Let’s get bigger? Not so fast — scale your practice intelligently

Consider these five factors as you think about the potential benefits of growing a larger practice.

Issue: May 10, 2017

ByJohn B. Pinto

“All change is not growth, as all movement is not forward.”
– Ellen Glasgow

“Growth for the sake of growth is the ideology of the cancer cell.”
– Edward Abbey

Expectations are high that modest solo and small group private practices, which are still the vast majority of eye clinics in America today, are fading into obsolescence.

As a result, practices are scaling up, senior doctors nearing retirement are running into the arms of private equity firms or local merger partners, and new graduates are choosing jobs with the largest practices and institutional medical centers they can find.

But the fact remains that significant diseconomies — and lower surgeon paychecks — can be associated with larger-scaled ophthalmic practices. Legacy physician practice management companies, including PPMCs such as Physicians Resource Group, the 1990s Wall Street darling that went down in flames, are now being copied by neo-PPMCs in the form of private equity firms — some smart operators and some not so.

Where this will lead is uncertain at best.

Here are a few factors to consider as you, alone or with colleagues, think through the potential benefits of growing a larger practice.

1. First of all, does your market need more ophthalmic care? In America today, we have roughly 20,000 potential patients per eye surgeon, and nearly 14% of these are Medicare age. If you practice in a hip urban hub, with a younger population and just 10,000 people per surgeon, it is going to be hard to grow unless you acquire other practices or develop distal satellites where doctors are scarce.

2. Realize that for existing owners of a mid-sized practice, doubling your scale will not necessarily result in a personal pay raise. Expanding a traditional medical practice is not like expanding, let’s say, a restaurant business.

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Imagine you are the sole owner of a popular pizza restaurant. You gross $1 million a year and bring home $90,000 (the profit margin in a restaurant is a lot lower than in clinical care). You have been making pies in the same location for 10 years and feel like it is time to expand. So you take out a loan and open a second location. In 5 years you are generating $2 million in revenue between the two locations. You do not make another $90,000 because you cannot be in two locations at once and have to pay for a manager for your second location, but you do manage to clear an extra $40,000 in the second location, and your total income is now $130,000.

If you did this five more times over the next decade, you would be up to $330,000, or about the income of a middling ophthalmologist. And you would still be the only owner. And if you are really good, you can franchise your concept nationally.

This kind of entrepreneurial scaling up is much harder to do in ophthalmology:

The capital investment in ophthalmology is notoriously high. You get into the pizza business for under $100,000; it takes a few multiples of this to open a comprehensive eye clinic.
Customers pay for pizzas with cash and credit cards in a 20-second transaction. It takes an insurance clerk 20 minutes to process the typical claim and another 40 days to get the money in the door.
Regulatory hurdles are much higher in medicine than in eateries. Once you pass a basic health department inspection, you can open a restaurant. Compare this with the crushing regulations you labor under daily.
An eye clinic needs expensive, specialized staff who can work up patients and toil over insurance claims; it takes years to get good at these skills. Experienced restaurant workers are inexpensive and abundant and can learn their new job in one day’s orientation.
Most vexingly, those ophthalmologists you hire as an entrepreneur want to become partner and keep half of the profits after just a couple of years.

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3. The key point of this discussion is that pure surgical practices are hard to scale up in a way that is accretive to the earnings of the risk-taking, empire-building surgeon. Instead, if you want to be an effective capitalist and ratchet your income-per-hour upward, you have to focus on those aspects of eye care where you are not obliged to widen the owner pool. There are three main outlets for this:

Develop an ambulatory surgical center. After a $1 million investment, this can provide $200 or more in essentially passive income per surgical case.
Hire optometrists. One-third of the average ophthalmologist’s clinical day is spent seeing patients who are well within a contemporary, well-trained optometrist’s scope of care. Shifting such patients to an associate OD can free up your schedule to care for secondary and tertiary patients, who are both professionally and economically more interesting to most surgeons.
Dispense glasses. Adding a well-run dispensary boosts surgeon-owner profits about 10%, with only modest incremental work and risk.

4. There is one added opportunity for profit-enhancing expansion, but it is only open to smaller, solo and two-surgeon outfits. This is to add one or two surgeons to an existing one- to three-surgeon practice to arrive at the typical two to five doctor economic sweet spot.

Here is a very simple example. Consider a solo surgeon, Dr. Smith, with a bit of extra office space. Dr. Smith adds an associate, Dr. Jones, who eventually becomes a partner. To accommodate the second surgeon, Smith does not need to buy a new computer system, just an extra license. Nor does he need a second administrator or a doubled marketing campaign. He might just need to equip three vacant exam rooms, add incremental staffing, and pay incidental insurance and other minor costs. Here is how the numbers work out:

5. Unfortunately, this simple maneuver does not work as well when adding incremental doctors to an already larger practice. There are four main reasons for this:

In a larger practice, let’s say five+ surgeon-owners, the marginal benefit per doctor of further sharing fixed overhead (facilities, computer systems, marketing, administration and the like) diminish and whatever does fall to the bottom line is divided up more ways. The $100,000 pay raise that Dr. Smith achieved in the example above by adding one doctor does not amount to much when slivered up in a larger practice.
As the number of surgeons grows, the human tendency is for most of them to stop paying attention to the granular details beyond their own clinic pod, so expenses are less well-contained and operations tend to fray in larger practices.
Along with fraying operations can come fraying tempers. More doctors mean more opportunity for conflict and strategic misalignment. This slows the pace at which business problems are solved and opportunities are seized.
A practice at this scale is often tempted to develop satellite offices, which can markedly distract the management team and result in material diseconomies of scale.

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Whatever your growth trajectory, pursue it only with formal preplanning and board approval. Adding a satellite office, a new service for patients or a new provider should always be validated in advance with:

A quality assurance review, indicating that any new services will benefit patients and enhance the practice’s standing in the community;
A pro forma spreadsheet showing that expected cash flows and risks with the new endeavor are acceptable;
A management committee review to assure that any expanded operations, duties or complexities can be handled by the team; and
A boardroom vote of sufficient formality to assure that an adequate majority of the owners are in accord with the plan.

For more information:
John B. Pinto is president of J. Pinto & Associates Inc., an ophthalmic practice management consulting firm established in 1979. John 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, The Women of Ophthalmology, Legal Issues in Ophthalmology, Ophthalmic Leadership: A Practical Guide for Physicians, Administrators and Teams and a new book, Simple: The Inner Game of Ophthalmic Practice Success. He can be reached at 619-223-2233; email: pintoinc@aol.com; website: www.pintoinc.com.