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Tough economic times may necessitate practice changes
An expert in the practice management field offers 20 responses for practice owners and managers to consider during this economic downturn.
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 John B. Pinto |
It is tough to pen an article of topical practice advice in a world where the cycle time of ghastly news has been abruptly compressed to minutes and you are reading this many weeks after it has been written.
From this end, it feels like trying to write a first-aid manual while embedded in a slow-motion 50-car highway pile-up, all the while hoping the air bag still works, your internist is on call and your insurance man is on speed dial.
In retrospect, we had it coming. America has succumbed to every fiduciary’s lament: “If your outgo exceeds your income, then your upkeep becomes your downfall.”
At press time, the most recent news is dire:
- A $700 billion bailout plan was approved by Congress.
- Guru Warren Buffet predicted disaster if it did not pass.
- The stock market had its largest drop since 1987.
- Even the most credit-worthy can expect tight capital access.
- Car sales are off by 25% in the last month, and dealerships are closing.
- Interbank lending rates are soaring, clogging the pipelines of commerce.
- Small businesses with tight cash flows are missing payrolls.
By the time you have this issue in hand, recessionary storms may be swirling into depression strength. Or not. You may be in a state of disbelief and panic. Or not.
Let’s hope the “or not” has come to pass.
Where does this leave all of us in “ophthalmology land?”
The effect on ophthalmology practices
The importance of health care as an issue with the electorate has been cycling up and down for the last year, trading rank with the Middle East wars and the economy. As I write this, the dramatic bursting of the debt bubble and the intrigues of the election itself are center stage. Health care is in a distant, trailing third place. How does this affect the average surgical eye practice in America?
Unless the bailout gains traction and restores consumer confidence, refractive surgery volumes will erode further. “Lucky” practices this year are experiencing only a 10% drop, average practices 30% and the unfortunate ones 50+%.
Reports from the field are that the typical general-geriatric provider is at present relatively untouched, with small year-on-year practice gains in settings where everyone is working hard and no more than 5% to 10% declines in less vigilant practices.
One anticipated impact of the banking and credit crisis is that borrowing will become more expensive and more difficult. Although the average ophthalmic practice is not capital intensive compared with the rest of industry, building projects, satellite initiatives, new doctor hires and similar development work may become more challenging. De novo startups by untried doctor-entrepreneurs can be expected to decline somewhat in the intermediate term if capital dries up, which is unfortunately happening at the same time that I am beginning to see some practices shelve their hiring plans. New grads have been in the driver’s seat for the past several years — what a difference a few months can make.
My “monster in the closet” concern is that continued economic malaise will provide political cover to allow some or all of the slated 21% Medicare fee cut in 2010 to go into effect. In the most challenging scenario, the average ophthalmologist’s income could abruptly decline by about one-third or more in about 15 months.
What direction will health reform take? Even before the current financial difficulties came to light, thoughtful economists in and out of government realized that the country lacked the resources to pay for expanded care for the uninsured. Now that the U.S. balance sheet is eroding further, and much more visibly to Main Street, I do not believe we can expect meaningful, national health reform for at least the next decade.
| Pinto’s development doctrine | |||
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Here are five determinants that provide a useful screen for new practice initiatives such as those discussed in the article. 1. Assess and prepare for the cash flow consequences of any proposed business initiative. 2. When making your practice larger or more diverse, be ready to manage the resulting complexities. 3. Every practice initiative should, within an acceptable time frame, improve the standard of care, increase practice security and give the owners a pay raise – ideally all three. 4. Align the incentives for all of the stakeholders in your practice. Patients. Payers. Staff. Providers. 5. Remember that health care is a local business. Do not overextend to distant operations or offbeat services unless you have abundant capital and proven operational competence. |
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Instead, we will continue to muddle through — as we have for the past decade — with creative state and local experiments, as well as the actions of private employers to reduce benefit costs. These are all inexorably shifting more costs to the recipient of care, the “patient shared responsibility” movement that leaders in our field, such as Richard L. Lindstrom, MD, and others, have been tracking. This year alone, based on a study just released by the Kaiser Family Foundation, annual deductibles have jumped 29% for those with health insurance coverage.
Surgeons, their managers and their advisers should watch the news closely and keep their fingers crossed. They should re-evaluate major development initiatives, especially in the elective care arena. But most of all we need to rededicate ourselves to providing great care while running ever more efficient, effective, progressive business units. Here is a short action list.
Prospective responses for practice owners, managers
1. Review lay staffing levels and push benchmarking responsibilities down to department head levels, where those closest to the scene can best gauge the real needs of the practice. Make deeper seasonal adjustments in labor levels than you have in the past. Test the limits of each department to do with one less person, or even a few less hours, than they once thought essential for the job. Reward supervisors for labor cost containment. Note: Do not reduce staffing to a degree that harms patient accounts claims and recovery, reduces provider efficiency or diminishes customer service to the point of being uneconomic.
2. Continuously review and work to improve utilization by provider, as well as for the entire practice. Under-testing, poor cross-referral between subspecialists within the same practice, excess time between appointments, insufficient encouragement to shop in the optical department and other gaps can reduce marginal revenue and leverage a disproportionately large drop in profits. Gaps here have been well-tolerated by your practice’s bottom line in strong economic times. Not today.
3. Ramp up partner and provider communication. Business challenges in a practice commonly result in a reduction in doctor-to-doctor harmony. Providers fight over expenses, access to patients or perceived referral slights. As the practice’s administrator or managing partner, expand doctor meeting time and be proactive in addressing discord.
