The Profitability Element

Profit. Often during medical school and residency, this word was uttered with a sneer by my attending when I asked about the business side of healthcare. I believe I asked the questions that are never to be asked. Since operating a practice, I quickly discovered profit is necessary. In fact, profit is the most essential pieces of exemplary patient care, yet it often isn’t examined as carefully as it should be. Profit has a genuine purpose and one that goes beyond earning more money than you spend providing a service. As Peter Drucker claimed, profit is actually the cost of doing business.

What is Profit?

Profit is more than revenue in excess of expenses. It’s necessary for any organization to grow and expand. Keeping the doors open is also dependent upon profit. Whether your organization is a for-profit entity or non-profit endeavor, profitability is fundamental and required if you are to deliver exemplary patient care. Profitability provides more than mere money at the end of the day. It provides information on your activities and decisions, a source of future capital, and the ability to weather uncertainty.

Profit is essential because your organization will need those excess earnings to reinvest in the organization. There are four components of delivering exemplary patient care - people, productivity, performance, and profitability. Profitability allows you to support the continuing development and improvement of the other three components. Profits ensure you can cover your cost of staying in business. Any business that has been around for more than a decade is likely not the same as it once was. It had to change and improve. Profit provides the capital for hiring new people, purchasing better equipment and services.

1. Information Profit is the ultimate marker for the effectiveness of your decisions, processes, and activities. Profit measures the net effect of your business efforts. When you are evaluating the profitability of your firm, ask questions such as how can we be more profitable? Is our pricing scheme right?
2. Covers the Risk Premium Profit helps you cover the risk you face by staying in business. No matter what industry you are in, it will cost you to remain in the activities of your business. This “risk premium” really is the costs of replacing equipment that breaks and people that leave, overcome the obsolescence of what you’re doing and using today, account for and cope with the market risk, and help prepare you for the uncertainty of tomorrow. If you want to remain in business, then that means you use the profit to stay in business.
3. Capital for Future Investments Profit also helps generate the needed supply of future capital for innovation and expansion. New technology and equipment will be available, and your people will want to be compensated more.

Pull the Plug

Finally, let me share with you a piece of valuable information I learned a long time ago. Pull the plug on unprofitable businesses that don’t cover the cost to stay in business or generate enough capital for future growth. I’ve said if the service line doesn’t support your mission and purpose, don’t do it. But the other side f the coin is that if the service line doesn’t cover its costs, it ’s risk premium, pull the plug. Just because something supports your mission and purpose doesn’t mean that you must do it.