The future of psychedelic medicine depends on your financial health. Are you FIT?

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In other words, if lots of ketamine clinics and psilocybin service centers start to run out of money, critics may be right to question the viability of psychedelic therapy.

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Getting involved in your financial health

If you’re like most providers, you’d rather treat patients than analyze financial reports. So it’s generally a good idea to delegate technical routines like expense reviews and bank reconciliations to your bookkeeper or accountant. However, after freeing up your time on these tasks, you should get more—not less—involved with your practice’s financial health.

The good news is that you don’t need to become an expert in finance and accounting. Instead, taking a more active role in your finances means doing two things which can be performed by anyone running a medical practice:

• Know whether you’re Financially In Tune or FIT.
• Expect more from your bookkeeper and accountant.

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What it means to be FIT

Being FIT means your finances are in tune with your goals.

If you haven’t already, articulate a clear financial goal for your practice. Examples may include adding a new treatment room, offering a new service like Stellate Ganglion Block or SGB, or growing your emergency cash reserves.

With your goal in mind, now choose a few data points to grok. Good data points should 1) indicate whether you are financially in tune with your goal and 2) be straightforward to find, calculate, or estimate.

Here are five examples:

• How many paid appointments do I need to breakeven for the week/month?
• What are my largest addressable expenses?
• What is my forecasted net income before taxes?
• What is my gross margin?
• How will my patients react if I change my prices?

Next, enlist your bookkeeper, accountant, and technology guy for help. They can help you figure out how to generate and view your data points regularly like monthly or quarterly. Hopefully, they’ll also help you understand the underlying data sources, calculations, and any limitations that might arise from missing or outlier transactions. If your data points are complex or cannot be easily generated, they may be able to help you find alternatives.

Keep in mind that some data points, like breakeven appointments and forecasted net income before taxes, will require you to make and revise assumptions about the future. Others like price sensitivity, may require market research, analyzing your past transactions, and lots of intuition.

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A detailed exercise: Get FIT

Let’s say your financial goal is to purchase a larger space so that you can relocate your medical practice. Assuming you have been treating patients for over a year and have a basic bookkeeping system established, here’s a detailed look at each of the potential data points from above.

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1. Breakeven point for paid appointments

One of the earliest warning signs that something may need your attention is noticing an unexpected and sustained dip in phone call, email, and website activity. The next thing to watch is whether there are enough paid appointments scheduled (this week or this month) to cover your expenses over the same period. This is known as a breakeven point and is easy to recall anytime you’re reviewing your schedule.

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Why it’s helpful:

If I can’t stay busy enough to pay my current expenses, purchasing a larger space is moot.

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What you’ll need:

• A past date range (a year or more is ideal to account for seasonality) from which to calculate:
• The sum of expenses categorized into fixed and variable
• The # of paid appointments
• The appointment prices and discounts

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How to find it:

Breakeven number of paid appointments = fixed expenses ÷ (average price for paid appointments - variable expenses)

1. Determine your fixed expenses. These costs do not vary based on the number of appointments and include things like software subscriptions, rent, and your salary. Eg: $3,600 per week.
2. Determine your variable expenses. These costs do vary based on the number of appointments and include things like medical supplies. If you pay someone for sitting or psychotherapy, their costs may be variable if you pay them based on the number of appointments vs hourly or salaried. Eg: $200 per appointment.
3. Determine your average price for paid appointments. You can use a straight or weighted average if you charge different prices and/or offer discounts. Remember that weighted averages can be complicated to calculate so it may be better to estimate or use a simple average. Eg: $600 per appointment.

Using the formula above, your breakeven point is 9 which is equal to $3,600 ÷ ($600-$200). In other words, if each paid appointment generates $400, you need to book 9 of them a week in order to cover your $3,600 in weekly fixed expenses. If you book 10 or more paid appointments in a week, your savings will grow.

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2. Largest addressable expenses

Like entropy, expenses tend to grow. Software subscriptions, membership dues, and utilities cost more each year. However, it can literally pay to reinstate a promotional rate, renegotiate a contract, or inquire about less-costly alternatives. Research your largest expenses, then all you have to do is ask.

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Why it’s helpful:

What could I reduce or eliminate today to shorten the time it will take to save for a down payment; moving expenses; and new furniture, fixtures, and equipment?

