Brace for impact of coronavirus: What now? What next?
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Ophthalmology is a wonderful profession, but it is uniquely exposed to the adverse impacts of COVID-19:
- The 7,000 or so private ophthalmic practices in America are mostly fragile, small-time operators, with high fixed costs, limited capital reserves and profit margins that have been squeezed even lower for a generation.
- Our staff are highly trained and specialized. It is hard to dismiss eye care employees and hire back the same talent in a few months.
- Our mostly geriatric patients are the most susceptible to dying from the virus. Given recent fatality statistics, geriatric health specialists could lose 5% or more of their patient base.
- About a third of ophthalmologists are 60 years and older, putting them in a high-risk category.
Just 30 days ago, America had a couple hundred cases. As of this writing, nearly a quarter of the planet’s 1 million confirmed cases are in the U.S. For epidemiologists, it is business as usual, the familiar pandemic pattern of case-case-case, cluster-cluster-cluster, then “BANG!”
Check out what could be called Johns Hopkins’ real-time “COVID-19 vs. Humans scoreboard.” At least for the present, Team Human is definitely not winning.
The final scale of human damage from COVID-19 is not yet discernable. The economic damage is similarly uncertain. Given the wide range of potential outcomes, practices are right to tuck down quickly and decisively into a defensive position, suffer as little as possible during the storm and prepare themselves for the eventual recovery.
The most common questions we are getting at the firm is, “What is the expected scenario for the impact of COVID-19 on my practice, what is the adverse case scenario, and how can I assess our fitness under each?”
Impact of virus
As Farr’s Law of Epidemics informs us, infectious disease cases rise and fall following a bell-shaped curve. If reports are to be believed, China’s new case curve was materially dampened in about 3 months and Korea’s in about 1 month. You can begin to discern the peak in a number of Europeans countries. Most countries, including the U.S., are still in the first few weeks of the front-edge, asymptotical rise in new cases.
The height and duration of Farr’s curve for any epidemic are influenced by several factors. In the case of COVID-19, the high transmissibility of the virus, driven in part by asymptomatic hosts, results in its rapid spread. Because official “active case” counts are now thought to be lagging by an order of magnitude or more, the fatality rate appears to be alarmingly high at 2+%. This in turn has ignited international social distancing
Data from Germany, with more comprehensive testing (and thus a higher denominator), put the fatality rate at perhaps 0.5%, but this is still five times the influenza fatality rate and substantiates the current lockdown in the absence of proper testing.
The width (ie, duration) of Farr’s bell curve in U.S. municipalities and other hot spots will probably not approximate that of China and Korea because our social controls are lighter. One can imagine instead that it will take about 2 months to achieve peak daily infection rate and 4 months to the much-diminished new-case rates now reported in China and Korea, which are allowing these countries to relax social distancing and slowly get back to business. Let’s use that as a lead assumption for business planning purposes.
But of course, the U.S. is a large, geographically diverse country. Practices in locations where strong social distancing was implemented early on, compliance was high and health infrastructure is comparatively strong (eg, California, New York) will probably get to the far side of their pandemic bell curve sooner. Other parts of the country will climb their own Farr’s curve.
The experience in the U.S., I believe, will thus not be one acute 4-month-long bell curve, but the additive overlay of curves emerging chiefly in all of the country’s population centers. This, combined with the decentralized, under-resourced nature of public health in America, will stretch the total duration of the curve out significantly. Today New York is the hot spot. It looks like New Orleans is next in line. Several hundred American cities are preparing for their turn.
Each of these hot spots will eventually cool down. It remains to be seen if a “cooled-down” New York is allowed to return to pre-coronavirus life locally or whether — in an abundance of caution — we wait until a significant part of the entire country has to cool back down before getting back to business and reopening our clinics.
At some point, the aggregate, overlapping bell curves will indicate to public health leaders that as a nation we are over the peak, and like China today, social distancing and business closures will begin to unwind. When that occurs, we will start to get back to normal.
