April 10, 2008
11 min read

Practice management: Facts, industry trends and performance benchmarks

John Pinto examines the political, financial and societal factors that are influencing ophthalmology and health care.

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Last year about this time, the OSN Editorial Board discussed during a group retreat the hard work ahead in the “plateau era” of ophthalmology. Health care costs were, and continue to be, growing unsustainably at nearly three times the growth pace of the general economy. Health care now consumes 16% of the country’s economic output. And the number of workers per Medicare enrollee will continue to fall sharply in the years ahead, as expensive new treatments continue to proliferate.

John B. Pinto
John B. Pinto

Despite this, America’s eye care practices are still hanging in there. But without constant vigilance, profit margins are slipping into 30% and lower territory, and there is an emerging sense of fatalism about the prospect of future fee reductions, whether they arrive this year or at some future point. At the same time, creeping enterprise complexity is obliging a much more business-like approach on the part of not just managers but providers. Typical doctors used to spend just a few minutes a week managing. No longer.

And even the country’s most vanguard surgeons and practices are running out of new income “rabbits” to pull out of the practice “hat.”

Over the past 15 years, ASCs have boosted typical practice profits about 30%, but most vanguard practices have already developed these. They have also opened optical dispensaries, which can elevate profits another 10%.

What’s going to be the next opportunity to come out of the hat? The typical eye surgeon still spends about 30% of his time providing routine care, work that can be readily delegated to optometric colleagues. This is the next frontier, the shift toward the so-called “integrated eye care delivery system,” in which there is a much higher ratio of ODs to MDs.

Statistics on practices, physicians

Ophthalmologists are a declining percentage of the physician provider base in America. Back in the 1970s, eye surgeons were about 3% of the total physician population cohort. Ophthalmologists are now only about 2.25% of the physicians in the country.

Stability has been achieved, however, on a population-per-MD basis.

The population of the United States is growing at about 1%, and the number of ophthalmologists is now growing at around that same pace in recent years. There used to be about 20,000 people per ophthalmologist; that ratio has slowly gone down over time. Now, we have in America about 15,000 people per active ophthalmologist.

Age distribution data from the American Society of Cataract and Refractive Surgery and the American Academy of Ophthalmology show that we have an important cluster of high-experience, high-output providers who are just a decade or so from winding down their practices. But there is no similarly sized cohort of younger doctors to take their place.

Of the 80% or so of eye surgeons who are in private practice, a significant percentage are still in solo, two and three doctor practices. Only about 12% of the private practice ophthalmologists are in 10+ doctor practices. Despite fears of the demise of smaller practices a decade ago, ophthalmology is still a very intimate, fragmented enterprise, with perhaps as many as 7,000 or more separate and distinct “brands” of care.

Ophthalmology is still a financially robust profession, with individual incomes subject largely to individual initiative. Based on average profit levels and the typical hours that an ophthalmologist works, the average surgeon is now making perhaps about $135 an hour. But the most assertive ophthalmologists can readily exceed this figure by an order of magnitude.

Estimated residency training positions are down in the last decade from 1,400 to about 1,250. This 11% decrease is in stark contrast to an 11% increase in the U.S. population during the same time period.

Emerging trends to watch

Here are 17 emerging trends in ophthalmology.