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What you'll need:

• A past date range (a year or more is ideal to account for seasonality) from which to calculate:
• A list of all your expense accounts sorted from largest to smallest
• Transaction details for the five largest expense accounts: payees, dates, amounts, descriptions, and memos

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How to find it:

1. Starting with the largest expense account, review the transaction details. Make sure you recognize the payees. Confirm that the amounts seem reasonable for the goods or services that you received. Scams targeting small businesses often involve sending bogus, but believable, invoices for things that were never ordered.
2. Identify the largest transactions and recurring transactions. Reaffirm that they are necessary. Consider things like purchasing less frequently, using cheaper alternatives, canceling unused subscriptions, and renegotiating contracts.

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3. Forecasted net income before taxes

I remember my high school accounting teacher once say something like, “If you pay a lot in taxes, it means you’re doing just fine.” Assuming he meant “a lot” in absolute terms, I agree. However, this doesn’t mean that you should pay more income taxes than you are required to by law.

While it may sound sketchy, tax avoidance is neither unethical nor illegal. (Tax evasion is.) On the contrary, all medical practices should employ tax avoidance strategies with help from a competent accountant.

In addition to the comfort of knowing how much you will have saved*, share your forecasted net income before taxes with your accountant so that they can help you identify and take advantage of tax benefits.

* Like most small businesses, if your private practice uses the cash basis of accounting, your forecasted net income should reflect how much your cash reserves will grow.

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Why it’s helpful:

When will I have enough saved to make a down payment and prepare for relocation? And how should I plan this relocation to minimize my income tax liability?

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What you'll need:

• Profit and loss statement or P&L, by month, for at least one year (but ideally 2-3); be sure to include annual totals as well as any sub-accounts

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How to find it:

1. A basic P&L has three main sections: income, cost of services (or cost of goods sold for businesses selling physical products), and expenses.
2. Review the line items which comprise each section. For example, the income section usually includes a line for sales or services and one for discounts and refunds. Familiarize yourself with each line item by reviewing the past amounts and annual totals.
3. Estimate what the future amounts will be for each month through the end of the tax year which follows the real estate purchase and relocation. For example, if your tax year ends on 12/31, it’s May 2024 now, and you plan on relocating your clinic in February 2025, forecast through December 2025.

Here are two simple ways to start a forecast:

• Option A: Copy amounts from each month from the prior year if you don’t think the future will differ by much. (Similarly, you can also use the average of the preceding 12 months.) While this accounts for seasonality, it does not factor in changes over time such as new prices and services, additional capacity, and inflation.‍
• Option B: Multiply the average of the preceding 12 months by some factor like 1.00275 (ie, if you expect the amount to rise by 0.275% per month or 3.3% per year) for each month going forward.

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Since you’ll be revising these estimates monthly or quarterly, use the same approach for all of your line items. Then, manually adjust just the five most important or largest line items (eg, if you plan to raise your prices or expect your rent to increase).

Resist the urge to accurately forecast smaller line items or expense accounts. They’re immaterial. Remember, it’s the planning, not the resulting plan, that’s important.

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4. Gross margin

Gross margin is what remains after subtracting your service costs (aka time and materials) from the fees which you collect from your patients. It's a popular metric to determine whether a company is efficient at generating revenue.

Put another way, rising gross margins signal a potential for future growth whereas falling ones may mean that additional growth will get prohibitively expensive.

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Why it’s helpful:

As I grow into a larger space, are my staff and supply costs growing faster than my revenues?

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What you'll need:

• Profit and loss statement or P&L, by month, for at least one year (but ideally 2-3); be sure to include annual totals as well as any sub-accounts (this is the same as above)

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How to find it:

1. Within the cost of services section of your P&L, review the line items. Examples may include credit card processing fees and medical supplies. Payments made to sitters, facilitators, and therapists may also be represented here if the payments were based on the number of appointments as opposed to hourly or salary wages.
2. Compare month-to-month amounts and note any patterns like seasonality or sharp increases or decreases.
3. If not already shown, calculate your gross margin as a percentage: gross margin % = (income - cost of sales) ÷ income.

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To illustrate:

• April Income = $30,000
• April Cost of Sales = $4,500
• April Gross Margin % = ($30,000 - $4,500) ÷ ($30,000) or 85%

If this percentage decreases, your cost of sales went up faster than your income. This could mean you paid higher prices, used more time and/or supplies to earn the same amount as before, or both. Investigate significant changes to make sure that you’re paying competitive prices and using your team and supplies efficiently as you grow your practice.

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5. Price sensitivity

The second most memorable takeaway from my business school class on pricing was that while there are ways to determine an optimal price, it requires perfect information about production costs, willingness-to-pay, and the shape of the demand curve.

The most memorable takeaway was that, in practice, prices are usually set in one of the following ways:

1. Cost plus [incentive],
2. Whatever the competition charges, or
3. A combination of both.

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When starting your medical practice, deciding on what price to charge was likely straightforward if not nerve-racking. But as you consider responding to more competitors, offering additional treatments, targeting different patients, and opening new locations, one of the most common questions you may ask yourself is, “Am I charging too much or not enough?”