But it probably will not happen all over the country at once, and forecasts now being made by some practice owners and their advisers for a full restoration of accustomed cash flows by mid-summer are, I believe, overly optimistic.
As reported in The New York Times recently, consumers may remain risk averse, making them prone to thrift for many quarters after COVID-19 is defeated — maybe even years. If anxiety endures and people are reluctant to spend, business restoration will be slower. “The psychology won’t just bounce back,” Charles Dumas, chief economist at TS Lombard, an investment research firm in London, said in the Times article. “People have had a real shock. The recovery will be slow, and certain behavior patterns are going to change, if not forever at least for a long while.”
This is not easy for me to write. Or for you to read. But the foregoing could help as you try to ascertain the most likely month-by-month percent of net revenue you can expect. Putting it all together, I believe for now that the accompanying table presents realistic expected case and adverse case models for ophthalmic gross charge production in the average U.S. practice through the balance of 2020. This is divided into general and retinal categories because of differences in nonelective vs. elective components; glaucoma might be expected to fall somewhere in between. Elective plastics and LASIK cash flows will be much more deeply affected.
|
|
Mar |
Apr |
May |
June |
July |
Aug |
Sept |
Oct |
Nov |
Dec |
|
Expected case: general |
60% |
10% |
10% |
15% |
30% |
50% |
65% |
80% |
85% |
90% |
|
Adverse case: general |
50% |
5% |
5% |
10% |
20% |
40% |
50% |
60% |
70% |
70% |
|
Expected case: retina |
80% |
40% |
40% |
50% |
60% |
70% |
70% |
80% |
90% |
90% |
|
Adverse case: retina |
60% |
30% |
30% |
40% |
50% |
60% |
65% |
70% |
80% |
80% |
Note: Figures shown in each cell are the percent of baseline gross professional fee charges expected, before factoring in the usual third-party payer adjustments and delays to yield net revenue received on average about 25 days down-calendar. This does not include fast-diminishing old accounts receivable from services rendered, earlier. While I believe that the “expected” and “adverse” estimates are approximately correct, it is important to understand that the U.S. and the world were heading for a recession and market correction already, and this, combined with jittery patients (who could be expected to delay routine care until well into 2021), may make the tabulated figures overly optimistic.
Every practice will experience their own return to productivity at a different pace depending on location, patient mix, furloughing patterns and owner assertiveness in getting back up to speed. While recent legislation and CMS policy changes may advance access to capital and help practices in offsetting labor and facility costs through forgiven loans, these programs at present offer only token assistance. Many practices are going to get to the far side of this crisis only by taking on significant debt loads backstopped by personal guarantees. You will be paying this debt back down for 5 years or longer post-coronavirus. For practice owners in this position, you can think of this as a multiyear 10% to 25% personal income cut.
This month-by-month gross charge forecast table may be improved (ie, things will get back to normal faster) in the earliest hot spots of the country and pushed down-calendar in secondary markets where COVID-19 arrives later. If social distancing is unduly relaxed and new cases surge, this could increase the delay in restoring your practice to full production. If a safe, effective and readily available antiviral therapy surfaces or testing is introduced at rates seen in Korea and Germany, the June to December cells could be somewhat improved.
This table is only a starting point in your planning. From here you can apply your own educated estimates to the trajectory of COVID-19 in your community and generate one or more pro forma spreadsheets showing expected cash flows and capital access needs. What follows is a highly simplified month-by-month approach; you may decide to break this down weekly. There are six steps:
1. Revise the table above to construct your own local “expected case scenario” in Excel. If you have a practice plus an ASC, construct two revised tables.
2. Now open a new Excel page. Down the y-axis, show visits, cataract cases, expected gross charges, net collections (the aggregate of old A/R and temporarily meager ongoing net revenue coming in); also show high-level expenses by category: partner comp (likely to be $0), non-partner provider comp, lay staff wages/taxes/benefits, facility costs, etc, plus a catch-all for general and administrative.