  1. Demand for eye care services is growing. The age 65+ population will grow by 50% in the next 15 years. That is about 3% per year of compounded growth, as compared with about 1% growth for the nation at large. Because seniors can consume as much as 10 times the eye care services as younger patients, this creates a leveraged increase in the demand for ophthalmic care — as much as a 5% net gain per year.
  2. Growth in the ophthalmic provider base is stagnant. There is a bulge in baby boomer ophthalmologists poised for retirement and downsized training programs, and the ratio of patients to provider full-time equivalents is expected to rise materially in the years ahead.
  3. With advanced apologies to a few workaholic young surgeons I know, the average young provider’s output is underwhelming. There are fewer physicians in training as ophthalmologists than in the past, and the social dynamics have changed. Gen X and Gen Y factors are compounded by gender and culture issues. It is hard to parse this information and my empiric observation in a way that is politically correct, but the basic fact is that one-half of all residency graduates are now women and are often keen to balance business and family life. In addition, many young ophthalmic families now have two high-earning professionals who are often less workaholic than their forebears. So in the next generation of eye surgeons, I believe we will see a significant drop in the number of patients, cases and fee dollars generated over the course of an average career span.
  4. Ophthalmologist succession planning is getting a lot harder. Past generations of ophthalmologists found an abundant pool of potential successors willing to pay a premium to take over their practices. Today there are a lot more jobs than applicants. This is softening practice buy-in and divestiture terms. Some practices are now being sold for little more than book value or simply closing down for lack of a willing buyer. Several client practices have closed down over the last year. They were perfectly great, cash-flowing practices in reasonable, if rural, places to live. But they closed down because they could not find buyers.
  5. Practice growth can be retarded by a lack of new doctors. The difficulty in finding buyers is not just limited to older doctors who are nearing retirement. Group practices looking for additional doctors are now having to forego expansion or pay premium base wages that are up to 50% higher than just a few years ago. This is particularly the case in retina, glaucoma, plastics and pediatrics, and in less-favored secondary markets, markets that are away from urban hubs or less attractive areas.
  6. The business of ophthalmology is getting vastly more complex. With HIPAA, EMR, pay-for-performance, and legal and regulatory risks, it is little wonder that few young surgeons are daring to hang a shingle and launch a de novo practice today.
  7. Treatment diversity and complexity is growing. As in every era of medicine, technologic progress comes in fits and starts. The present period is one of robust change and development with many new procedures, obliging far more continuing education than in the past. Surgeons who could once spend a lot of time on business development have to deflect much of that time to mastering new surgical maneuvers.
  8. The comprehensive ophthalmologist is yielding to the subspecialist. Many eye surgeons would like to continue to serve their patients with a wide skill set. But aside from especially skilled and dedicated individuals, and those practicing in more remote areas, ophthalmologists will continue to shift toward niche expertise as treatment complexities multiply.
  9. Refractive surgery is industrializing and commoditizing. Refractive surgery started as a low-barrier-to-entry, RK-based service with a fairly even distribution of low-, medium- and high-volume surgeons. LASIK demands much higher capital commitments. The provider distribution curve now looks like an hour-glass profile with a growing number of high-volume centers and a diminishing number of low-volume boutiques co-existing.
  10. Profit margins are continuing to soften. Twenty years ago, the profit margin of a well-run general practice was 40% to 55%. Ten years ago, 35% to 45%. Now, 30% to 40% is typical, and sub-30% margins are not unusual in urban practices where facility, marketing and labor costs are higher, managed care can be abundant, and there is more competition.
  11. Ophthalmology remains a splintered “micro-business.” Fifteen years ago, everyone expected soloists to fade away. “Build, join or die” was the mantra of the 1990s. Today, fully one-third of private practices remain solo.
  12. The low-hanging, passive income fruit is nearly plucked. The majority of vanguard surgeons have already developed ASCs and optical dispensaries to generate passive income, control their service quality and provide one-stop shopping. Not much that is easy will remain to rebuild margins in the event of a material drop in Medicare rates, especially if this drop is abrupt.
  13. The profitability of cataract surgery is now about the same as in-office patient care. As we discussed last year, the fundamental value of cataract surgery has slowly declined more than 99% in the last 30 years, an amazing statistic. Here is how it is derived. Performing one surgical case in the early 1970s yielded payment sufficient to buy about 80 ounces of gold, which back then was $35 per ounce. Today, one surgery yields only enough revenue to buy about a half-ounce of gold. Unless one owns a surgery center, it has become more economically viable on a profit-per-surgeon-hour basis to provide efficient, higher-volume, in-office exams, testing and treatment, plus dispensing, than to perform surgery.
  14. The best compensated eye surgeons in America work closely with optometry. They do so either through co-management relationships or through traditional employer-employee arrangements. In either arrangement, access to surgical cases is improved and the surgeon’s workday is narrowed to high-value/high-satisfaction surgical care.
  15. Integrated MD-OD delivery systems are on the rise. Because the scope of ophthalmology is expanding to full-service care at the same time that optometric scope is widening, there is a rising trend toward combined OD-MD practices. Relatively conservative 1:1 or lower OD-to-physician ratios today will yield to 2:1, 3:1 and even 4:1 ratios in the future.
  16. The search continues, with mixed results, for new services and products to sell. Ophthalmology has been vanguard in the hunt for new benefits to provide to patients. Not all of these have worked out well economically or clinically. Many novel variations on refractive surgery have disappointed, as have blepharopigmentation, facial skin resurfacing, hair removal and selling cosmeceuticals.
  17. The use of electronic medical records is still not widespread, but the move to EMR is now inevitable. There is an industry-wide sense of fatalism about going paperless, which was not present just a few years ago. EMR adoption is still moving at a glacially slow pace in ophthalmology. Well under 10% of practices have made a full conversion. About half of this 10% group is delighted. For the other half, the jury is still out.

The 2008 presidential election

Shifting to another dimension of the trends affecting the typical practice, here is what the presidential frontrunners are saying about health care, as reported by the Kaiser Family Foundation.

