Executive Summary
Independent optometry practices thrive on autonomy, efficient cost management, and maximizing revenue. Although certain buying groups market themselves as networks designed to provide operational support and cost savings, a closer examination of their fee structures and associated service models raises concerns. This white paper evaluates how a buying group model—particularly its 2.5% revenue-sharing fee on gross income, even for services outside its “cost-saving” umbrella, along with its lab work pricing and rebate structures—may ultimately erode profitability for successful practices.
Introduction
In today’s competitive optometry landscape, maintaining high margins and operational efficiency is paramount. Independent practices are continuously evaluating how network affiliations affect their bottom lines. Many buying groups promise benefits such as group purchasing power, marketing support, and access to network services. However, industry observers have raised concerns that the underlying financial model may not always work in favor of a successful, high-performing practice.
Buying Group Model: Revenue Sharing and Its Implications
Revenue Sharing on Gross Income
- Mechanism Overview:
This buying group model includes a fee structure that deducts 2.5% of gross revenue from services rendered. Notably, this fee is applied even on procedures that fall outside the direct scope of cost-saving initiatives—such as glaucoma exams and other diagnostic procedures. - Impact on Non-Core Services:
For example, consider a practice performing a glaucoma exam generating $200 in revenue. Despite the exam not directly benefiting from any negotiated cost savings, the fee still applies—resulting in a charge of $5 per exam. Every service contributes to an incremental reduction in net margins. - Profitability Erosion:
For a successful practice with a strong volume of diagnostic and ancillary services, even a seemingly modest fee of 2.5% can accumulate over time, diverting significant revenue that could otherwise be reinvested into patient care or growth.
Illustrative Examples: The Domino Effect of Hidden Costs
Example 1: The Box of Contacts Scenario
Consider the following scenario for a box of contacts:
- Wholesale Purchase: A box of contacts is purchased at a wholesale price of $100.
- Buying Group Discount: Through the negotiated deals offered by the buying group, the practice saves a nominal $5—effectively realizing a net savings of $4 after internal adjustments.
- Retail Sale: The box is then sold for $200.
- Fee Impact: A 2.5% fee on the $200 sale amounts to $5.
- Net Outcome:
- Savings benefit: $4
- Fee paid: $5
- Net Loss: $1 per sale
This example illustrates that even when a discount is secured on wholesale purchases, the revenue-sharing fee can completely offset, or even exceed, the benefit of the cost savings—resulting in a net loss on the transaction.
Example 2: High-Volume Diagnostic Services
- Scenario: A practice performs 100 glaucoma exams in a billing cycle, each generating $200 in revenue.
- Revenue Sharing Fee:
- Per exam fee: 2.5% of $200 = $5
- Total fee for 100 exams: 100 × $5 = $500
- Implication: Although $500 might appear manageable in isolation, for practices operating on thin margins or with high exam volumes, this recurring fee represents a substantial drain on profitability over time.
Example 3: Aggregated Impact on Ancillary Services
- Scenario: Consider a high-margin ancillary service such as a premium contact lens fitting or specialty eye exam:
- Revenue per service: $400
- Fee per service: 2.5% of $400 = $10
- Monthly Volume: If a practice conducts 200 such services in a month, the fee totals 200 × $10 = $2,000.
- Broader Impact: When combined with reduced savings on wholesale purchases and other non-service products, the cumulative effect of the fee across various revenue streams can significantly erode overall margins, leading to a substantial net loss.
Example 4: Lab Work Pricing Versus Market Rates
- Scenario:
- Market Rate: An independent practice might secure lab work at $80 per unit.
- Buying Group Pricing: Under the buying group model, lab work may be priced at a premium of $90 per unit.
- Rebate Structure: Rebates might return only 1–2% of the spend, translating to minimal recoupment relative to the increased cost.
- Fee Consideration: In addition to the higher lab work cost, if the practice generates additional revenue from services associated with lab work, the 2.5% fee further reduces net profitability.
- Overall Effect: The combination of higher lab work prices and a fee on gross revenue compounds the financial disadvantage, reducing the practice’s ability to negotiate better independent terms.