3. Across the x-axis, show monthly columns from March to the end of 2020.
4. At the bottom of each sheet write down an expanded set of assumptions, so anyone working through this crisis with you can see where you are coming from: describe how you are handling vendor and landlord payments, your staff layoff and furlough approach, how much urgent retinal or other care you will keep providing, your use of SBA, CARES, PPP and similar new financing, etc.
5. Then create one or two more (ASC and clinic) spreadsheets in the same format on which you track actual cash flows, using the same x and y labels; share this with the board and senior team monthly with any appropriate commentary from the senior leadership team. (In smaller practices, this team will be the owner, the administrator and any advisers.)
6. With each monthly edition, fine-tune your cash flow forecast, and use the emerging cumulative losses to inform how much capital you need to get through this. It would ordinarily be prudent to have access to at least two times your peak cumulative losses. Thus, if your cumulative losses were forecast to be $500,000 by November, you would want to have access to not less than $1 million in the form of credit lines, new SBA program loan funding, personal resources, etc.
Checklist of principle COVID-19 activities
By the time you are reading this, you should already be well along in working your way through this list.
- Establish a coronavirus task force; meet regularly; draw on advisory resources.
- For surgeons near retirement, consider if COVID-19 will accelerate or retard your retirement date; surgeons very close to retirement may want to simply close down now.
- Protect patients and employees — medically, economically and empathically.
- Protect providers; they are the chief assets of the practice. No doctors mean no practice.
- Stay informed about local developments; monitor the American Academy of Ophthalmology website and public health resources closely.
- Have your local accounting and banking resources help you take advantage of fast-evolving government aid (SBA, CARES, PPP, etc), even if these are now appearing to be less robust than when first announced.
Decide where you are drawing the line on continued patient care. The typical practice as of this writing is limiting their care to emergencies and sight-threatened patients (retina, uncontrolled glaucoma); a very small number of clinics are remaining more liberal and seeing some patients whose status could be considered less urgent. A comprehensive guideline is on the AAO website. Operating within state and federal guidelines, and your own professional ethics, provide all the revenue-generating care you can: sight-preserving care, emergency services, telemedicine, etc.
- The more liberal you are about the level of patients you are seeing, the more aggressive you need to be in applying safety standards to staff and patients alike.
- Per above, develop a dynamic, changeable forecast of expected and adverse revenue scenarios at least through December 2020.
- Conduct a line-by-line review of practice expenses and apply all feasible/practical containment.
- Use the prior two items above to prepare an expected and adverse case cash flow pro forma.
- Use this pro forma and the practice balance sheet to determine capital access requirements and the gap you will need to fill with new lending.
- Secure, with as large a margin of error as you can, all of the capital you forecast to be needed to get to the far side of the pandemic in your local area.
- Compress your practice’s financial reporting cycle; consider weekly profit and loss updates.
- Consider possible restructuring (permanent shutdowns of faltering satellites, service lines, the elimination of positions that were redundant even pre-coronavirus, etc).
- Consider possible new alignments (local practice merger-consolidation, hospital alliances, private equity partnership, etc).
- Be prepared to apply deeper second-round cost containment if conditions deteriorate.
- On a more pleasant note, write a plan for recovery and growth; update it as conditions change and apply it with vigor.
I hope this helps your planning work. Stay safe, healthy and grateful that for the average eye surgeon in America, COVID-19, for all of its frights, will represent only about a 3% to 5% lifetime cut in pay.
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, Simple: The Inner Game of Ophthalmic Practice Success and a new book, UP: Taking Ophthalmic Administrators and Management Teams to the Next Level of Skill, Performance and Career Satisfaction. He can be reached at 619-223-2233; email: pintoinc@aol.com; website: www.pintoinc.com.