Pinto: Business side of ophthalmology is in a ‘plateau’ era

In this first report from the OSN Section Editor Summit, Practice Management Section Editor John B. Pinto discusses the life cycle of ophthalmology and how to cope with its current flat period.

A note from the editors:
Ocular Surgery News convened its annual Section Editor Summit in Las Vegas in March. In this first installment of reports from the OSN Section Editor Summit, Practice Management Section Editor John B. Pinto gives an overview of the business of ophthalmology.

Some of the recently past and current events in ophthalmology might make us feel a little bit down. We all have an individual sense of what is going on in ophthalmology and what is going on in the country and the world. Hopefully, we will start to feel good about things soon.

Life cycle

First, let me review the natural life cycle of products, people and practices that we have recently examined in my OSN column, “By the Numbers” (April 1 issue, page 19). In practices, there is a birth, growth, a plateau, a decline and ultimately a death. The coming limits to revenue and profit growth, even in the face of rising demand for eye care services, will transform and increasingly separate the winners from the losers.

In the professional business enterprise of ophthalmology, each of these natural life stages can be applied at three levels: your career, your individual practice and the entire U.S. eye care profession. At the level of your personal career, you train hard to give birth to a professional life and livelihood, followed by growth at a faster or slower pace, maturity to a relative plateau and a decline in the last few years, which ends in retirement.

At the level of your practice entity, if you are a solo practitioner, the birth-to-death arc coincides with your own professional years, unless you pass along your practice to another physician upon retirement. Group practices, by contrast, can live on for several generations. In well-managed practices, the institutional decline and death stages can be avoided.

This brings us to a consideration of the same birth, growth and maturity cycles as they apply to the broad national domain of eye care. We now appear to be reaching a relative plateau after decades of steady growth.

In 2006, 16.5% of the $13 trillion gross domestic product will be spent on health care. According to the Centers for Medicare and Medicaid Services, by 2015, 20% of our projected $20 trillion GDP will be spent on health care. That is nearly as much as the entire 1990 economy, before adjusting for inflation. How does the United States compare in its health care spending with the rest of the industrial world? Germany today spends about 11%, Canada spends about 10%, and France spends about 10%. Our industrial competitors are spending just over half what we do as a percentage of their annual output. Since 1965, U.S. health care costs have risen from 6% of the total economy to 16.5%.

Because of the limits to individual output, after strong efforts to increase patient volumes, surgeons are now on a plateau of seeing about 600 patients per month. They find it is no longer possible to make 5% to 10% annual volume gains the way they could when their baseline was only about 400 patients per month. Fifteen years ago, I would go into a client practice, and they would say they see 300 or 400 patients per month. You would come out the hero 3 days later because you would show them how to see 400, 450 or 475 patients. They would get an immediate gain in pay without that much more subjective feeling of having worked much harder. But you cannot do that anymore.

There are some utilization limits emerging. Utilization of services has increased to a natural plateau. As the safety and efficacy of cataract surgery has improved, the incidence of surgery has climbed from about 40 eyes per 1,000 patients per year to about 60 or 65 eyes today per 1,000 patients. Beyond that ceiling, it is hard to ethically increase the surgical density of most practices.

Direct patient billing is on the rise. That also is coming to a plateau, however. In 2000, the typical practice charged little or nothing for refraction. In 2006, refraction fees range up to $75. Twenty-five percent or more of patients pay for such services. In the typical client practice that I have today, the practice makes 10% or 15%, or even 20%, of their profits just on their refraction fee. If I had stood up at a meeting 20 years ago and said, “A big piece of your future profit is going to come from refraction fee,” they would have shouted me out.

Obviously, there is a big push into accommodative IOLs and utilization for those out-of-pocket services. These are all natural market responses to the sense of the plateau era.

Billing

The most prominent limit to ophthalmic revenue and profit growth in future years will be frozen or falling third-party payer allowable fees, which may occur even in an era of rising inflation. The 1-year reprieve that we had this year on the slated 4.4% Medicare cuts will only forestall the all-but-inevitable fee reductions. There is more than a 30% level of fee cuts slated in Medicare that, absent an act of Congress and a signature in the White House, will have to occur over the next 5 years.

John B. Pinto

There is a subtle but growing plateau emerging that is going to shift health care costs to patients. This will lead to the deep rationalization of health care buying habits. It is one thing if you go to see a doctor and virtually all of your costs are covered. As patients are going to have to pay out of pocket for services, that is going to cause them to rationalize what they spend.

