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Ophthalmic megatrends 2014 through 2024, part 2
Ophthalmologists should prepare for the inevitable changes that will alter health care.
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“It is always wise to look ahead, but difficult to look further than you can see.” – Winston Churchill
“Every man gotta right to decide his own destiny.” – Bob Marley
With this column we continue where we left off last month, with a number of ophthalmic megatrends coming over the horizon over the next decade.
Our post-recession trajectory
The consensus of economists is that we have mostly emerged and will continue to slowly move past the Great Recession. A countercurrent opinion holds that our country’s return to positive growth — and a hoped-for resurgence that optical, elective care, cosmetic and related eye care categories will rise in lock step — is a false dawn brought on by unsustainable federal stimulus. If these contrarians are correct, we will continue to experience a very broad, U-shaped recovery with a much longer trough than we have had thus far, or even a multi-dip, W-shaped recovery. Such ups and downs will be dispiriting for providers and problematic for any owners and managers who rush their development efforts ahead of a more lasting economic resurgence. The next decade will reveal the actual path of the general economy on which eye care depends and provide a context for understanding just how “great” the last recession really was.
A growing capital intensity
Twenty years ago, a solo practice could be well-equipped for about $200,000, or roughly 20% to 25% of annual cash flow (collections). Today, a practice with a contemporary array of equipment and furnishings needs to spend around $500,000, or about 40% to 50% of annual cash flow. A decade hence, with softening fees and rising technology, it will likely take about 60+% of annual cash flow to set up a new office. The math is even more stunning when expressed not as a percent of annual collections but as a percent of annual profits, in which case the ratios are about 60%, 120% and 200%, respectively. Said another way, imagine a 55-year-old surgeon today who is two-thirds of the way through his career and started his solo practice 20 years ago. At the start of his career, he could furnish an office on about 7 months’ worth of profits. At the end of his career, 20 years on, it would take about 24 months of profits to hang a shingle again. De novo practice growth will increasingly become the province of large practices and institutions with better capital access. At the same time, smaller, sparser offices and slower technical adoption will prevail for small-time operators. Major regional eye centers may find an opportunity in developing open-access diagnostic testing centers.
Energy-economy-ophthalmology nexus
Most of the major legacy petroleum fields of the world have passed their peak production, and outputs are shrinking. This is why oil prices spiked in 2008, helping in turn to spur the Great Recession. Although oil prices have been sharply lower since then with the “fracking” revolution, some economists and peak-oil theorists believe that as post-recession petroleum demand rises worldwide and fracked fields deplete at a much faster pace than originally expected, reserve capacity will be stretched thin, and barrel prices will be briskly leveraged back upward into higher ranges. A U.S. economy that falls backward or only grows anemically will have several knock-on effects for eye care providers, including:
- An enduring era of higher unemployment, constraining the rolls of well-insured patients
- Depressed consumer confidence, retarding the purchase of elective services
- Stronger political cover for more health care reform and draconian Medicare fee reductions
- Sustained challenges for others in the eye care community, including manufacturers of ophthalmic equipment and products, inhibiting the pace of innovation
A new era of billing defensiveness
Ophthalmology practices are the last holdout of Ma and Pa Country Store credit accounting. Patients without an eye emergency and with an outstanding balance due are seen anyway, and the new charges are simply added to the unpaid balance. This largesse is kind and in keeping with the kindheartedness of most surgeons, but it is no longer appropriate. It will be even less so in future years. With the Affordable Care Act and soft authorization protocols, we are even seeing a sort of “medical shoplifting” occur here and there, as patients profess coverage through the balky insurance exchanges and then skip payment when they have been found to be going bare.
Resurgent inflation and dollar devaluation
The toughest scenario for a largely fixed-fee profession such as ophthalmology is one in which dollar-denominated fees are stagnant or falling while dollar-denominated practice costs are rising with inflation. If this occurs, as seems likely even if at the slowest of paces, key practice cost drivers such as staffing, facilities and technology could climb sharply as a percentage of fixed revenue, shrinking profits in a leveraged manner. For the moment, most practice cost increases are tempered in a still-wobbly post-recession environment with stubbornly high unemployment rates. Most practices have been able to essentially freeze lay staff wages, and a few have even rolled back hourly wage rates. The present environment calls for continued cost vigilance and a resistance to capitulating on wage requests for as long as ethically possible. As much as you may feel for your office workers and their families and would like to relax the purse strings, remember that these staffers, their families and society at large depend even more on your disciplined efforts as a leader to sustain the long-term viability of your practice — and their jobs.
Pareto was right
The well-known “80-20 rule” is being played out in the distribution of surgical cases and overall ophthalmic market share. A small percentage of high-volume surgeons and surgical institutions are harboring a slowly growing majority percentage of patient care. This is happy news for larger institutions, but not so much for smaller players. Today’s broad ophthalmic middle class — providers earning $300,000 to $500,000 per year — can be generally expected to slide backward over the next decade, while a few jump forward to greater success. The resulting ophthalmologist wage gap, of course, will mirror the now-much-discussed general wage gap and the growing discord between the 1 percenters and the 99 percenters.
Value-based health care purchasing
At present, the majority of health care provided in America is paid for on a fee-for-service basis. If the provider serves the patient, he or she is paid irrespective of outcomes or cost-effectiveness. This is the way that ophthalmologists have been paid since the invention of the profession. Based on government and private payer planning now under way, fee-for-service may be replaced, or at least materially supplanted in ways that reward highly efficient and high-quality providers and punish, even eliminate, others.
