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For ophthalmologists, changing times require changing tactics
Profit management in the coming years will mean shifting from revenue management to expense management.
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“I believe that thrift is essential to well-ordered living.”
– John D. Rockefeller
“A bargain ain’t a bargain unless it’s something you need.”
– Sidney Carroll
“Thrift comes too late when you find it at the bottom of your purse.”
– Seneca
During this summer’s Midwest drought, every farmer was looking to the heavens for rain. They would still lose a contest for breath-holding and lip-biting to the typical ophthalmologist, who for years now has been looking to Washington and asking:
- Will I be safe next year?
- Will my fees go down? By when? By how much?
- Will I make it to the end of my career as a private practitioner?
The breath-holding and lip-biting are not just national ophthalmic phenomena. They are spreading north, too.
Cuts in Canada
John B. Pinto
Based on a Canadian client’s report, the typical hard-working eye surgeon in Ontario will face the prospect of a roughly 10% cut in his or her overall annual collections through a progressive withholding of professional payments starting in 2013. (Keep in mind that a mere 10% Medicare fee cut in the next few years is something the typical surgical society lobbyist in America could only hope for. The expectation is for something closer to 15% or higher.)
Here is how it will work in Canada. Surgeons will be able to keep 100% of their first $400,000 in government collections. They will then forfeit 5% of the next amount up to $750,000 and then 10% of collections up to $1 million.
Surgeons will be paid only 75 cents on a dollar of allowable charges above $1 million, a 25% cut. For above-average Canadian surgeons who will collect $1.5 million in 2012, their revenue will fall to about $1.35 million in 2013. But they have it much better than their American counterparts, as it turns out. Here is how.
There is a big difference between the underlying business model of U.S. surgeons and their Canadian counterparts. American surgeons spend a lot more overhead on each patient encounter than in Canada. Here in America, the typical cost margin is 60% of collections in a well-run practice. In Ontario and throughout the rest of Canada, 60% is the typical profit margin.
If we can assume — correctly, I think — that both U.S. and Canadian surgeons are going to experience a roughly 10% fee cut, how do bottom-line results compare for each side of the border? Let us compare the results — which surgeon would you rather be? Here is a simple table (see Table 1).
Source: Pinto JB
If you practice in America, your profit per hour is commonly less than in Canada. After a 10% fee cut, your Canadian colleague is still way ahead of you income-wise, even though you have both taken an income hit.
But the most important reason why the Canadian surgeon is ahead of you today and more resilient to cuts than you is his or her lower cost structure and specifically how much less it costs in the typical Canadian practice to transit a single patient visit. The difference is astounding (see Table 2).
Source: Pinto JB
This table compares U.S. and Canadian surgeons. But what I would really like you to see embedded in this simple example is a business mandate in the years ahead that is not only comparative with colleagues in Canada today but also with your own practice tomorrow. We all must find a way to reduce the cost of seeing each patient. To do otherwise means an untenable dollar-for-dollar reduction in your take-home pay for every dollar in slated fee reductions.
This can be accomplished by seeing more patients with the same overhead or by reducing practice overhead. We will obviously need both in the years ahead. But as most hard-striving practices are nearing their practical limitations on revenue enhancement, I predict a phase shift to a renewed emphasis on cost containment.
And here will be the tough part: You will have to contain costs without reducing the quality of care, while complying with an ever-more-onerous regulatory environment and competing with every other eye surgeon in your community.
Cost containment in your practice
As this month’s column goes to press, the U.S. gross domestic product growth is straining at barely stall speed. Job growth lags. Middle-class incomes have been stagnant for a generation. And the so-called “fiscal cliff” looms in January.
The demand for eye care is rising 3%+ per year in America. It is hard to imagine how we are going to afford meeting that demand when the general economy is growing at perhaps 1% per year, unless we curtail physician fees. Medical fee reductions in America, sooner or later, are baked in the cake, I am afraid.
Abroad, the nations of Europe are arranging a circular economic firing squad. Lesser-developed countries of the world are bracing for a significant contraction in their growth rates. We are going to have to learn how to live within limits. Whether you practice in North America or just about anywhere else in the world, we are all entering a new and unaccustomed era of relative frugality. The sky is not falling. But some stooping may be obliged as you find your way in the new era.
Where to start? It all begins with your mindset. As the lay or physician leader of your practice, you can either wring your hands or you can take up the interesting challenge of reducing what it costs your practice to see each patient.
Some potential opportunities are obvious, painless and easy. I just visited a practice with more than 1.5 technician payroll hours per patient visit, when the norm is 1.0 or less. In a practice like this, it is as though the doctor incinerates a $10 bill after every patient visit. The profits here and in similar settings are at least figuratively going up in smoke.
In another practice I know, an otherwise sensible surgeon is insisting that he needs a minimum of six exam rooms to see 20 patients in a morning, when half that would obviously suffice for most of his colleagues.
These are easy settings to apply a solution. But in other practices, perhaps yours, all of the coarse cost containment has been accomplished. That still leaves scores of opportunities for fine adjustments, which can add up to significant savings in the aggregate. Some examples:
- Trimming overtime with tighter approval standards
- Holding off on expansions that will not add proportional value to patient care
- Buying reconditioned equipment rather than new
- Consolidating practice loans and stretching out payments to improve near-term cash flow
- Marketing internally rather than externally
- Ceasing routine management reports not being used to improve practice performance
- Controlling inventory better
- Tapering supplies to just what is needed near term
- Getting all providers to agree on one product to lock in volume discounts
- Running the practice evenings and weekends to extract more value from fixed costs
- Reducing staff and associate compensation to conform with market rates
- Negotiating deeper discounts with vendors
- Renting rather than buying, or buying rather than renting
- Renegotiating facility lease terms, even mid-contract
- Experimenting with leaner staffing than you ever thought possible
- Simplifying at every level
Next month I will discuss aspects of this new mandate toward frugal innovation and how to get yourself and your practice in this new game.