How Does VSP Affect Cost Of Goods Expense For ODs?

Dear Jerry,

I just read your blog regarding your suggestion that a dispensing OD should spend no more than 50% of his collected gross revenues on total staff expenses and Cost of Goods.

I get it. But, I have a question about my overhead structure. 60% of the patients I see have VSP and most of those are on a plan that does not allow me to supply the frames or do the lab work.

That got me thinking as my total COGS — which includes: contact lenses, frames and ophthalmic lenses — is only 23% of collected gross revenues. This seems to be much lower than the 30% number I see from Hayes Consulting, the AOA and the Ciba Vision Essilor MBA statistics.

I guess my COGS would be higher if I had more private pay patients and fewer people on VSP. Am I missing something here?

Benjamin Franks, OD, FAAO (name changed)

Dear Ben,

You are very astute to recognize a financial scenario not well understood by many practice owners.

Even though vision plans may pay you a discounted fee, good or bad, any plan that does not allow you to provide the eyewear to your patient will actually cause your COGS to decrease.

For an illustration of why, let's look at the practice of Dr. Seemore who had collected gross revenues of $800,000 in 2011.

Of that $800,000, she did $600,000 in private pay revenues and $200,000 in managed care revenues from plans that did not allow her to provide the eyewear.

That means her Cost Of Goods Sold on the private patients was $600,000 x 30% = $180,000. Her COGS on the vision plan patients was, of course, zero.

By comparison, if Dr. Seemore’s entire practice was private pay, her COGS would be $800,000 x 30% = $240,000.

But, because 25% of her practice revenues was from vision plans, her COGS was only $180,000 ÷ $800,000 = 22.5% of her collected gross revenue.

The 50% Rule Still Holds

That said, I still stand by my suggestion that any practice owner who wants to net 30% of gross collected revenues, pretty much the national average, needs to keep his combined total of staff expense and COGS at or under 50% of collected gross revenues. Here’s why:

100% collected gross revenues
- 50% staff expenses and COGS
- 20% for all other practice overhead
-----------------------
30% Net income

Let me know your thoughts.

Sincerely,

Jerry Hayes, OD

PS: Feel free to send any questions you have about creating goals to me for a completely private and confidential response. Click here to send me an e-mail.

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