“Concentration of Risk” is a banking term which designates the overall spread of a bank’s outstanding accounts over the number or variety of debtors to whom the bank has lent money. If the bank has $100mm in outstanding loans and a loan is for $1mm, then the risk concentration is 1%. This example indicates a relatively low concentration of risk.
This same doctrine can be used within an optometry practice. What is your Concentration of Risk?
On the surface, an optometry practice spread’s it’s risk over thousands of patients. A $1mm practice likely delivers about 2500 comprehensive eye exams per year. Thus, on average, no single patient represents more than .005% of the business. Even if you considered families as a single “customer”, the concentration of risk in an optometry practice is low. Or is it?
To assess your Concentration of Risk, you must first distinguish between patient and customer. Yes, you see thousands of patients per year. Thus, your concentration of patients is limited. But, in eyecare, patient is not always customer. Indeed, they are usually different. Consider that vision plans are customers while individual plan members are patients. When you look at your practice through this filter, it’s easy to see that your concentration can be very high. Indeed, in many states, vision plans represent most practice revenue and it’s common for a single vision plan to represent more than 50% of a practice’s patient volume.
The Concentration of Risk in an optometry practice is, therefore, very high.
As the CEO of your practice, the Concentration of Risk doctrine should be very important to you. Ask any business-person what they’d consider an acceptable concentration. My guess is that any number over ten percent (a single customer represents more than ten percent of your revenue) would be of concern.
Vision Plans represent deep discounting and, thus, anemic margins. Even worse, they represent a level of concentration that would not be acceptable to most businesses.