Mastering DPC Finance: Key Metrics And Management Tactics For Practice Growth

Direct Care has emerged as a transformative model aimed at simplifying how care is delivered and paid for. By eliminating the middleman—mainly insurance companies—Direct Primary Care or Direct Specialty Care allow you to focus directly on patient care without the bureaucratic overhead. 

However, navigating the financial aspects of such a practice can be challenging without the appropriate strategies and insights. Stay tuned as we delve into DPC Finance.

What is DPC Finance?

DPC finance refers to the financial management and strategies specifically tailored to Direct Primary Care (DPC) practices. It encompasses all aspects of financial planning in healthcare, management, and operations within such practices, to ensure the practice's sustainability and growth.

Why Is It Important to Talk About DPC Finance?

Here are some key reasons:

Sustainability of the Practice 

Effective financial management is crucial for the longevity of any business, including DPC practices. Discussing DPC finance helps you to understand how to maintain a healthy cash flow and profitability without the complexities of insurance-based billing systems.

Operational Efficiency

With a strong grasp of finance, DPC providers can optimize operational costs and enhance efficiency. This includes smart spending on clinical supplies, judicious hiring, and potentially expanding service offerings.

Affordability and Accessibility

One of the core values of DPC is to offer more personalized and accessible healthcare at a predictable cost. Proper financial strategies ensure that practices can continue to offer affordable services without compromising the quality of care.

Adaptability to Market Changes

The healthcare sector is dynamic, with regulatory, economic, and technological changes shaping the landscape. DPC practices must be financially agile to adapt to these changes while continuing to thrive.

Insights and Strategies for DPC Finance with Nick Shiver, Financial Advisor

This article brings a conversation with Nick Shiver, Director of Wealth Planning at Fidelis Wealth Planning, where we explore key DPC financial strategies and insights for practices. In this interview, Nick will shed light on the crucial financial health indicators that DPCs should monitor to ensure they meet their operational efficiency goals. 

We'll delve into the significance of maintaining a healthy profit margin, managing expenses wisely, and the potential benefits of diversifying services. As healthcare continues to evolve, understanding these financial dynamics is essential for any practice aiming for long-term success and sustainability. 

Join us as we discuss how to navigate the financial challenges of starting and maintaining a DPC, ensuring it thrives in various economic conditions.

Let's start with the first financial milestone of every DPC practice: achieving the break-even point. What advice could you give for reaching it?

I thought about the importance of a good, healthy break-even analysis. It's incredibly helpful to know how long it will take, or what the critical number is, for your costs to equal your revenue. 

A good measure is based on estimating all the necessary costs, distinguishing between fixed and variable costs, and determining at what patient count your revenue will match your expenses. 

This doesn't happen overnight, but reaching that break-even point is a milestone worth celebrating. It’s motivating to have a clear idea of the number of patients needed to break even when starting, and at what patient count you can begin to expand your services.

What are the essential financial health indicators that DPC practices should monitor regularly to meet their operational efficiency objectives?

I believe the beauty of Direct Primary Care is that it allows every doctor to have distinct goals regarding their desired manner in which they wish to serve and grow. 

There are three types of financial ratios worth considering:

Liquidity Ratio: This well-known ratio focuses on liquidity at hand—specifically, the ability to service short-term debt. The Current Ratio, which compares current assets to current liabilities, is a primary example. A higher ratio is preferable, indicating a substantial amount of assets relative to liabilities. This is crucial for managing short-term debts swiftly, especially since unexpected needs can arise within a short timeframe.

Solvency Ratio: This ratio measures a company's ability to meet its long-term debts and financial obligations, reflecting long-term stability and creditworthiness. It includes metrics like the Debt to Asset Ratio, which compares total long-term debt to total assets. A lower ratio is ideal, suggesting that the company is not excessively reliant on debt to finance its assets. Solvency ratios are critical for banks when evaluating loan applications, as they indicate the financial leverage and health of a company over the longer term.

Profitability Ratio: Essential for evaluating earnings relative to costs, this category includes the Net Profit Margin, which measures how much of each dollar earned is converted into profit by comparing net income to revenue. For a DPC, especially in its early or growth phases, different profit margins might be targeted depending on the practice's size and the doctor's career stage.

Assessing these ratios can provide valuable insights into a DPC’s financial health, from managing debts to maximizing profitability based on the specific preferences, location, and style of the practice.

What advice would you give to physicians to better manage their expenses, such as payroll, job supplies, rent, and office supplies? 

There are essential standard supplies needed to practice medicine, and these inevitably cost money. However, there are smart and savvy ways to save in these areas, similar to any kind of bargain hunting. 

