically produce a net profit of $150 after expenses. When you deduct the discount from this value, rightfully where it belongs, you are left with a measly $50!"¹Consider also: "You would have to see three patients like that one to equal the net profit from one usual and customary fee patient. If you dropped the discount program you could afford to lose two-thirds of the patient volume and still maintain the same net income. Lose only 50 percent of the patients and you're money ahead," according to Gailmard.¹His advice is certainly something to consider when deciding whether or not to participate in third party payer or network contracts that force discounting services and/or products, match a competitor's discount, or discount usual and customary fees for any reason. Unless you understand your practice's financial needs, including breakeven, profit needs and the overall impact that discounting has on net profit, you could find yourself working very long hours and very hard with little corresponding compensation or profit. The practice's profit and loss statement (P&L) paired with your hourly breakeven fee analysis should help when deciding whether or not you can afford to participate in specific plans based on specific reimbursement schedules or when considering a discount marketing promotion.

Discounting fees, matching competitor pricing or participating in network and third party contracts can be an easy way to attract more patients, but more patients does not always mean more profit. Developing other competitive advantages is likely a far more profitable approach to marketing and may be healthier for the practice. That is not to say that all discount programs or third party payers are bad or that you should opt out of participation with all of them; however, every audiologist should make the decision to participate or not with each individual program based on the underlying financial needs of the specific practice and the specific reimbursement guaranteed by the plan. And, always consider the impact of all discounting on net profit.

References

1. Gailmard, N. An Eye-Opener About Discounts. Optometric Management Tip 333, June 2008 . Accessed online at www.optometric.com.

Kathy Foltner, AuD, is CEO of AuDNet Inc. She also teaches courses in Practice Management and Basic Business at Rush University Medical Center and Salus University. Contact her at kfoltner@aud-net.com or 312-593-1787. Visit www.NowiHear.com or www.aud-net.com for more information.