Physical Therapy and the Subscription Economy

How the patient churn rate can erode your business’s bottom line.

By Scott Hebert, PT, DPT

If you have been watching your bank account recently, you may have noticed a lot more recurring transactions happening. I know I have. To put an eternity’s worth of new music on my iPhone, I fork over $9.99 a month for Spotify. For unlimited TV shows and movies, it is another $7.99 for Netflix. My gym membership, razor blades, and even certain groceries are all goods and services I purchase through a subscription. There is a good reason why this model is becoming more common: It is a business model that has proven to be an incredibly successful way to make money—that is, if you understand how to optimize it. Just like any other business, it comes with its own set of risks. Without the security of a long-term contract, subscription companies must keep customers happy and engaged or risk losing millions. The second they cannot, customers drop off—sometimes never to be seen again. This customer drop off is what has come to be known as “churn” and is measured with a simple metric known as the churn rate.

So what about your physical therapy business? When a patient walks in your door, are you selling them a series of one-time services? Or are you selling them a subscription path to recovery? While perhaps not as immediately obvious, your physical therapy practice already generates revenue via a subscription model, there is just a good chance that you are not framing it this way to yourself or to your staff. Nearly every patient who walks in your door will require multiple visits to reach their recovery goals; every new evaluation signs up for a physical therapy subscription. In a fee-for-service world, there are no long-term contracts; you only get paid if the patient shows up. Every time a patient comes back to your office they renew their physical therapy subscription, and it is up to you to make sure they keep coming back. If you fail to engage a patient in the process or are unable to sell them on their plan of care, not only will your patient’s outcomes suffer, but also your business’s bottom line will suffer.

Running a subscription business requires laser focus on key metrics such as the churn rate, which is simply how you measure the percentage of customers who leave a supplier over a specific time period. In physical therapy, patient churn is a bit trickier to calculate than in other business sectors but still just as important. This is because metrics like average visits per case and cancel/no show percentage, while easier to measure, can often misrepresent the true business problems. By thinking about your physical therapy business as you would a subscription business, you can borrow the best practices from a host of other industries to maximize both your patient’s outcomes and your business’ profitability.

Understanding the Subscription Model in Physical Therapy

In a subscription model, and in your physical therapy business, the basic unit economics are simple. Just take the product of the following three variables to estimate top line revenue.

• Total Number of Subscribers (in your case, patients)
• Average Length of Subscription (how many visits do they come for?)
• Subscription Price (How much you make per visit)

While optimizing a subscription business requires monitoring a number of key metrics,¹ churn rate is a critical place to start.

The Hidden Impact of Churn Rate On Your Bottom Line

In looking for a good benchmark for patient churn rate, we examined over 30,000 outpatient physical therapy episodes of care. The results were startling: Over 20 percent of all patients treated came in for 3 visits or less.² While a certain percentage of patients experience quick recovery, I think we can all agree that one in five patients requiring less than three visits is unlikely. It is therefore safe to draw the conclusion that a large subset of patients are not seeing the value of physical therapy for one reason or another and are failing to complete their course of care all the way through. This fact is a textbook example of bad customer churn.

So Why Not Just Measure Average Visits per Case?

The quick answer: You should measure visits per case, but it will lie to you. While almost every practice owner that I talk to can rattle off an average visits per case number for their clinic, I find that very few are accurately measuring patient churn and the impact of patient dropouts on their practice. As it turns out, it is really easy to hide bad churn behind a good average visits per case number.

In the sample of 30,000 discussed before, even though 20 percent of all patients came for three visits or less, the average visits per case was still 10. Ten visits per case is typically just fine; in fact, it is a number for which most physical practices strive. The problem is, this number can clearly be misleading. To start, take a look at Graph A.

While the large majority of patients are coming in for 10 visits or less, there will always be outliers. These outliers have the ability to substantially alter your average visits per case number, as it has done with our sample. If you zoom in further on that same graph, the actual impact of bad patient churn is clear.

