Comparing succession options for solo and smaller ophthalmic practices
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“Retirement is not in my vocabulary. They aren’t going to get rid of me that way.”
– Betty White
“Any intelligent fool can make things bigger and more complex. It takes a touch of genius — and a lot of courage — to move in the opposite direction.”
– E. F. Schumacher
In 1995, the RAND Corporation, an influential nonprofit think tank, published a study portraying that there was an overall excess of eye care providers. As a result, in the years that followed, residency programs tapered training slots, and business consultants like us used the study to influence client recommendations.
What a difference 30 years makes.
A growing cohort of baby boomer patients (which is great for ophthalmology) is now matched by a growing bubble of baby boomer eye surgeons (which is not so great for ophthalmology). The impacts today include:
- higher numbers of ophthalmologists retiring than entering the profession;
- fewer job candidates than jobs;
- longer appointment waiting lists in some communities;
- and a net increase in population-per-provider statistics.
There are many dimensions of these medical workforce dynamics impacting individual surgeons. For younger surgeons, there are more job openings — and much higher base salaries. Their new practices are growing faster than in the past, with less relative competition in many markets. For mid-career surgeon-owners of private practices, it has become profoundly more difficult and more expensive to hire MDs. And for these same mid-life doctors, personal workloads and collateral stresses are rising.
The challenges are perhaps toughest for late-career doctors and particularly those who are in smaller practices looking for a succession plan and eventual retirement.
In the last year alone, we have worked with scores of these small-enterprise doctors who are just a few years out from retirement and want to transfer their patients and staff to the care of the next generation. This is easy in larger private practices, where succession protocols are embedded in the operating documents and there is an agreed precedent for the next retiring doctor. It is a little harder if you own a smaller practice.
Here are two basic options available for peri-retirement surgeons in small-scale practices, along with comments on each, including a simplified comparison of the financial results for the surgeon who is winding down.
Traditional succession
Most small-practice owners, as they approach their last few professional years, think of this option first. Hire an associate MD. Make them a partner in 2 or 3 years. Slow down. Retire. Traditional succession along these lines has several attractive features. Your staff will retain their jobs. Your patients will remain in familiar surroundings with a protégé you handpicked. And the practice you have built may still be going strong long after you retire. These features, combined with the pleasures of mentoring a young doctor, make this approach popular. But there are increasing headwinds and a few downsides.
MD recruitment has become slower and much more expensive. The young surgeon you could have readily secured in 6 months with a $250,000 base salary a decade ago now commands a base of $350,000+ and can take more than a year to find. And that is just the beginning.
Only about 50% of partner-track associates go on to actually become partners. This high failure rate means that the senior doctor has to start 5 years or more before their planned retirement date to allow for one or more false starts. What’s more, the net financial benefit of traditional succession over simply running out the clock as a soloist can be uncertain. In their first associate year, the typical junior doctor rarely does more than break even with their recruitment, onboarding and compensation costs. If they do not flourish and progress to ownership, the senior doctor takes an income hit for a year or two and then has to start all over again. This can be difficult for doctors nearing retirement who are not quite over their financial finish line and are hoping that the sale of their practice will secure the last of their nest egg. Bottom line? Simply running out the clock and winding down a smaller practice can be financially advantageous.
Non-succession: Keeping the status quo, then closing
Under this approach, you do not add a partner-track associate and skip the challenges, costs and risks of doing so. Let’s compare this with the traditional option, both with and without successful partnering. Here are the assumptions with a solo practice:
- The baseline is a durably solo general ophthalmologist with $1 million in net collections and $400,000 in profit. When they retire, they get $300,000 in salvage value for the practice tangibles, cash and residual accounts receivable less debt.
- Alternate one is the same general ophthalmologist who recruits and retains a partner-track doctor. The senior doctor’s personal income dips $100,000 in the first year, catches up with prior earnings of $400,000 the second year and rises to $450,000 in years 3, 4 and 5 because the junior doc is helping to cover fixed overhead. The junior doctor pays $250,000 for a 50% ownership stake after 2 years and buys out the senior doc for another $250,000 upon his retirement, for a total of $500,000.
- Alternate two is like alternate one, but the junior doctor stays for only a year and then departs; the senior MD remains solo and sells the practice for salvage value at the end of the fifth year.
As you can see from this simplified example (Table), there is not much financial difference between the baseline of staying solo and selling the practice for salvage value at the last minute and the alternatives of successfully or unsuccessfully hiring a partner-track associate.
If your retirement funding is complete and you are financially independent, then you can decide whether to stay solo or recruit a successor based on nonfinancial considerations: Is keeping the practice open after you retire important to you? Would you enjoy the process of mentoring a younger colleague? How would you tolerate a failed effort to find a successor?
If you are just a few years from retirement and are not yet financially independent, there is a good argument for staying solo and not risking the downsides of a failed succession effort.
This still leaves a few succession options on the table, including:
- Sell to — or merge with — a near-lying colleague/competitor practice: Your practice may be worth more to a local peer than to a young doctor just getting started.
- Sell to a local health system: This is rarely seen in ophthalmology (a non-admitting specialty) but does occur. You will be paid less for your practice as compared with most peer-to-peer sales, but there can be offsetting salary, leadership, scheduling flexibility and other benefits.
- Sell to private equity (PE) or a similar corporate entity: Until the rise in interest rates in early 2022, PE firms typically paid as much as twice peer-to-peer prices for practices. PE firms are less generous and more discriminating now (at least until interest rates decline again), but this is still a viable exit option for small-scale practices in selected communities.
- Reference:
- Estimating eye care provider supply and workforce requirements. https://www.rand.org/pubs/monograph_reports/MR516.html. Published 1995. Accessed Sept. 13, 2024.
- 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. He can be reached at 619-223-2233; email: pintoinc@aol.com; website: www.pintoinc.com.
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