Megatrends leading ophthalmologists toward an era of hard work ahead

In this first report from the OSN Section Editor Summit, Practice Management Section Editor John B. Pinto discusses the challenges facing the profession in the years ahead.

A note from the editors:

Ocular Surgery News convened its annual Section Editors Summit in February. In this first installment of reports from the summit, Practice Management Section Editor John B. Pinto discusses the economic “megatrends” in the field and what ophthalmologists are facing to emerge from the current “plateau era.”

We’re all faced with a series of great opportunities brilliantly disguised as insolvable problems.

— John W. Gardner

Mr. Gardner, secretary of health, education and welfare in the Johnson administration, may well have been projecting to the 21st century. From a health care providers’ perspective, times are tough, considering the macroeconomics of the country, issues with global resources and looming health payment reform in the United States. We’re heading toward more challenging times. Hopefully, these are just opportunities in disguise.

The growth of health care costs has outpaced the growth of the general U.S. economy by a multiple of about 2.6 for a number of well-understood reasons.

We witnessed a post-war explosion in capacity, enabled by the 1946 Hill-Burton Act, providing grants and loans for hospital construction. We also had demand driven by the advent of Medicare and Medicaid, employer-sponsored health care programs, advancing technology, the obesity epidemic, rising consumer expectations and an aging population.

In 1993, 13.8% of the U.S. Gross Domestic Product (GDP) was spent on health care. Today, we’re nearly at 17%, and by 2015, this figure is expected to rise to more than 20% of the GDP.

There are about 44 million Medicare enrollees today, allowing for about four active workers for every enrollee. By 2020, there are only going to be about three workers per enrollee, and there will only be two workers per enrollee in a short period of time. This is not sustainable.

In 1993, we spent about $3,000 per capita on all categories of health care. Today, we spend about $7,000 per person … roughly $2 trillion per year spread out over 300 million people.

By 2015, which is right around the corner, we’re going to be spending in excess of $12,000 per person. If you think about this as percentage of the average income in America, it’s an untenable figure.

According to the Heritage Foundation, paying for mandated Medicare and Medicaid entitlement costs, which now amount to some 8.7% of the GDP, (and rising to 19% of the GDP by 2050) would require a tax hike of about $13,500 per household.

This is obviously unacceptable.

Even if we eliminated every other federal program, including defense, education and anti-poverty initiatives, we still would not quite bridge that gap.

We experienced a rather dormant time from the early and the mid-1990s until about 1 or 2 years ago, when health care drifted away as a major issue in America. The economy strengthened and other issues rose to the forefront. But the public interest in health care cost and payment reform is elevated now as never before.

Obviously, this is a political as well as economic issue, and the political views cover a wide spectrum. Presidential candidates for 2008 range from rabidly pro-universal health care to decidedly status quo.

The World Health Organization ranks the United States 27th in terms of efficiency and effectiveness of its health care delivery system. The United States and South Africa are described as the only two industrialized nations in the world without a universal health care system.

High deductible plans and health savings accounts are seen by some in the electorate and by some analysts as just a clever stopgap measure created to advance the twin interests of the insurance and banking industries.

We all need to watch the next 2 years closely for the interplay between three inter-dependent variables: the general economy, the trajectory of distractions in Iraq and the presidential race for 2008.

General economy

Mid-range forecasts are that the economy is going to expand in 2007, but at a pace somewhat below the 3.2% increase in real GDP growth in 2005 and 2006.

Unemployment is now down to about 4.6% and job gains will remain strong enough to keep the unemployment rate in this favorable range. National economic output, as measured by real GDP, is predicted to grow by about 2.4% in 2007 and 2.5% in 2008.

Long-term interest rates are projected to continue their gradual upward climb. The 30-year conventional mortgage rate will increase to about 6.6% this year and 7% in 2008, compared to 5.9% in 2005 and 6.5% in 2006.

Inflation will be held in check over the next 2 years, which is important in ophthalmology in that fees are largely fixed and falling, so if we enter a phase in the general economy where inflation takes off, we will feel that effect profoundly.