Sen. John McCain, R-Ariz., wants to provide access to affordable care for all and make sure private insurance choices are made by individuals. He wants to shift tax credits from employers to individuals, with no mandates for coverage and with multi-year, multi-state direct-to-consumer insurance contracts. Sen. McCain also wants portable coverage so one can move from company to company, and he wants a lot of latitude for state-based experiments. Federal tort reform is on his docket. Measuring and paying for quality of care, promoting the use of MD extenders, allowing re-importation of drugs and promoting health information technology are on his agenda.

Sen. Hillary Clinton, D-N.Y., is in favor of affordable, quality, universal coverage. Private insurance is preserved, while public insurance is expanded with a variety of incentives. There would be mandated coverage for all citizens, capped at a percentage of income. Sen. Clinton also proposes mandated benefits for large employers, incentives for small employers and removal of the deductibility of high-end benefits for high-income workers. She would impose new regulations on private insurance and would liberalize access to insurance for patients with pre-existing conditions.

Sen. Barack Obama, D-Ill., also eventually wants affordable, quality, universal coverage but with a near-term mandate only for child coverage. This is the major health policy difference between the Clinton and Obama camps. Sen. Obama wants all employers to provide health benefits or pay into the cost of a federal program. Subsidies would be available to help individuals, and the uninsured public could buy the federal plan or private insurance. He wants private insurance to be at least as generous and accessible as the federal plan.

The forecast

How is all this going to shake out for the average surgeon practicing today? Here are some predictions.

Great political rhetoric will continue to translate into slow-paced, often poor public policy reform. Reform will move further along than in the 1990s, particularly if the general economy does not rebound, as was the case last decade. Last time around there was a strong mandate to reform the system, but that reform evaporated overnight due to a lack of transparency and a strongly rebounding economy. If the current softening economy does not rebound in the same manner, we are going to be more vulnerable to adverse reform efforts. If the economy springs back or if tensions elevate a notch in the Middle East, look for health reform to return to being a second-tier issue in America.

It would require unanticipated national wealth or unprecedented national consensus borne of crisis to materially reform the current system and provide affordable, high-quality, universal care as promised by the current Democratic candidates. Indeed, better health care, and especially better preventative care, leads to a higher overall lifetime health care cost. Here is one example of this: Dutch smokers in a recent study have total adult health costs of about $326,000; the obese, $371,000. But if you are thin and healthy, it costs $417,000 to provide health care over the life of the individual.

All politically feasible, slow, incremental reform merely plays around the edges of the health care cost containment problem because it avoids the “R” word. Rationing is the only way that costs can be contained as the population ages and great new cure options proliferate — either rationing care from patients or rationing payments to providers.

I suspect we are going to continue to muddle through with less business and regulatory pain for eye care than feared, but more than desired or deserved. Expect 8 more years of continued scapegoating, 11th-hour RVU fee concessions, rising practice costs and potentially disruptive local, state, federal and corporate experiments in cost containment.

And here is the wild card: Imagine the unexpected, that a top-down, federally mandated health plan is actually installed. This would likely shift a higher percentage of the gross domestic product to health care, increase the demand for eye care services, decrease the ratio of dollars going to corporate insurance profits, and actually add net revenue and profits to the average practice.

So the bottom line is this: The demand for our services is growing at nearly 5% per year due to the leverage of an aging population. The net effective provider base is growing at only about 1%, if that. Doctors in underserved markets with elastic capacity to see more patients are going to thrive. Owners hiring associate doctors and enjoying passive income flowing from their labor will thrive. Efficient, business-like practices on every scale are going to thrive.

The sky is not falling. Yet. If the sky does fall, it may not hit us. If the sky hits us, it might not hit too hard. If it hits hard, we are likely to be better prepared than ever before. And we may actually end up just as surprised by the positive results of the sky “falling” in 2010 as were surgeons in 1965. Back then, although they bitterly fought the advent of nationalized senior health care under President Johnson, they were ultimately delighted with the actual outcome. Without Medicare, ophthalmology today would be much diminished.

So don’t worry. Be happy. Remember that every seemingly insurmountable obstacle is really just a composite of lots and lots of simple, solvable problems. Pursue your business, your profession and your dreams with that in mind, and you will do just fine.

For more information:
  • John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. Mr. Pinto is the country’s most-published author on ophthalmology management topics. He is the author of John Pinto’s Little Green Book of Ophthalmology, Turnaround: 21 Weeks to Ophthalmic Practice Survival and Permanent Improvement, Cashflow: The Practical Art of Earning More From Your Ophthalmology Practice, The Efficient Ophthalmologist: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees and The Women of Ophthalmology. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; Web site: www.pintoinc.com.