Don’t be late to the Third Party!
I might be dating myself a little, but I remember when third party payers promised that they would only “cover the necessities” and allow ECP’s to profit on the upgrades. But recently when I printed an authorization for a patient, eight pages of single spaced words in twelve-point font shot out of the computer at me! These eight pages outlined the price for every imaginable lens accessory from every possible manufacturer. And if you feel like your head is spinning searching for margins, you are not alone. But there are some basic tactics that will help.
The most basic type of insurance plan, are plans with retail allowances. These plans have been around the longest, but are rapidly disappearing. Even many wholesale based plans, have some retail based options such as lens material or coating upgrades.
These plans are simple because as you raise your retail, your margin increases in proportion.
Increasing Retail values may harm private pay customers.
Traditionally, the solution for these plans has been to increase Retail prices and offer a “prompt pay” discount to cash customers. Since most insurances do not pay promptly, there are usually no contract violations by offering this type of discount. However, some insurances may be getting wise to this plan and have begun faxing a “benefit credit card” to be processed in your terminal for immediate payment.
The more common type of insurance plan today consists of wholesale allowances for the eye wear options. These plans have made it increasingly difficult to find ways to increase margins. But there are a few ways to increase margins on these plans.
The customer experiences the same basic pricing from office to office, eliminating the need to do a price comparison. The sales team can use this to their advantage during price discussions.
Raising retail prices on most products may not directly influence margins or cover the cost of goods.
There are several ways to increase margins on these plans including acquiring vendor discounts, purchasing specific price points on frames, and adjusting retail prices. Bargaining for vendor discounts may at times be as simple as decreasing the number of vendors who share the dispensary, but determining which price points to purchase may be more challenging.
Often these plans have network laboratories and fixed lens reimbursements. Therefore the only remaining item which can be adjusted is the frame. But wholesale frame allowances have made this very complicated.
Purchasing profitable frames
When purchasing inventory, it is important to first understand the wholesale allowances of frames on the plans offered in your area. Many offices adopt a practice of only purchasing frames higher than the highest plan allowance. This is not ideal for every office because many customers are seeking more pricing options. I recommend taking the highest and lowest plans available that are most common in your area to consider for an assessment. A typical plan may have a $57 wholesale allowance, and another may have a $74 wholesale allowance.
The worst margin frame to purchase on a frame with a wholesale price of $57, is a frame purchased for $56 on most plans. Likewise, the worst frame to stock on a $74 wholesale plan, is a frame with a wholesale price of $73. These figures are what I call your office frame price “donut hole.” Frames in this example with a list price just below $56 and $73 will typically yield your least margin on average. The goal is to stock as few frames in this zone as possible regardless of markup or retail price. Make it clear to vendors that any frames in or below this range must be purchased at a massive discount. All frames under this amount should be from a Value vendor. This type of vendor offers product at massive discount from the list price. These frames, even though they may be covered, can yield greater margins than some “non-covered” frames. This provides a value to the practice and the patient. We used some typical plan metrics to compare various wholesale prices and plan allowances.
When preparing to meet with buyers or go to and expo, it is important to figure out your own donut hole. Remember that this is not an absolute “no buy zone”, but frames in this zone must have a guaranteed vendor discount to be profitable. Frames below your donut hole should be eliminated or purchased from a value vendor. Frames below the donut hole can yield higher profits than those just above the donut hole, if they are from a value company.
The last question I often receive as a former frame company representative is: “how do I ask my vendors for discounts?”
I remind the customer that the frame company gives discounts every day, but often the sales person may have to speak with his superior when increasing the discount of a current account. When the salesperson does this, they may need something to give to their superior. It could be something as simple as giving them a little more board space, or promising more volume. I usually explain it this way “We are looking to use your company for our fastest turning price points on one of our larger insurances. We would like to move out another line which is not working for us from your competitor and move your frames in, but we need a discount of at least 20-30%. Are you interested in working with us?” This partnership approach often works best.
Remember selling frames is not the goal, but selling frames at a profit.