The Federal Reserve Board is going to maintain its “wait-and-see” approach. The housing market retreat will remain orderly. If you think about it from the elective care/self-pay side of things, average Americans have been using their homes as an economic buffer and piggy bank. Their ability to do that may get increasingly difficult. If there are material limits on what Americans can spend, this will have a dampening effect on everything from elective oculoplastic and refractive surgery to what’s spent on optical goods.

The war in Iraq

At the time of the 1992 election, after which Hillary Clinton led efforts to reform health care, the September 11 attacks had not yet happened. There was no Iraq war and no Hurricane Katrina. So health care concerns easily rose to the top of the issues inventory.

If by 2008 current wartime distractions are reduced, health care could rise again to the top of the national agenda. On the other hand, if war costs escalate, the electorate may be distracted from health care, but the inherent conflict between military and entitlement budgets will grow, obliging a showdown on spending priorities.

So whether the Iraq war goes well or poorly, there will be a strong ripple effect on the eye care business.

2008 presidential election

Here’s what the presidential frontrunners are saying. Sen. John McCain, R-Ariz., says there should be no limits on patient choice provided the patient is willing to pay extra for specialist care. He has not formally updated his position on health care issues in almost 2 years.

Rudolph Giuliani has a health care-focused legal partnership in New York. Based on this, he probably will not be interested in a reform program trending toward specialized medicine.

With respect to Massachusetts Gov. Mitt Romney, his state has mandated that the citizens have to either get health insurance or pay fines.

Sen. Barack Obama, D-Ill., says he is determined that by the end of the first term of the next president we should have universal health care in this country.

Sen. Hillary Clinton, D-N.Y., says her goals are health insurance for every child as a first step toward universal health care for every American.

And Sen. John Edwards, D-N.C., says that he’s seeking universal health care with individual mandates and tax increases to subsidize those unable to afford such compliance. He wants a “Medicare buy-in” to compete with private insurance options.

Competing paths to health care reform

We are looking at four competing health reform options. I believe the most likely option is that we are going to muddle through with a patchwork of uncomfortable but comparatively minor changes to the present system, reserving painful change for another generation.

Or option two, we could have an acceleration of state-by-state reform basically saying to the employer, “Insure your workers or pay a payroll tax into a state-funded system.”

Option three, we could move incrementally toward a single-payor system. For example, Medicare could be made available as a purchased option at age 55.

Finally, we could turn to an “HMOs-for-all” approach, run by a consortium of leading corporations.

Additional facts and trends

A robust increase in demand for service is upon us – the number of seniors aged 65 year and older will increase 50% by 2020.

Supply vs. demand is growing at disproportional rates. A shortage of providers means that associate physician recruitment time and employment costs are rising sharply.

As might be expected in the era of anticipated but unknown change, partner-to-partner and doctor-to-administrator conflicts seem to be rising.

Patient and contract access continues to be broad in most markets. We’re in a largely “any-willing-provider” environment in place now – that is, if you’re willing to take the lower allowed fees.

Success with non-ASC, non-optical ancillary services continues to be challenging. In my experience, whether it’s Botox, incisional procedures or skin resurfacing, there are more examples of failure than success, even by those surgeons with otherwise great business and promotional skills.

Furthermore, we have regulatory confusion on the horizon, leading to more challenges for smaller practices. The Physician Voluntary Reporting Program ended March 1, and the Physician Quality Reporting Initiative commences July 1. Changes such as these are difficult to track and respond to in a small business setting.

Overall, it’s safe to assume that the pace of change we’ve all been adapting to with greater or lesser success for the last 20 years is not going to slacken in the next 20 years, and may at least moderately accelerate.

Historic and current adaptations

Historically, ophthalmologists have adapted to change in various ways. These include choosing to work 1 or 2 years longer than originally planned, reducing lifestyle costs modestly, becoming more medically and surgically assertive, adding surgery centers, dispensing glasses and contacts, building practice scale and bringing in optometrists to increase passive income.