4. Eliminate business or clinical processes that do not add proportional value. Eliminate data gathering and reports that are not used to make management decisions. Reduce patient movement. Check to make sure that doctors and technicians are not duplicating history taking or testing steps. Note: Do not eliminate value-added services to patients that could lead to better care or (appropriate) higher charges.
5. Limit capital outlays. Until the trajectory of the current recession is clear, table nonessential purchases. For purchases you do make, adopt formal economic thresholds – for example, “We purchase in a timely fashion all equipment required to deliver contemporary care in our community. For other equipment that is not obliged by this quality mandate, the purchase must be forecast to generate a net profit after all expenses are considered: staffing, promotion, maintenance, lease or interest payments, depreciation and obsolescence, etc.” Some practices find it useful to retard the pace of equipment acquisition by either using an annual budgeting process or requiring a 60-day “cooling-off” period, rather than allowing impetuous providers to buy the latest gizmo. That said, do not use a recession as an excuse for “poverty thinking.” You have to spend money to make it; take full advantage of the likely expanded tax incentives to purchase needed equipment.
6. Examine the value added by each member of middle management. Most large practices require a head tech, a manager of billing and reception services (or one for each area), a bookkeeper, someone to coordinate marketing and outreach efforts, an optical supervisor and site managers for each office location. Ask: Are all of these positions required? Is there something unique about the talents of the current team that would allow them to do more with less? Could we have a “flatter” organization?
7. Focus on the top line. Because most practices today are already careful about expenses, most profit gains are driven by incremental revenue gains. Beyond ramping utilization, practice revenue is driven by patient volumes. The bar has been significantly raised in this area in the past decade. Generalists who once topped out at 35 or 40 patient visits are now routinely seeing 50+ encounters. Just serving three more patients a day can result in a six-figure annual net profit boost per provider.
8. Boost ancillary fees. Ten years ago, refraction fees were minimal or nonexistent. Today, fees range to $75+ and in a general practice are charged routinely in about 25% of patient encounters. The fee now averages about $35. I have never seen a practice that raised a refraction charge from this middle-of-the-road fee to $45 and then rolled back prices due to patient complaint. No-show fees, uncovered retinal imaging and other testing fees, and custom IOL upgrades are just a natural and increasing part of the shared patient responsibility movement now taking place in medicine.
9. Do not shortchange marketing. A common instinct in a soft economy is to reduce advertising and promotional outlays. While it is perfectly reasonable to audit the results and investment return of every marketing activity and eliminate lagging tactics, your practice’s marketing costs as a percent of collections should remain the same in good and bad years alike: 3% to 5% of revenue in the typical general practice, 8% to 12% in a LASIK practice, 1% to 3% in a retinal or other subspecialty practice.
10. Consider compression to a 4-day workweek. Staff and doctors would both appreciate working one less day, and it could boost profits if you are facing an absolute ceiling on patient volume. If patient volumes are stagnant, the empty office can be leased out one day a week to visiting subspecialists. Doctor downtime can be deployed working as a visiting provider in another clinic, such as by proving MD coverage in a distant optometric practice.
11. Examine satellite profitability. As professional fees have softened and travel costs climbed, your remote service sites may no longer be profitable. Calculate the average monthly profit per office location, applying the best allocations of revenue and expenses you can, and divide this figure by the average number of MD hours, including travel time, per location. This exercise may point out sites that should either be eliminated, put on a “watch list” or actively turned around.
12. Review and potentially revise professional staffing and recruitment plans. If patient growth falters, the existing provider base may be able to handle patient volumes. If visits actually decline, it may be time to consider downsizing associate or semi-retired providers. In addition, factor in that the typical peri-retirement provider may decide to work longer than planned to offset worries about the sufficiency of retirement funds in a falling equity market.
13. Brace yourself for more drastic fee reform. A severe or prolonged recession could provide the political cover needed to make future slated Medicare fee reductions stick.
14. Review tax strategy and personal financial planning. All-but-certain personal and corporate tax reform — up, down or sideways, depending on who wins the White House — may change your tactics for minimizing adverse tax exposure and taking the greatest possible advantage of emerging tax benefits.
15. Assure liquidity. Examine your balance sheet for a quick ratio — current assets divided by current liabilities — that materially exceeds 1.0.
16. Lock in access to capital. While you are in a relatively strong business position, negotiate durable lines of credit with your commercial bank. General guidance is a secure line of credit equal to not less than 3 month’s operating expenses before owner compensation.
17. Review insurance coverage. Think through what-if scenarios. If you temporarily or permanently lost a high-revenue provider, could the remaining doctors cash-flow the business? If not, purchase appropriate insurance to hedge against this potential adversity, which could be merely difficult in good economic times but crippling to some practices in softer conditions.
18. Review practice contracts. Buy-sell agreements are commonly negotiated and then left to molder in the files until a doctor dies or is disabled. Review your agreements. Are the buyout provisions still reasonable in the context of practice scale and the generally falling value of goodwill?
19. Examine the strength of your commercial and personal banking establishments; to the extent practical and appropriate, arrange per-institution balances to conform with current FDIC insurance limits.
20. Stay informed. If you had a wobbly patient, you would examine his vital signs frequently. The same applies when the “patient” is the U.S. economy, on which you depend for your practice’s success. Read widely. Educate your board. Limber up your ability to respond to both threats and opportunities.
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 The Women of Ophthalmology. He can be reached at 619-223-2233; e-mail: pintoinc@aol.com; Web site: www.pintoinc.com.