Responding to physician income headwinds
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“Profit is not the legitimate purpose of business. The legitimate purpose of business is to provide a product or service that people need and do it so well that it’s profitable.”
– James Rouse
“Civilization and profits go hand in hand.”
– Calvin Coolidge
As the old saying goes, “When your outgo exceeds your income, your upkeep becomes your downfall.” Ophthalmologists are realizing this unhappy truth a little more each year.
The drivers for this are manifold:
- Rising operating costs: Pandemic and now post-pandemic inflation has seen rising energy costs, supply disruptions and tighter labor markets. In “normal” businesses like appliances, floral shops and construction, one can simply raise prices. But in most domains of ophthalmology, we live under a regime of largely fixed prices.
- Sticky or reversing third-party payments: Even though payers recognize that operating costs are rising for their contracted providers, which would ordinarily lead to adjustments if this were a kind world, payers have more pricing power than doctors. This is especially true in urban markets with an excess of providers. In Los Angeles, for example, commercial contracts paying just 70% of Medicare allowables are routine.
- Private equity or other corporate employment: For the last several years, an important fraction of private practices have divested or merged into larger business collectives. More private practices will do so in the future. In all such transitions, for perfectly reasonable business reasons, some of the money that used to flow to doctor income is sidelined for company profits.
Don’t forget that at the same time your income is hitting speedbumps, your personal lifestyle costs are rising across the board. Since 2012, the average annual home price increase has been nearly 8%, according to the Federal Housing Finance Agency. (And that is just the price — higher interest rates are having a much greater impact on monthly ownership costs.) Auto costs were up 13% in 2023, according to AAA. Food and travel costs rose by a similar percent last year.
Providers operating in major urban centers are in the toughest position. A surfeit of providers allows third-party payers to discount allowable fees. Facility and staffing costs are higher in large cities. Competition for city-based patients can be intense, leading to discounting for elective care. And on top of all that, personal living costs are much higher than in suburban and rural settings, so you are pinched from both sides.
What can you do? Here are 10 ways to counter the physician income headwinds that are blowing a little stronger each year.
1. If your personal circumstances permit, move to a more favorable part of the country where there are fewer ophthalmologists, lower costs, more patients and prospective staff, and more generous payers. A simple screen is to count the total population in a market and divide by the number of existing ophthalmologists. If the ratio is about 20,000 people to one ophthalmologist, it is in line with the average American market and likely not too welcoming. If the ratio exceeds 40,000 per ophthalmologist, your career will be easier and more lucrative.
2. Work in a private practice setting. In the typical private general ophthalmology practice, the partner doctors bring home around 40% of each revenue dollar they collect. Contrast this with doctors working in a health system or private equity-based practice. In such settings, the providers generally receive about 30% of collections, and the last 10 percentage points of profits are retained by the institution or corporation.
3. Add services. Here are the “big three.” First is having your own surgery center, which doubles the profit per cataract surgery that the owner-doctor earns. Second is optical dispensing, which boosts overall profits by about 10%. Third is employing optometrists. Each OD hired yields at least $50,000 in passive income for the MD-entrepreneur and sometimes a good deal more.
4. Work in a practice with higher profit margins. The range of profitability in anterior segment private practice is 30% to 45%. Some practices struggle at 20%; some achieve 50%. If you are looking for a job — especially as a partner-track associate — one of your early questions for your recruiter should be, “What is the profit margin of this clinic?” Joining a practice boxed in by low profit margins (due to poor management habits, low productivity, locked-in high rent, etc) places a low ceiling on your potential earnings.
5. Increase your patient volumes. The typical anterior segment surgeon can comfortably see 40 patients or more in a full clinic day. Some see 80 or more and manage to continue to provide great care to delighted patients (who judge the quality of care more by the effectiveness and “presence” of their doctor than by raw minutes on the clock). Whatever your volume is today, seeing just three more patients per day can boost profitability by $100,000 per year, a 25+% pay raise in the average setting.
6. Increase your surgical density. Cataract surgeons will typically see anywhere from five to 30 patient visits for every surgical case they perform. Those who set their practices up as optometric referral centers see a much higher ratio of surgeries to clinic encounters, and their revenue density shows it. If your revenue per visit is even marginally higher, your profit margin rises sharply because the cost to transit a single patient visit (staff, facilities, marketing, IT, billing and on and on) is largely fixed.
7. Train in a more lucrative subspecialty. Consider retinal care. Beyond its obvious benefit to patients and fascinating science, retinology leads the ophthalmic earnings curve, with the typical subspecialist earning more than twice what a generalist earns. Fun fact: Every hour that a retinal surgeon spends in their fellowship training program results in a $10,000 lifetime earnings premium.
8. Increase your testing assertiveness. While every practice and patient base is different, in the average general practice, about 5% of patient visits include a visual field, and about 10% to 15% of visits include an OCT. How does that compare with your rates?
9. Don’t overlook refracting. The typical general practice charges out a refraction on 10% to 30% of visits, with a fee that ranges from $25 to $125 around the county. Where you fall on this range will materially impact your profits. For a single doctor seeing 500 visits per month with just 10% of patients charged $25, the annual revenue comes to $15,000. The same provider charging 30% of patients a refraction fee (ie, every time this service is performed) and collecting $125 comes away with $225,000 per year (and both doctors are probably doing about the same amount of refracting, with the same direct staffing costs). For the average client who is making an effort and is reasonably assertive about patient-responsible fees, we see a 20% charge rate and a $60 charge. That comes to $72,000.
10. Extract as much value as you can from every resource you buy. Labor and occupancy costs consume half or more of your operating expenses. Take a deep dive and examine the value you draw from each. In an anterior segment practice, you should be transiting one patient visit for about every 2.5 hours of lay staff labor that you pay for. (In overstaffed client practices, we see doctors paying for 3 hours or more of labor to see a single patient.) You should typically not be paying more than 6 cents of every dollar you collect on rent and utilities. In a practice with $1 million in annual collections, that would come to no more than about $60,000 in occupancy costs. We often run into clients who have overbuilt their facilities (or, said another way, underbuilt their patient volumes) to the point of spending up to 15 cents of every dollar collected on rent and utilities.
- For more information:
- John B. Pinto is president of J. Pinto & Associates, Inc., an ophthalmic practice management consulting firm established in 1979. He is the country’s most published author on ophthalmology management topics, including John Pinto’s Little Green Book of Ophthalmology: Strategies, Tips, and Pearls to Help You Grow and Manage a Practice of Distinction, UP: Taking Ophthalmic Administrators and Their Management Teams to the Next Level of Skill, Performance, and Career Satisfaction (with Corinne Wohl), Simple: The Inner Game of Ophthalmic Practice Success, and Ophthalmic Leadership: A Practical Guide for Physicians, Administrators, and Teams. Available now for purchase at slackbooks.com. Receive 20% off with promo code PINTO20. He can be reached at 619-223-2233; email: pintoinc@aol.com; website: www.pintoinc.com.
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