Warren Buffet, the ‘Oracle of Omaha”, is a mega celebrity in my home state of Nebraska. His reputation for value investing has reached mythical proportions.
Investopedia stated in a 2015 article that $8,175 invested in Berkshire Hathaway in 1990 was worth more the $165,000 by September 2013 as compared to $42,000 in the S&P 500. Needless to say, his value investment philosophy has made investors in his company a lot of money.
Warren Buffet is known worldwide for being a genius at value investing. Value investors buy securities that are currently undervalued by the market based on their intrinsic worth. Investopedia goes on to say “Buffet chooses stocks solely based on their overall potential as a company…Buffet seeks not capital gains but ownership in quality companies.”
Therapists regardless of their employment situation can learn a lesson or two from Mr. Buffet on value investing. All therapists need to take ownership of their own value regardless of their employment situation. You can do this by understanding patient’s hierarchy of values and a few simple business fundamentals.
Value vs. Cost of Care
When patients evaluate different healthcare services, like physical therapy, chiropractic or massage, they weigh the perceived value they’ll receive against the cost of care.
Declining reimbursements have led some providers to focus on generating revenue by seeing more patients. The easiest way to keep ahead of rising overhead is to decrease treatment times and utilize assistants and techs to deliver care.
However, there comes a point where consumers perceived value of the service diminishes. How many times have you heard patients complain when they only got 3-5 minutes of the physician’s time? In the consumer’s eyes, the provider’s service wasn’t worth their exchange of time, money and energy.
What patients value can be much more challenging to pin down than the charge per visit. Value is often in the eye of the beholder. However, rigorous research into understanding what consumers value can be used to compete by offering an exceptional patient experience.
30 Elements of Value
Eric Almquist and researchers at Bain & Company have identified ’30 Elements of Value‘. They categorize these elements into four groups resembling Maslow’s Hierarchy of Needs. You might find them useful as you think about the nature of the value you offer. The authors have created an extremely effective visualization of the 30 Elements of Value. Click on the link to get a quick animated overview of their findings.
Healthcare services like physical therapy deliver fundamental elements of value that relate to four kinds of needs:
3. Life Changing
4. Social Impact
Three decades of research has found in general, the more elements provided, the greater perceived value and the higher the company’s revenues. Similar to Maslow’s pyramid of needs the four categories of value have been placed in an ascending order of impact.
In your ‘quest for value,’ you might find their description of your patients needs helpful in differentiating yourself from other practices. I think we all agree there is no substitute for quality care and helping patients get better. All things being equal, making value a priority in a couple of key elements can be a great growth strategy.
To get a clearer picture of your value, while looking at the 30 Elements of Value pyramid, thoughtfully write down your answers to these questions:
Functional- What do we help people do?
Emotional- How does it make people feel?
Life Changing- How does it change people’s lives?
Social Impact- What value to we add to society?
Most of these elements have been around for a long time even though their presentation may have changed over the years. The success of your practice may depend upon your ability to meet your patients’ needs in the higher value elements. Let’s take a look at the mindset you might need to adopt to add elements to your existing services.
What’s Wrong With Functional Improvement?
In physical therapy, there is an emphasis on creating and measuring functional improvement in our patients’ lives. Somehow, it’s evolved into the default standard of measurement of value. It’s assumed, if we document functional improvement then we have provided value and proven the worth of our services.
Unfortunately, this diminishes the emotional and life changing elements of value that often are a part of patients therapeutic experience. Have we relinquished to insurance companies the measuring stick of our quality to our own demise? Are professions that emphasize the elements at the top of the pyramid more successful than ones that focus solely on functional elements alone?
Ultimately it’s our patients that determine the value of the care they receive. We shouldn’t allow insurance companies to pressure us into indiscriminately seeing more patients per hour. Instead, we need to develop clinic cultures where the emotional and life changing benefits of your care are delivered and promoted.
Forward thinking clinics have chosen to navigate the upheaval in healthcare by offering high-quality services that are not capped by insurance companies. Setting yourself apart from the competition by providing “better” care is not enough. Better value is proven through tangible results.
Value-added services must prove their effectiveness by increasing patient satisfaction, loyalty and revenues. The diagram below illustrates examples of successful companies that have delivered elements of value that may help you picture what value might look like for your practice.
Value Business Model
This brings us back to Warren Buffet. When Buffett invests in a company, he really isn’t distracted with the activity of the stock market. He’s concerned if the company possess intrinsic worth that can make the company money. Perhaps we can learn a lesson about value investing that can translate into physical therapy.
Like the stock market, much of the turbulence in today’s healthcare system is caused by factors beyond your control: sweeping changes with healthcare reform, the federal deficit, intensifying competition and so on.
Because businesses can’t control their environment, therapists in private practices must adapt their business models or create new ones to remain competitive.
A business model is simply the means by which an organization financially sustains its operation.
Almost all organizations and individuals need a viable business model. Viable means more cash comes in than goes out. At the very least it must have as much cash coming in as going out(breaking even).
The cash based practice model is a new business model that is gaining momentum and causing disruption in the private practice realm. A therapist or practice that wants to operate outside the health insurance system steps directly into the healthcare marketplace.
Consumers are the reason for a business’s existence. No organization survives for very long without paying customers. Value is the main reason that consumers select one business over another.
The ability to provide exceptional value is a key reason why one practice thrives and another barely survives.
Many articles and books have been written about Buffett’s methodology. Here we look at a few issues to consider when you are thinking about the value of the services you provide regardless of how you get paid.
How To Figure Out Your Value
Most therapists struggle to put a price tag on what they do. You might not be involved in the financial operations of the clinic where you work. I thought it might be helpful to cover a few business basics of how to put a number on your services.