Other historic adaptations include shifting most dilations, refractions, scribing and testing to technicians, early efforts to have EMR increase clinical tempo, utilizing machines to do human labor, offering refractive surgery and aesthetics services, learning more about business management, and engaging in a deeper financial vetting of new technology.

What are some contemporary adaptations? Some surgeons I know are now beginning to work many more years than planned and reducing lifestyle costs, not just modestly, but materially. Surgeons have to objectify and increase utilization and surgical density, build somewhat larger practice groups and in some settings merge with other practices to better share costs and technology.

We’re now increasing the number of optometrists per ophthalmologist in private practices and delegating all possible work to technicians.

Although EMR systems are still not widespread, they are increasing efficiency in a few cases. Surgeons are growing the profitability of their ASCs by renting them or syndicating to other providers. More improvement in this area is expected.

Dispensing glasses and contacts is a rising percentage of the total ophthalmologic business sphere. It’s not unusual now to see practices with 20% or 25% of their collections coming from optical dispensing. Just a generation ago, only 10% or 15% of practices even offered optical services.

Ophthalmologists are either expanding their refractive surgery practices, or they are abandoning them because they realize that other segments of their business offer higher revenue and profit yield per hour of their time.

A vanguard segment of ophthalmologists is moving strongly into custom IOLs, with some practices reporting at least 20% of their total case volumes being comprised of custom lenses.

Finally, we’re hiring stronger administrators, building marginal volumes and holding the line on practice cost creep.

Future adaptations

The most efficient ophthalmologists have markedly increased their clinical volumes. In the future, the concept of “hyper-volume” practices will continue to grow, with ambitious doctors seeing 80 or more patient encounters per day. This is an entirely different service model to the patient, and often entails an expansion of the doctor’s workday and work week to cover largely fixed costs.

The future will also bring a material increase in management sophistication, both for doctors and staff, as well as increasingly scrupulous cost containment practices. However, there are limits to how far we can take that in a business with many fixed costs. Most of the work to sustain profits will have to come from revenue enhancement, not cost containment.

We’re going to have much larger practice groups developing, but that doesn’t mean that nimble soloists won’t be able to survive. Mergers and acquisitions will rise, I predict, but this will vary depending on the competition in each individual market. Rural markets will continue to be underserved, profoundly so in many cases. I’m now seeing the leading edge of an emerging epidemic of senior practice owners in less-attractive markets who are having to close their practices down when they retire because they are unable to attract successor physicians, even when they steeply discount buy-in terms.

We will be seeing three or more associate optometrists per ophthalmologist, which will generate more passive income. Right now we have about two ODs per MD in the United States. In the most efficient environments, we may be moving toward four, five or even six ODs per MD.

In the future, we’ll see an increase in direct-to-patient fees, including much higher refraction fees, no-show charges and fees for non-covered screening and care upgrades.

ASC profits will continue to soften a bit, especially with upcoming reimbursement reform, but ASC ownership will become increasingly critical to sustaining acceptable cataract surgery profitability.

Optical dispensing is going to rise to 30% or more of the typical practice revenue, especially as we add more optometrists and offer ever more full-service care.

Refractive surgery is fast becoming economically viable only in higher volume centers.

Custom IOLs will rise to at least 30% of total case volume in the future. To drive this, doctors will need to more effectively harness direct-to-consumer marketing. Right now, the typical practice is spending, on average, only about 2% or 3% of its cash flow on direct-to-consumer advertising. This will rise to 5% to 8% and higher in elective-oriented practices.

The most aggressive, risk-tolerant and hard-working providers will seize these opportunities, while there will be, necessarily, an uncomfortable acquiescence to the new era by the rest of the profession.

Our ability to adapt over the last 40 years gives us hope about our ability to adapt to and overcome the challenges ahead.

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 a new book, The Women of Ophthalmology. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; Web site: www.pintoinc.com.