Taking Advantage of Economies of Scale: A Guide for the Physical Therapy Industry
Steve Tolger, Alliance PTP VP of Mergers & Acquisitions - First and foremost, a business striving to maximize growth must create economies of scale to achieve its goals. Economics of scale occur when operational efficiencies are implemented that make the business more productive. Concisely, economies of scale help a business be more profitable. The larger the business, the more likely it can take advantage of economies of scale.
Economies of scale provides a company with a distinct advantage over its competitors. Partnering with a large organization with economies of scale can provide cost reductions while increasing production.
There are two main types of economies of scale: internal and external. External factors are typically out of your control such as macro events so let's focus on the internal economies of scale. Here are three types of internal economies of scale and how each can help your business thrive in today's market:
Technical economies of scale are achieved through improvements in efficiencies of business processes. Organizations with capital will invest in technology and equipment to optimize operations.
Medical records are traditionally stored on paper-based mediums. Many small clinics may use paper because of the upfront costs of an electronic medical record (EMR) system or the unfamiliarity with an EMR system. Paper-based systems have the following disadvantages:
- Storage is limited
- Lack of backups and security
- Time consuming and prone to errors
- No clear audit trails
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A large organization has the capital to buy and implement an EMR system. Beyond buying and implementing the system, the company will spend time to train the employees how to use it. An EMR benefits your practice by bringing all documentation, billing, and scheduling information under one easy-to-use system. Thus, creating efficiency while driving down costs.
Purchasing economies of scale is achieved through buying goods and services in bulk or by the ability to negotiate lower prices for contracts because of the size of the business.
An owner finds out a payor is decreasing the reimbursement rate. Unfortunately, most payers are not willing to budge on reimbursement rates. They are trying to keep their costs low and going head-to-head with a payor is a tough and time-consuming path.
A large organization has the resources (dedicated personnel) and firepower to negotiate with payors. If a company has significant market share, then the payor will be more likely to negotiate rates. You can also assume they have cordial relationship with the payors in your market. If you can negotiate higher reimbursement rates, then that increase goes straight to profit.
Financial economies of scale are achieved through favorable borrowing rates and access to capital. Lenders are more likely to provide capital to larger organization because it is considered to be more creditworthy.
An owner wants to open an additional clinic in the area but is having trouble securing a loan from the bank.
A large organization has the credibility and capital to open clinics quicker and possibly without taking on any loans. If they do need to secure a loan, the borrowing rate will be lower than a small company or individual. Being able to open clinics at decreased or no costs will lead to quicker growth of the business.
The advantages of economies of scale to businesses are wide-ranging, but overall, it enables the following:
- Reduced costs
- Increased profits
- Ability to grow faster through scale
- Access to capital
When it comes to economies of scale in the physical therapy industry, you can achieve economies of scale and it can lead to exponential growth for your business. How you achieve economies of scale is up to you. If you are looking for a trusted partner to help, get you there, Alliance is here to support you on your journey.