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Here we go again: 20 early recession-proofing actions to take now to help your practice
Most of these tips will be helpful even if the economy continues to flourish.
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“The business cycle ... is the downward and upward movement of gross domestic product around its long-term growth trend. The length of a business cycle is the period of time containing a single boom and contraction in sequence. These fluctuations typically involve shifts between periods of relatively rapid economic growth (expansions or booms) and periods of relative stagnation or decline (contractions or recessions.)” – Wikipedia
The business cycle is the rhythmic rise and fall of economic growth that occurs over time. This cycle is a useful tool for understanding the economy. It can also help you make better practice and personal financial decisions, even if you are not an economist.
Each business cycle has four phases. They are expansion, peak, contraction and trough.
“Expansion” is where we are at now. The gross domestic product (GDP) growth rate, healthy at 2% to 3%, just hit 4%. Unemployment typically bottoms out during an expansion at about 5%, but government analysts say we are at about 4% now. And inflation is targeted for 2%, and 3% is on the horizon. Is it time to call the top?
The stock market roars upward during an expansion. The price-earnings ratio of the S&P 500, a basket of large U.S. stocks, climbs from typical averages of about 15 to the current value of nearly 25.
At the end of the expansion comes the peak, and then like a roller coaster, there is an inevitable slide into recession. GDP growth rates fall and then turn negative. Business investments and hiring slow down. Unemployment ramps. Stocks tumble.
Although the government is nominally tasked with managing the business cycle, its levers and buttons to do so are imperfect, and some recessions are extra long and deep, including the “Great Recession” of 2008, despite best efforts.
It is about now, with the current expansion getting decidedly long in the tooth (it has been going on for twice the usual expansion period of under 5 years), that thoughtful practice owners and administrators should be packing their parachutes.
Although nobody knows when the next recession will occur or how deep it will be, there are a number of generic steps you can take. Most of these will be helpful even if the economy continues to flourish.
1. Start keeping meticulous track of practice performance. This is not an era to be looking at your financial and volumetric performance stats once a quarter. Spending on elective health care services (glasses, refractive surgery) is a pretty reliable leading indicator of a looming recession. And remember that conditions in your individual market could be different from rosy national stats.
2. 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. Do not reduce staffing to a degree that harms patient accounts work, reduces provider efficiency or diminishes customer service to the point of being diseconomic.
3. Continuously review and work to improve utilization by provider, as well as for the entire practice. Under-testing, under-coding, 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 materially reduce marginal revenue and leverage a disproportionately large drop in profits. Gaps here were well tolerated by your practice in strong economic times. Perhaps not a year from now.
4. 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. Increase doctor meeting time and be proactive in addressing discord.
5. 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. Do not eliminate value-added services to patients that could lead to better care or (appropriate) higher charges.
6. Limit capital outlays. Until the trajectory of the next recession is clear, table nonessential purchases. For purchases you do make, adopt formal economic thresholds (eg, “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.”).
7. Examine the value added by each member of middle management. Most successful 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?
8. Focus on the top line. Because most practices today are already careful about expenses, key profit gains are largely driven by incremental revenue gains. Beyond ramping utilization, practice revenue is driven by raw 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 per day are now routinely seeing 50+ encounters. Just serving three more patients a day can result in a six-figure annual net profit boost.
9. Boost ancillary fees. A generation ago, refraction fees were minimal or nonexistent. Today, fees range to $100+ and in a general practice are charged routinely in about 25% of patient encounters. The fee now averages about $45. I have never seen a practice that raised a refraction fee to $45 and then rolled back prices due to patient complaint.
10. Do not shortchange marketing. A common instinct as an economy softens 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, 2% to 4% in the typical general practice.
11. Examine satellite profitability. As professional fees have softened and some travel costs have 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 be eliminated, put on a “watch list” or more vigorously turned around.
12. Review and potentially revise professional staffing and recruitment plans. If patient growth falters, with the next recession, the existing provider base may be able to handle patient volumes. If visits actually decline, it may be time to consider downsizing associate or semiretired 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 a resumption of fee reform. A prolonged recession could provide the political cover needed to make unpleasant Medicare fee reductions.
14. Develop written, staged response strategies to reduce your anxiety about the future. Stage 1 might only include a few light adjustments. Stage 3, the difficult choices. This approach to staged responses should be mirrored in your family’s financial planning.
15. Assure liquidity. Examine your balance sheet for a quick ratio (current assets divided by current liabilities) that materially exceeds 1.0. Make sure you always have ready access to a minimum of 3 months’ average operating expenses in your working accounts.
16. Lock in access to capital. While you are still in a strong business position, negotiate the most durable possible lines of credit with your commercial bank(s).
17. Review insurance coverage. Think through all the what-if scenarios. If you 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 all the more difficult in a falling general economy.
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. Are the buyout provisions still reasonable in the context of practice scale and the generally falling value of goodwill?
19. 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. Start following what could only be called the early signs of “recession porn” — the following headlines are recent and their sources reputable:
Forbes, March 20, 2018: The Next Recession Might be Worse than the Great Depression
- Look for recession in 2019 or 2020.
- Consumers are tapped out and slowing their purchasing.
- Looming trade wars would accentuate a recession.
Fortune, July 19, 2018: The End is Near for the Economic Boom
- Interest rates are back on the rise.
- Not enough available workers, which will limit growth.
- Rising oil prices will put the brakes on growth.
20. Meet with your personal financial adviser and discuss whether your retirement funds are appropriately hedged. While the conventional wisdom is to not try to time the market, locking in gains and lightening up leveraged holdings may be indicated.
- 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.