BLOG: $10 million club: Solving problems on the way to becoming a much larger practice, part 4
The apparent constraints that come with the scale of a practice are also accompanied by a few gratifying opportunities for big-practice builders who get their second wind. Once you’re in the $10 million club, it’s easier to take on projects that others lack the resources to execute.
Mergers and acquisitions with other practices in the region are much easier for a larger practice to drive; such practices have the management depth, capital base, prestige and “fear factor” that smaller practices don’t possess and that local targets can find compelling.
Similarly, developing de novo satellite offices is a much lower hurdle. A large $10 million practice may only have to put 3% of its annual cash flow at risk to develop a new office — a smaller practice might risk 20% or more of its annual cash flow for the same opportunity.
Branding improvements are much easier to accomplish if your practice is large, for three reasons. First, you already have the high ground and pre-existing name recognition. Second, you can likely tout that you are among the largest, the oldest, the most diversified or the most convenient practices in your community (or all of these things). Third, you have a lot more media budget to play with. Here’s how. It’s reasonable for a general practice to spend 3% or more of its annual collections on marketing. That’s $300,000+ in a larger practice, and perhaps a fifth of this or less in a small practice. Which practice would you bet on to win the promotional race?
Institutional and payer alliances are more readily crafted by large practices than smaller players. Joint ventures with hospitals and preferential treatment by third-party payers were the order of the day a decade ago in the last era of health care reform. Now as then, larger practices are better positioned to be dealmakers in their markets. A new era of alliances may be upon us.
Finally, even if all common sources of passive eye care income have been tapped, there is at least one last opportunity that can be best executed by larger practices. This concept of passive income is critical given the tipping point that ophthalmology stands at today: Doctors in larger established practices are nearing the limits of their personal productivity and nearing the limits of cost containment as a means to raise profits. As we have discussed, it’s likely in your large practice that ancillary opportunities have all been executed. And fees are poised to decline in the years ahead. So the only way that doctors in fully mature practices can engineer a pay raise for themselves is through the passive income of other employee doctors.
Larger groups of 10+ ophthalmologists will often have no more than one or two optometrists on staff. It makes every good sense — in a general/full-service eye care setting — to staff up to the levels of optometric coverage seen in the nation, with more than two optometrists for every ophthalmologist. The resulting passive profits (approaching $50,000 per OD per year) can do much to offset falling fees in the future.
Just as is the case for senior law firm partners, passive profits for senior shareholder doctors can break through the income ceiling imposed by a finite limit on the number of hours that can be worked in a day. More optometric care boosts optical sales, improving margins for overall sales. Surgical referrals are increased, and these supplemental cases leverage ASC profits. Each surgeon can refer on routine care that clogs their schedules, keeping them not only somewhat bored, but held back from more profitable care by patients who really need their higher level of training. And if ODs are placed in completely new storefronts for the practice, you simultaneously improve the visibility of your brand of care and extract more value from every advertising dollar spent.