Don’t let your practice get ‘Enronized’

No business, large or small, is immune to the ravages of neglect.

By the time this article is published, it’s likely that even more business (and political and ethical) lessons will have emerged from the Enron debacle. But there’s enough known right now to keep a columnist busy for at least the next year. I’d like to focus this month on just a few of the most relevant lessons for the average eye surgeon and practice manager.

Lesson one

You must know, and understand, the little details, numbers and protocols.

One senior Enron executive officer after another has now been trotted before various congressional committees, mostly to plead the Fifth Amendment. Few current and former officers who have been bold enough to actually testify have said, in so many words, “I wasn’t involved with those decisions.” Or, “I knew generally about that accounting procedure, and it worried me, but I didn’t really understand it, and assumed the lawyers and accountants had signed off on it.”

It’s essential that as a practice owner and as a manager you not only have access to the numbers and the operational details, but that you also understand them.

I was on the phone with a really great physician on the morning I wrote this. His practice generates about $2 million a year in collections; not much in Enron’s terms, but great deal of work for a solo ophthalmologist. It’s a lot of cash flow to blow in a year. It turns out that this gentleman has not touched or even seen a formal financial statement for the past several years. The closest he has come recently to reviewing the economic reports on his company has been when he’s signed off each year’s general tax returns, never bothering to even turn the pages and see what’s beyond the cover sheet and signature line of each form.

The result? This physician was genuinely surprised to learn that he made almost nothing in 2001.

He had figured that the diminishing draws he was able to take each year were part of some tricky pension plan his accountant had dreamed up and had all under control. The truth? There was no pension plan. This physician had simply let his expenses get more and more outsized each year, while his revenue slowly eroded. It hadn’t affected his lifestyle any; he’d simply been living on his old, taxable savings, thinking that the net effect was that his tax-qualified savings were rising all along, and he’d be further ahead when retirement finally came.

In reality, it seems this physician’s net worth has actually been declining about 10% a year for the past several years.

Here is another simple example, this one from a practice whose operations I audited for the first time.

The physician will say, “We have a splendid recall system. I always nominate a return-to-clinic order, and the staff always enters it.” The office manager will say, “We have a great recall system. We send out cards, and most of our patients come back on time.” The clerical staff will the say, “We have a pretty-good recall system. We send out cards whenever we have the time, and anytime one of our cards gets sent back with a bad address we try to call the patient.”

Finally, I go to the stacks of charts. And the 2-year and older charts say, “Thanks for stopping by. We’ve been sitting up here on the shelf gathering dust. Nobody bothers to open us up and find out what happened to our owners, the patients. Will somebody please give them a call?”

Surely, there could be few elements of running a practice more fundamental than regular financial statements and a solid recall system, yet these basics are absent in a remarkable number of otherwise fine, high-quality organizations. Thank goodness Congress is not all that worried about ophthalmic business practices, or you’d being tuning in CNN this evening to see Dr. Smith and his business manager Jenny up on the Hill giving testimony about how their business affairs somehow got away from them when they weren’t looking.

Lesson two

It’s essential to know the big picture.

There was one core Enron failing — or perhaps it was a success, since it kept the party going for just awhile longer. Numerous, now-famous off-balance sheet entities with romantic Star Wars names were used to veil Enron’s corporate debt and mask losses.

The average ophthalmic practice owner may look at this and say, “Well, what does that have to do with me?”

Interesting you should ask. In the last year I’ve run across a number of successful physicians with big, Enron-like problems. You see, these doctors have been advised — and it’s not bad advice, really — that they should subdivide their practices into various constituent parts to partition risk and shelter assets in case of an adverse legal judgement.

In these settings you typically see a core practice entity that basically owns nothing. It might in turn lease equipment from an equipment company, staff from a staffing company, a building from a real estate company, and so forth.

The only problem is that this risk management advice is most often held out by attorneys without the benefit of corresponding accounting advice to unbraid the snarl of financial tracking entanglements that attend this approach. On top of this, the typical physician is poorly advised on his or her personal financial planning, so no one really knows much about their big, consolidated picture; the lawyers and the physician can only see the slivered-up entities.

This is where Enron comes in. Without proper accounting treatment and a handy financial technician to sort things out, the core practice (combined with personal finances), seen from some angles, can look like a million dollars when it’s really a fragile house of cards.

Lesson three

Bad enterprise models always fail; it’s just a matter of time.

This week thousands of fresh, new businesses will noisily spring to life in America, rosy cheeked, fully funded, their CEOs charging hard toward dreams of wild success. In the same week, about the same number of businesses will be smothered, voluntarily or otherwise.

Obviously, the majority of you reading this are working in enterprises that fall somewhere between these two extremes of nascence and demise. The happy truth is that eye care is an extremely difficult business to destroy. You have to work really hard to go completely out of business as an eye surgeon. That doesn’t keep some ophthalmologists from trying, however. Here are the most frequent cliffhangers I run into:

“I’ll just slow my practice down a little and keep my hand in for a few more years part-time.” Ophthalmology is a largely fixed-cost business. At 40% net profit margins, a 25% drop in production results in up to a 60% collapse in profits.

“Sure, I’ve got more than my share of malpractice cases, but that’s because I live in a city with hungry lawyers.” Unless you’re a hypervolume LASIK surgeon, more than one or two malpractice cases in your career should be a warning to stop and solve whatever the problem is. Nine times out of ten, it’s not a frank clinical problem so much as a problem with patient relationships.

“We need more surgical cases…let’s just ramp up our advertising.” Advertising is like pain medicine; necessary and highly helpful when used in the right doses, but addictive when used inappropriately. And it can mask other practice problems. Spending more than 5% of revenue for marketing in the typical general practice or 10% in a LASIK practice long-term may be a sign that something is awry with the underlying organization.

“I don’t need disability insurance. I’m in great shape, and besides, if I’m out for a couple of months, the practice could carry on without me.” Could it really? Run the numbers, consult a reputable insurance broker, decide if you’re underinsured, and act accordingly.

“I don’t need an attorney to advise me on this contract. It’s pretty straightforward.” I continue to be amazed how many surgeons making seven-figure incomes begrudge their attorneys, accountants and other advisors a few thousand tax-deductible dollars a year to keep them out of trouble.

“I know we can’t really afford it right now, but I’d really like to buy a ________.” You fill in the blank. It could be a new office complex or a cutting edge piece of equipment. Any purchase that exceeds 5% of your annual collections that is not absolutely required to meet clinical quality assurance requirements should be subjected to formal economic analysis for a reasonable payback period or return on investment. This includes most newly posted staff positions.

When you scanned the business headlines and saw the Enron news break for the first time months ago, you probably thought to yourself, “There’s not much for me to learn from this.” Think again. Business is business, and all businesses are fragile, living creatures. Someone has to be their guardian, steward and watchdog. Your wee ophthalmology business, while less fragile than the weakest of Wall Street’s wobbling giants, needs your daily care, vigilance and feeding.