The answer requires more art than science.

However, assuming that your practice has been open for at least a year and operates in an area with several providers, you may have enough data to guide your intuition the next time you’re faced with this complicated question.

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Why it’s helpful:

What will happen to the number of paid appointments if I change my prices?

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What you'll need:

• A past date range (a year or more is ideal to account for seasonality) from which to calculate:
• The # of paid appointments
• The appointment prices and discounts
• A recollection of recent consultations with patient candidates who were deciding whether to pursue treatment (eg, importance of price, alternatives considered, sense of urgency)
• Information from medical practices which offer similar treatments in your area: eg, treatment prices, discounts, availability (to approximate demand), and intangibles like quality, experience, uniqueness, perception, and recognizability

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How to find it:

1. Analyze the number of paid appointments before and after you changed your prices. (Include discounts as long as it’s likely that they were a factor in your patient’s decision to pay for an appointment.) Then calculate the price sensitivity of your patient population as the change in paid appointments ÷ the change in price.

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To illustrate:

• Let’s say you averaged 40 appointments per month. Then you reduced your average price from $750 to $600 which is a decrease of $150 or -20%.
• In the months following the discount, you averaged 44 appointments per month, which is an increase of 4 appointments or 10%.

10% (change in appointments) ÷ -20% (change in price) = -50% (price sensitivity)

• The -50% price sensitivity means that for each 1% increase in price, your appointments will decrease by 0.5%.

1% (increase in price) * -50% (price sensitivity) = -0.5% (change in appointments)

• The negative sign indicates that changes in price and appointments move in opposite directions. The inverse is also true: Each 1% decrease in price will increase your appointments by 0.5%.
• Importantly, this correlation is only valid between $600 and $750.
• Price sensitivities of -100% or less, mean that every 1% price change results in a 1% or more change in appointments in the opposite direction. This would be considered price sensitive.
• On the other hand, as price sensitivity nears 0%, changing your price has little to no effect on the number of appointments.

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2. Now, compare your calculated price sensitivity with recollections from conversations with prospective and actual patients.

• If you believe that price was a major factor in deciding to seek treatment, it’s likely that your patients are very price sensitive in your price range.
• At the other extreme, if you can’t recall the last time a patient questioned or hesitated on price, they may be less sensitive to price.

3. Finally, corroborate your findings from #1 and 2 above based on what you know about similar providers offering similar treatments in your area. Try to learn the following about each provider:

• How busy do they appear? Unless they tell you, you may need to infer this by calling about their availability, observing foot traffic, or speaking with their neighbors.
• What are their prices? It’s likely you’ll find prices on their website for comparable treatments. But remember, some providers may offer discounts to specific audiences through word of mouth, socials, and live events.
• How are they perceived? Gather intelligence from internet reviews, past patients and employees, other providers, and community organizations like chambers of commerce and local trade associations. Hopefully, all of the practices are safe and reputable. They’ll likely differ in terms of patient experience quality, location accessibility and convenience, as well as community involvement.

If you plot the results of your market research on a chart like the one below where each dot represents a medical practice similar to yours, you may see patterns emerge that can indicate whether you’re in a region with patients who are sensitive to prices (Region A) or less so (Region B).

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A new source of advice and support

With a better understanding of whether or not you’re FIT, you’re ready to evolve your relationships with your bookkeeper and accountant. Because once they are aware of your financial goal—and your intent to be more active in managing your practice finances—they’ll be better prepared to offer you timely insights and advice.

They may suggest ways to improve your source of financial data (eg, adjust your chart of accounts or upgrade your bookkeeping software). Or they may simplify estimates and calculations, making your data points more reliable and efficient to generate. The best bookkeepers and accountants may even propose cost-cutting and tax avoidance techniques which help you reach your financial goals faster.

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The main takeaway

Since you’re already paying bookkeepers and accountants who have access to your private practice financial information for routine tasks like payroll and tax preparation, you should maximize the value of the relationship by sharing and expecting more.

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Concluding remarks

As a medical entrepreneur, you already have a thorough understanding of your patients, services, treatments, equipment, and supplies. By deepening your understanding of your finances—a critical factor for long term success—you’ll be an unstoppable practice owner and manager.

You’ll also be better able to cope with anxieties about the uncertain future of psychedelic medicine. This is because you’ll have the confidence to act more quickly and decisively when the next opportunity (or threat) presents.

Rather than avoid the details and hope for the best, invest the time it takes to learn if you are FIT.