The approval of direct billing of Medicare patients for accommodative lens implants and associated care is a good news/bad news story. Costs shifted to patients, both directly through service upgrades and indirectly through higher copays, high deductibles and medical savings accounts will bring more dollars to the eye care market. However, as more of the costs shift to them, patients will be more strongly motivated to neglect needed eye care, including preventive care.

If this trend continues, health care delivery will become a much more volatile sector economically. Practice revenue will rise and fall with the general economy. Currently, it is somewhat unhinged from the general economy. Practices that provide a high quality of services but are loath to do consumer advertising are going to fall behind practices with just average services who do more advertising. There will be growing concerns about access to needed care and an increasingly tiered system of health care.

Health care expenditures are rising at about 2.6 times the pace of the overall economy for a variety of reasons: increasing technical sophistication, a rising standard of care, the aging population, the demands of a more educated consumer and a rise in elective care. This disproportionate growth cannot go on forever. It must eventually be equilibrated with the growth pace of the overall economy.

National scale

There are three key customers for ophthalmic care: business, government and patients. Businesses that are faced with health insurance costs that rise faster than their sales can only shift costs to workers, reduce or eliminate benefits, reduce base wages, reduce staffing levels or reduce company profits.

The government, which is faced with health care costs that exceed tax collections, can only reduce allowable fees, disallow selected services, raise taxes, premiums and copays, or go into deficit spending. We are doing all of these things today and have been for years.

Patients, faced with an even larger share of an even larger health care bill and having seen their average real wages fall, can only try to find more generous employers, accept lower wages, ration their use of health care, clamor for government action or scapegoat the players in the delivery system — including you, the providers.

There are about 80 million baby boomers in this country. They started turning 60 this year. Unless we trim Medicare and Social Security (which is only about one-fifth the size of the Medicare budget), the national debt will be $11 trillion by 2010. The interest costs alone at nominal interest rates will equal the current Pentagon budget.

This new plateau era of eye care is obviously a small segment embedded within the broader trends for health care.

Playing it safe

How are surgeons changing in the transition to this plateau era? There is a shift in profit-enhancement tactics. Profit growth via revenue enhancement — seeing more patients, doing more services and marketing better — starts to shift to growing profits by reducing costs. I have not done a formal study on it, but in the last year, for every doctor who said, “We need to increase profits in our company; we need to see more patients; we need to do more surgery,” I have many clients who said, “We need to improve profits, so how can we cut costs?”

Cost containment becomes more interesting than revenue enhancement. The danger here is that at a practice level, a certain level of cost cutting leads to a downward business spiral.

Compensation and resource squabbles are surfacing. Practice divorces are increasing. It has become harder to reach consensus. Practice managers are caught in the crossfire, and their tenures are expected to shorten.

The pace of new technology adoption slows down. It is not that we are doing fewer services. We are going to do more services. It is the amount of revenue yield per patient visit and per doctor hour that is going to be falling.

Much of what is so exciting about eye care is the fast pace of technology development. So it is hard to imagine an era in which the technology adoption rate of doctors is slowing down. In the next decade, capital equipment demand will taper sharply. The exceptions to this will be for products that increase our ability to see more patients or to generate new fees.

Everyone plays it safe, a natural reaction to the plateau era. Managers and doctors become less bold. The development cycle slows down. Instead of saying, “We should acquire five new practices,” or “We should add a second suite to our ASC,” it is more a sense of, “We should take it slow,” or “We should try it in 6 months.”

Rationales for hope

Here are some rationales for hope. In 1990, none of the world’s 10 richest people were American. In 2004, eight of the 10 were American.

The most advanced prevention and cures for eye disease are still in the basic research laboratories, and genomics could lead to a revolution in eye care in the long term. It will not be a surgical revolution, but it will be a genomic revolution in the intermediate or more distant future. The most sophisticated and scientifically sound eye care has yet to be developed and delivered.

The number of seniors age 65 years and older in America will grow 50% in the next 15 years. Most of them highly value clear vision. Americans age 50 years and older control more than $47 trillion and 50% of discretionary income.

If outcomes-based payment arises, there is no more objectively measurable domain of medicine than ophthalmology. Eye surgery outcomes are among the most accountable and the most readily forecast of all specialties. Cash flows in eye care, compared to other specialties, are robust enough to pay for the technology that will drive accountability and compliance.

The most effective eye surgeon is not yet at work. The most financially robust and successful practice model lies ahead in the future waiting to be discovered. The best opportunities lie ahead.

For more information:

• John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consultin 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 and The Efficient Ophthalmologist: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; Web site: www.pintoinc.com.