The concept of value-based health care purchasing is that buyers should hold providers of health care accountable not just for units of service, but for both the cost and quality of care. Value-based purchasing brings together information on the quality of health care, including patient outcomes and health status, with data on the dollar outlays going toward health. It focuses on managing the use of the health care system to reduce inappropriate care and to reward the best-performing providers. This nascent and potentially disruptive payment approach stands in stark contrast to long-standing efforts to apply unit price discounts (eg, PPOs and vision care plans), which transiently reduce unit costs but can lead to higher utilization rates, rebounding total costs and no net increase in favorable health outcomes. Despite much chatter, the jury will remain out on this one for years to come. On a hopeful note, it is hard to imagine how ophthalmology, in which almost all outcomes are both nearly perfect and objectively measureable, can be harmed by a pay-for-performance approach.
Solo, small practices should continue to survive
The death knell for solo practices has been ringing loudly, starting more than 35 years ago when I first began my consulting career. Today, a new generation of worrywarts assumes that the end of the boutique, mom-and-pop practice is nigh. Horse feathers. Small, nimble outfits can, with effort and intelligence, often deliver a unit of patient care for less cost than their mega-competitors, in which there can be frustrating diseconomies of scale. In truth, I get more 911 rescue calls from large practices than small ones.
Custom/premium surgical care proliferates
The typical client is now implanting well more than 15% of their cataract patients with premium IOLs, including toric lenses. Fifty percent rates are not unheard of. But more 0% surgeons exist than you might expect. What will the future bring? I predict that 10 years from now we will see the same three adoption bandwidths: zero, moderate and extreme. As we have seen with LASIK, I believe we can expect mild pricing competition to encroach on the average selling price of these technologies.
Femtosecond lasers today are where phakic IOLs were at their outset. At the advent of any new technology, there is an immediate chorus of naysayers and a countervailing chorus of, “No, this is the real deal, the next big thing.” A tug of war ensues between these two camps, and one side or the other always wins. In some cases, the benefits of the new option are pretty obvious to most rank-and-file ophthalmologists from the outset. That is what happened when the transition was occurring from planned extracapsular cataract extraction to phacoemulsification; a rapidly swelling cohort of doctors concluded that phaco might be a whole lot better for their patients and practices. As a result, the diffusion of that technology into the profession was fast; today, it is essentially 100%. Other good ideas have taken hold much more slowly but ultimately become the standard of care. Where will femto end up? In the present marketplace of ideas I am exposed to, I am having a hard time understanding how femtosecond laser-assisted cataract surgery is going to become the standard of care even 10 years down the line unless pricing comes way down.
Patient expectations, demands will not decline
As baby boomers age and increasingly populate your waiting room, their expectations for Lexus service at Chevrolet pricing will be a growing fact of practice life. They will expect spotless facilities, snappy service and one-stop cures, accompanied by a customer experience that is educational, entertaining and thrifty. And all this at a time when you and your management team are trying to pack in the masses and trim the fat. Do the best you can and paint on a smile. You and your staff will continue to bear the brunt of patient frustrations, which in a fairer world, would be borne not by you but by their employer, their insurance company and their elected government officials. So it goes.
Profit margins continue to soften
Depending on the twin trajectory of ongoing health reform and future Medicare fee adjustments, surgeons will continue to accommodate to higher cost margins and lower profits. Gross mitigation, in the form of optical shops, ASCs and related ancillary development, is a tapering opportunity. Most practices that could develop such entities have already done so, which means that raw efficiency and marginal output gains (seeing 60 patients when you once maxed out at 45) are the easiest strategies still under your direct control. Adding optometric providers as durable associates, although harder and riskier, remains the most underutilized mitigation opportunity at present, and it is a strategy that meshes well with limits to the number of newly graduating ophthalmologists.
“Bunts and base hits” prevail
The day-to-day pursuit of incremental revenue, cost control and profit gains can still materially plump up economic performance in the average practice setting. Even the best-run practices in America waste dollars and miss out on profits daily. In the typical practice, seeing just three more patients per day can result in a $100,000+ net annual profit gain. For successful practices, the next 10 years will be an era of redoubled vigilance, the energetic pursuit of missing profits, both small and large, and a ceaseless dissatisfaction with the status quo. Increasingly, the responsibility for these gains will not fall on practice managers but on providers themselves, who ultimately control how long, how aggressively and how intensely they are willing to work.
Smaller nest eggs, later retirement dates
Surgeons in their last years of practice who have now seen their retirement plans melt down several times in the course of three decades no longer trust the certainty of “market rates of return.” They are hitting the reset button on when they expect to retire. Even doctors who were a couple of hundred percent over their economic finish lines are having to recalibrate their planned post-retirement lifestyles. At a practice level, the uncertainties of the past decade will continue to impact the next one, retarding the pace of retirement among boomer-aged doctors and affecting decisions about whether practice free cash flow should be reinvested back into the company or used to backfill the remaining divots in the owner’s retirement plan.
As I wrote last month, with changes such as these on the horizon, “Who will want to practice a decade from now?” Many. Probably most. Those with bureaucratic or pliant minds will accommodate readily to these demands. Those who work for larger institutions will be shielded more than entrepreneurs in private practice. Those who entered the profession 30 years ago have been slowly accommodating to the accelerating encroachments.
And, of course, those who are just entering practice today do not know any better. They do not remember a time when the patient record was a 5” × 7” card on which was written, “Patient doing fine,” a time when allowable fees were whatever the doctor charged, and “revenue cycle management” was a noontime walk to the bank to deposit the checks.