DEFINE YOUR VALUE
First, think of the value of the benefits created by your “package” of services and products. Consumers often select providers on benefits received such as saves time, therapeutic value, anxiety relief, and risk reduction.
A clear definition of who you help (ideal clients) and how you help (value provided) is central to defining your value-based business model. A good way to define your value is to ask yourself several fundamental questions:
“What outcome is the consumer paying to achieve?”
“What benefits does the consumer gain as a result of my service?”
For example, the value therapists provide is not a manual technique or evidence-based exercise program per se. The 30 Elements of Value can provide a framework to evaluate the unique combination of needs you address.
For example, when a patient says her therapist “really good”, her valuation may be based upon some combination of functional elements such as avoids hassles, quality, informs and connects.
Think about the value you provide. Is there an emotional or life-changing element you can strengthen.
- How can you meet an affiliation and belonging need?
- How can you provide more convenient access?
- Can you offer wellness services?
- How can you make therapy more fun and entertaining for patients and staff?
DETERMINE YOUR VALUE
The next step to implement a value-based practice model is to calculate how much to charge for your services. Your business value is determined by the people who are willing to pay for it. The market gives brutally honest feedback on how much they care and what they will pay.
Do you feel uncomfortable when someone asks you how much you charge? They are aware of the cost of a professional education and have confidence in their clinical skills but are unskilled at how much they should charge for their services.
To ease their discomfort some therapists just copy what others are charging without calculating their costs and their revenue goals. This can lead to confusion, tight profit margins that often leads resorting to squeezing patients into a busy schedule.
KEY PRINCIPLES IN DETERMINING YOUR FEES
- You’re Unique. Only you can offer you. People will buy the unique combination of who you are and how you help
- Work with ideal clients who already value what you do
- People rarely purchase professional services solely on price
- Consider the total value of benefits your client receives: physical, emotional, intellectual, social and financial
KEY MONEY TERMS FOR AN ONE PERSON BUSINESS
Revenues (Sales)- Money coming in
Expenses (Costs)- Money going out
Earnings (Profit)- Money left over
Break Even- Money coming in equals money coming in, no money left over
Example- Salary versus take home pay minus living expenses equals savings “profit”
METHODS TO CALCULATE FEES
Cost Per Visit
Estimated Yearly Expenses-
Add Estimated Salary-
Divide by the number of Yearly Visits-
Cost Per Visit-
Start Up Example: Most solo cash practices treat 5 to 6 patients per day. Consider 230 working days per year. Multiply 6 patients a day by 230 to get 1,380 visits per year. Divide 1,380 by your total estimated expenses for the year. Most likely in the $50 per visit range.
Double your cost per visit amount for a 50% profit margin, $100 to $150 hourly fee.
MINIMAL VIABLE INCOME
When starting a practice from scratch accurate projections are difficult because you don’t know your actual expenses. Nonetheless, you can begin with the minimum income you need to support yourself and work your way backwards. The minimal viable income is one method to calculate the number of visits you’ll need to reach your minimum financial goals.
Assume $48,000 is enough to support one person
Assume $100/visit as an industry average
Divide monthly salary $4,000 by 100 = 40 billable hours per month
A provider would need to bill 10 hours per week to earn a gross income of $48,000
per year before taxes and expenses.
$__________ Your Minimal Viable Income
$__________ Your Fee per Visit
$__________ Your Monthly Billable Hours Needed
$__________ Your Weekly Billable Hours Needed
PRIVATE PRACTICE TARGET SALARY
Creating and managing your own private practice involves innovation, clinical expertise, risk and a lot of hard work. It is no surprise that the market rewards entrepreneurs willing to take the leap into private ownership with the highest salaries.
One method of calculating your hourly fee starts with the industry average for therapists in private practice and work your way backward to the hourly fee you need to produce that income level.
Target Annual Salary- $120,000
Work days per year- 220 days
“Work days” available for billable hours- 154 days/yr (Accounts for vacation, sick leave, continuing education, administrative and marketing etc.)
Appointment slots per day– 6 hours
Multiply 154 days by 6 hrs/day = 750 billable hrs/yr
Divide $120,000 by 750 = $160/hour.
$__________ Your Target Income
___________ Your Monthly Billable Hours Per Year
___________ Divide Your Target Salary by your billable hrs/yr
$__________ Your Hourly Fee
As you have already noticed, there aren’t many Warren Buffetts in the world. He is one of the richest people in the world with a net worth over $60 billion.Yet Buffet remains a practical, down-to-earth, midwest bargain hunter who’s done his homework and knows value when the opportunity presents itself.
He doesn’t drive a fancy car or live in a huge palace. He’s found a formula that works for him and has stayed with it despite several tumultuous times in the stock market. He’s an ordinary man who has done extraordinary things.
Be a value investor like Buffet. Invest in your own intrinsic worth even when you are undervalued by the current market.
Take ownership of your earning potential and the tremendous value you add to your patients’ lives.
Choose one of the 30 Elements of Value, share how you’re going to develop it into a strength in the comment section or on social media?
As therapists, we have tremendous opportunity to use our abilities, education, and expertise to enhance client’s lives. What a privilege? If you are in the therapy business to serve people, then my new book On Fire: Ignite Your Passion with a Cash Therapy Practice might help you. The healthcare industry has undergone so many changes lately and many therapists are overwhelmed, overworked and confused on where to turn to for help in the battle.
On Fire takes a close look at innovative therapists who are using alternative ways to deliver high-value care to their patients. Cash therapy services have emerged as a viable alternative to accepting business as usual.
If you are intrigued by the attention that cash-based practices are attracting On Fire is a great primer to help you get up to speed on the key issues and how if might impact your practice. The book is available on Amazon. If you are interested in getting your own copy join my email list and I’ll keep you up to date on the special pre-order bonuses I’m giving away.
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