Your average visits per case figure can be drastically swayed by outliers, and because of this, average visits per case alone may not be the best metric to measure. As health care continues to evolve, and new forms of payment become more and more common, these outliers will become much less frequent. Being proactive about monitoring churn now will allow you to be ahead of coming reform, and help you focus on providing the highest quality care.

Defining Churn Rate in Physical Therapy

Churn rate in physical therapy is simply the difference between expected visits and actual visits divided by expected visits. If the patient exceeds the expected visits, just calculate that churn rate as 0 percent (no need for negative churn here). The beauty of the churn rate calculation is that it takes into account the variability of care length. By taking the average churn rate for each patient, you start to get a much more accurate assessment of your clinic’s ability to keep patients engaged in their course of care, identify weak areas with regard to age and diagnosis, and target providers who are more engaging than others.

Measuring churn rate itself is not all that complicated, but it does take a plan. While actual visits are usually easy to pull from your practice management system, expected visits can be a bit more difficult to come by. Here are some of the strategies we have seen practices use to estimate expected visits.

Option 1: Take a Subjective Approach
After completing an evaluation, every therapist estimates how many visits a patient will need to reach their recovery goals. This number is being relayed to insurance companies, doctors, and other therapists—why not use it for your churn rate assessment? This is often a great estimation of expected visits per patient. The problem with this approach, however, is that it can be quite subjective and may vary by therapist experience level and skill. Still, it will get you started on your path to analyzing patient churn.

Option 2: Bucketing
If you feel like you have a good handle on the expected visits per case needed for a given patient type at your practice, it can sometimes work to bucket your patients by diagnosis, age, or a number of other factors. Specifically, if you feel that patients at your practice require only four visits for a meniscal repair, bucket all patients with a meniscal repair to use four visits per case as their expected visits. While this is sometimes hard to administer, Microsoft Excel can be your friend.

Option 3: Outcomes Tools
If you are using a standardized outcomes registry, you will often have access to an expected visits per case estimate. This is an excellent number to use and makes expected visits per case simple to track. It is also a bit less subjective as it takes into account your practice’s history, the patient’s diagnosis, and leverages a larger dataset to get a more accurate prediction when used correctly.

Once you have a handle on expected visits and actual visits, you are ready to start calculating. Be sure to calculate it on a patient-by-patient basis to get the most accurate numbers.

Always Strive for Good Churn

So what happens if your patient comes less than the expected number of visits but meets their recovery goals? Is this still bad? The answer is a resounding No! In fact, you should strive for this with every patient you treat. Exceeding expectations is an excellent way to develop customer evangelists.

How do you measure good churn from bad? Simply make a note if the patient’s goals were met or not. If his or her physical therapy goals were met and his or her actual visits were less than their expected visits, do not sweat it. Simply mark that patient down as 0 percent in your churn rate calculation. This will give you the most accurate picture of bad churn, which is what you are trying to correct anyway.

While there are other key metrics like patient lifetime value (LTV), customer acquisition cost (CAC), and viral coefficient to keep in mind, churn rate is perhaps the most important metric with which to start. By understanding churn, you will be well on your way to running your practice like a more efficient subscription business.

Resources

1. Hebert, S. Physical therapy and the subscription economy. Strive Labs blog Web site. http://blog.strivelabs.com/2015/04/10/pt-and-the-subscription-economy. Updated April 10th 2015. Accessed May 5th 2015.

2. Hebert, S. 5 steps to improve patient outcomes & increase revenue in PT part 1: churn rate overview. Strive Labs Blog Web site. http://blog.strivelabs.com/2015/04/16/churn-rate-pt-and-the-subscription-economy. Updated April 16th, 2008.

Scott Hebert, PT, DPT, is a PPS member and chief executive officer of Strive Labs, Inc., a patient relationship management platform for physical therapists. He can be reached at scott@strivelabs.com.