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The $10 Million Club: Solving problems on the way to becoming a much larger practice
Large practices can take steps to maintain their competitive edge, and use their size and resources as a basis for continued growth.
Only a small percentage of ophthalmic practices in the nation ever reach $10 million or more in annual collections. But the lessons learned along the way by these market leaders are critical to pass on to practices still striving for this benchmark, and perhaps equally valuable for surgeons with less-vaunted business goals.
You’d think the owners of these larger practices had it made. But interestingly, practices in the “$10 Million Club” have an even greater difficulty than smaller practices deciding where they should be heading next. Physicians in these practices often reach an elevated threshold, beyond which it’s difficult to conceive their next strategic destination.
Managing partner
This cohort of major practices typically has many characteristics in common. Starting at the top, they generally have one, highly driven, charismatic leader — often the founder. But the physicians next in line below this lead physician rarely have the same talents; the pool is simply too small. Unlike a large manufacturing firm that can choose from thousands of potential CEOs, inside and outside of the company, large practices can only turn to a handful of ascendant partners or partners-to-be; or they must be ready to relinquish control to the skills of a superior lay manager.
Being the managing partner of a $10+ million practice is more than 10 times the challenge of leading a $1 million practice. And the two best solutions for this problem take years to unfold: grooming an existing partner for the job, or seeking out in the next partner-track associate a physician with proven leadership talent.
This means the leaders of larger practices can’t put off until the bitter end their selection of a successor. In small practices the partnership can draw straws to pick their next leader, and turn out just fine. In large practices, the wrong grooming and selection of a leader can cripple the institution, especially as management difficulties compound in the future.
Losing competitive zeal
Large practices commonly feel as though they have run out of things to do next. By the time a practice reaches $10 million or more in collections, virtually all possible ancillary services have been developed. There is generally already at least one ambulatory surgery center. Optical dispensing is old hat, and the special testing department can’t really add any more patient services. In already-large practices, all or nearly all appropriate subspecialty areas are covered, and any that haven’t been added yet are likely of no interest to the founders, either due to an incompatible patient base (pediatrics) or lackluster economics (neuro-ophthalmology).
As the largest (or near-largest) player in their market, practices in the $10 Million Club often run out of the competitive zeal they once had. It’s a little like becoming the best tennis player in your club; you no longer have a “pacer” out ahead, driving you to improve. Also, with age and relative success, the founding physicians can often run out of financial needs; with no more homes, cars or dream vacations on the list, or simply a desire for more free time, the motivation to strive dims. Medical entrepreneurs are like any other kind, driven in part by financial reward and a striving for social rank.
If the next generation of physicians in the practice hold similar or greater dreams, the practice can readily undergo another doubling on their watch. But without this, the practice is like a kingdom with an ineffectual prince in line for the throne. And when a lead physician leaves, you lose not only his leadership, but his production. Everyone else’s overhead rises, and a negative profit spiral can ensue, reinforced in turn by the lack of leadership.
Diseconomy
I’ve found that at or near the $10 million threshold, practices can go through a period of “diseconomy.” This is the opposite of the expected economies of scale, where sheer complexity and all the moving parts demand a stronger middle management team, upgraded information systems, new facilities and endless meetings to facilitate communications up and down the line.
It almost inevitably happens in these settings that the partners (particularly the cost-sensitive younger and older partners) develop a preference for optimizing near-term physician take-home pay rather than long-term success. This conservative bias halts the growth of large practices in its tracks, although the partners may feel for several quarters or even a few years that cost-containment is working. After that, parsimony in areas like marketing, development of the management team and ongoing facility maintenance catches up and claws every dollar back from the partners in successive years. With continued short-term focus, practice profits slide even lower than they were before someone got the bright idea to fire the gardener, let the techs go without a supervisor and allow a junior clerk to take over a half-million dollar marketing program.
Centralize or not?
By the time big practices get big, they’ve had a chance to experiment deeply with centralization vs. decentralization and with outsourcing vs. insourcing. They’ve already found out that it’s better to centralize billing but decentralize phone pickup in a practice with many office locations. They’ve rationalized down about as many costs as they dare, which is always a frustrating state to reach for the most cost-conscious partners. And even when they do find costs to shave, they’re often small in the context of a $10+ million budget. Long-gone are the heady days of being a loosely-run $5 million company, and finding a way to bring $50,000 to the bottom line with just one change in IOL vendors.
On the revenue side, large practices have the “Proctor & Gamble” problem; you can’t drive a large company at high-percentile growth rates. Even a huge success is a relatively small addition to revenue. This takes some of the excitement out of the game for entrepreneurial physicians who remember the profit pop when they first added refractive surgery or an ASC. Entrepreneurial physicians who are forced into mere stewardship over what they’ve built often get lax about the details, and their inattention can send their practices back down from where they came.
Most practice owners in enterprises at this scale have to be comfortable with the transition to an era of fine-tuning and polishing, sanding with 500-grit paper and waxing, rather than changing wholesale the shape of the company.
Practice scale begets opportunity
These apparent constraints that come with scale 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 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 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 deal-makers 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. Physicians 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 physicians in fully mature practices can engineer a pay raise for themselves is through the passive income of other employee physicians.
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 about 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 physicians 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 out routine care that clogs their schedules, keeping them feeling not only bored, but held back from more profitable care of 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.