Lab Work Pricing and Rebate Structures
Lab Work Pricing
- Premium Pricing Model:
Many buying groups align with designated laboratory service providers where the pricing for lab work is set at a premium relative to open market rates. While negotiated rates may appear beneficial at first glance, practices often find that these rates are less competitive than what could be secured independently. - Cost Implications:
The premium pricing increases the cost base for essential lab services. When coupled with the revenue-sharing fee, practices face a dual impact that squeezes profit margins further.
Rebate Mechanisms
- Structure of Rebates:
Rebates under this model are typically structured to kick in only after meeting specific thresholds or volume commitments. Moreover, the percentage returned is often minimal. - Limited Financial Benefit:
For example, if a practice is subject to a premium pricing model on lab work and the rebates recover only 1–2% of the spend, the net effect is an increased overall expenditure compared to independently negotiated rates. When these small rebates are countered by the 2.5% fee on gross revenue, the financial impact becomes even more pronounced.
Comparative Analysis: Independent Practices Versus Buying Group Affiliation
- Autonomy and Flexibility:
Independent practices that manage their own purchasing agreements and service contracts often secure better terms by negotiating directly with suppliers and labs. This flexibility enables them to avoid the revenue-sharing fees imposed on non-network-specific services. - Opportunity Cost:
The fees deducted from gross revenue and the premium pricing on lab work represent opportunity costs—funds that could otherwise be reinvested into technology upgrades, patient care improvements, or expanding service offerings. For thriving practices, these costs translate into tangible reductions in available capital. - Risk vs. Reward:
Although buying groups may offer administrative and marketing benefits, the financial trade-off may not be justifiable for practices that already operate at high efficiency and profitability. The additional fees and less competitive lab pricing can dampen growth prospects over time.
Conclusion and Recommendations
Key Findings
- Revenue Sharing Drawbacks:
The model of applying a 2.5% fee on gross revenue—even for services that do not benefit from cost savings, such as glaucoma exams—directly impacts profitability. The illustrative examples demonstrate how even marginal fees can aggregate into significant financial losses across various service lines. - Lab Work and Rebate Limitations:
The buying group’s lab work pricing, set at a premium, combined with rebate structures that offer only minimal returns, further erodes cost efficiencies. These factors, when added to the revenue-sharing fee, cumulatively result in higher overall operating costs.
Recommendations
- Thorough Financial Analysis:
Practices considering buying group membership should conduct a detailed review of their revenue streams and service mixes. Understanding the specific impact of revenue-sharing fees on high-margin services is essential to making an informed decision. - Explore Alternative Arrangements:
Investigate independent purchasing agreements and alternative network models that might offer similar support without imposing fees on every revenue stream. Greater autonomy in negotiating lab work pricing and service contracts can lead to substantial cost savings. - Negotiation and Customization:
If choosing to join a buying group, practices should strive for contractual terms that provide transparency regarding fee structures and allow for exclusions or adjustments for services that do not directly benefit from network cost savings.
The Highland Optisupply Advantage: A Clear Path to True Independence
At Highland Optisupply, we understand that your hard-earned work should yield real, tangible profits—without hidden fees or convoluted revenue-sharing schemes. Unlike buying groups that scrape a percentage of your gross revenue, our approach is straightforward and transparent:
- No Membership Required:
Enjoy the best value, quality, speed, and customer service without the burden of membership fees or restrictive contracts. - Significant Cost Savings:
We cut most private pay lab bills in half, ensuring that you save on essential expenses rather than losing money on every transaction. - Transparency and Fairness:
We do not scrape your hard-earned revenue for our benefit. Our pricing is clear, with no hidden costs or game-playing tactics. - Empowering Independence:
We help independents stay independent by providing high-quality products and services on your terms, giving you full control over your practice’s profitability.
For independent practices looking for a true alternative to traditional buying groups, Highland Optisupply offers a compelling, financially sound solution that puts your practice first.
Email us at support@highlandoptisupply.com or call 989-303-1342 to learn how we can help you boost your practice with the best pricing, service, and quality in the industry.