For instance, I know of a physician in town whose practice, though not in Direct Primary Care, was closing down. Other local doctors heard about it and found that this retiring physician was giving away some unused equipment and various other items. Such opportunities can significantly reduce expenses when leveraged strategically over time.

For larger needs, it's worthwhile to explore deals within your network before resorting to purchasing at full price from suppliers. Additionally, there are groups of local DPCs who sometimes order supplies in bulk together, sharing costs and resources. This is particularly useful when it's challenging to utilize certain medical supplies before they expire.

Real estate is another major financial consideration. More space typically means higher expenses. I've heard of doctors starting in minimal space, like a small office or even their homes, to keep overhead low while building their practice. If you have excess space, consider renting it out to a chiropractor, physical therapist, or mental health specialist. This can be a temporary solution to manage costs as you grow.

Overall, there are many ways to control spending through strategic planning and collaboration. While increasing revenue involves excellent patient care, effective marketing, and garnering referrals, managing expenses gives you more immediate control over your practice’s financial health.

What are some effective methods for physicians to pay themselves?

Another key point I always like to discuss is how physicians pay themselves. There are several methods, whether you choose to draw a regular salary, work on a draw basis, or delay compensation until the practice is more financially stable. It’s a significant milestone in the financial journey of a new practice to reach the point where you can consistently cover your personal expenses. 

There's nothing wrong with taking a draw, but having a structured payment system that integrates your salary with the business operations makes everything cleaner for the long term. This clarity ensures that as a resource to the business, your compensation is factored into the costs properly.

Setting personal compensation goals can also be motivating. For instance, deciding that once you reach a certain number of patients, you’ll increase your pay. Just as a traditional employer might incentivize strong performance, you can do the same for yourself. We often respond well to such incentives, even if we're the ones setting them. Overall, managing physician pay effectively is crucial for the sustainable growth of a practice.

Do you believe that some physicians might have costs that go unnoticed? 

We see many practices using various solutions and subscribing to numerous services to support their operations. Additionally, transaction fees also play a role, and can significantly impact profitability. I wouldn't underestimate the impact of any minor expenses—they can add up quickly. 

It’s always possible to make some kind of projection, even with rough estimates, to determine potential costs. For instance, if you're considering software that charges an additional fee per patient, it’s vital to calculate the cost per person. If your practice is aiming to grow to, say, 500 patients, you might not worry at first; you just want the technology to function and to get started. However, it's crucial to consider whether you'll be comfortable with the costs when your practice is at full capacity. I recommend reviewing all the fine print concerning costs for any ongoing DPC EMR before you commit, to avoid any surprises later on.

Take your time, make detailed projections about expected patient volumes, and evaluate how long you'll be using the EMR technology. Assess whether the ongoing costs will be manageable as your practice grows. Starting a business is a marathon, not a sprint. By anticipating these expenses early on, you can help ensure financial stability.

Turning now to the income side, how do you view the strategy of diversifying services, such as adding offerings like weight loss programs, labs, medications, imaging, and other procedures?

I like that idea. It really comes down to the physician's skills and the community's needs. For example, if DPC becomes extremely popular in a community and keeps the doors constantly revolving, a physician might not have the capacity to explore additional revenue streams. They might be so busy providing primary care that revenue isn't a concern. In such cases, sticking with primary care makes sense. However, for doctors with additional specialties or passions, incorporating these interests into their practice can be very fulfilling and potentially attract more patients if done well.

Additionally, it's important to consider local needs. If there’s a gap in services, such as easy access to imaging—which might be inconveniently located or hard to work with—offering these services in-house can be a strategic move. Ultimately, the decision to diversify depends on personal preference, market opportunities, and the existing workload. 

Expanding services might necessitate hiring additional staff for administrative support, which introduces new costs. So, physicians should reflect on what they enjoy doing, the opportunities in their market, and their capacity to manage additional responsibilities. These considerations will guide their decision on whether to diversify their practice.

What is the expected profit margin for a well-rounded DPC practice? 

I do like 25%. I think that's a strong number in business overall and could be considered the gold standard. I don't think doctors, especially those just starting out and gaining their footing, should beat themselves up if they aren't hitting a 25% margin right away. However, if we manage to control expenses and charge fair prices, that target should certainly be attainable.

Part of it also depends on whether we're calculating the 25% profit margin before or after paying ourselves. It's possible to do it either way. Regardless, it's crucial that physicians are compensated and not hesitant to pay themselves due to financial concerns.

Aiming for a 25% margin as the gold standard is a good goal. It provides assurance that you'll be sustainable through both up years and down years, allowing you to carry on. 

I like that 25% margin, but I'm not fixated on it, especially considering the flexibility of DPC and the variability of practices throughout the country.