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BLOG: Orthopedic business language: The derivation of kappa, part 1
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In our education and training as orthopedic surgeons, we spent years learning a vitally important technical language, without which we could not exchange ideas and accumulate knowledge. Amongst ourselves, we may use a term like “varus derotational osteotomy” to easily communicate a complex biomechanical principle, but non-orthopedists would have little idea about what we were discussing. Without our technical language, we could not be successful as orthopedists. It is therefore easy to understand the value of language to any complex occupation.
It is worth noting that as private practitioners, we each wear two hats: surgeon and business-owner. As noted above, we are fluent in our technical language. But, to our detriment, few of us speak the language of business. Even if we did, that language would not be specific to orthopedic private practice. In this blog, we will begin to build orthopedic-specific business language that we can use to examine, communicate and refine our business processes. Rather than starting from scratch, we can begin by deriving our language from similar concepts in pre-existing business language.
The non-orthopedic business world uses TAM, or total addressable market, to express a conceptual framework that represents the potential market a particular company can capture and service. Understanding TAM (and its family of related terms) gives business executives the common language needed to organize, manage and measure the performance of their business plans. TAM is a useful concept we can borrow to begin building our own language.
First, we need to set the conditions for this topic by defining the physical size of the market that each of our practices is intended to serve. The foundation of this concept relies on health care being a geographic business. If the surgeon orients a map such that his practice locations are at center of mass, he should generally be able to draw borders around the area that his practice serves, delineating the population reach of his revenue opportunities. Outside of these borders, people tend to travel away from his practice to other metropolitan areas and practices. While it may be possible to expand these borders, and hence expand his market, let’s assume well-established borders for the purposes of this discussion.
Given this assumption, we can derive a market equation where business opportunity equals the delivery of goods and services plus a coefficient of untreated pathology (neglect).
Opportunity = Delivery + Neglect
In this blog, we will define the opportunity side of the market equation. The delivery side of the market equation will be defined in next month’s blog.
Quantify the opportunity
A 3-D model can be constructed to represent the business opportunity that is created in our markets every day, and we can build this model one dimension at a time.
It is a given that within the defined borders of our local market, new orthopedic pathology is created every day. People sustain fractures, joints become incrementally more painful and arthritic, spinal discs deteriorate and menisci tear, among thousands of other quantifiable pathogenic events. This aggregate creation of new orthopedic pathology occurs independently of the orthopedic marketplace and can be termed the “total daily orthopedic pathology created in the market” or TDOPCm. The TDOPCm represents the first dimension — a measure on the x-axis of the model that we are going to define.
Notice that each pathological entity is represented by a different-sized entry on the coordinate system above. Size, in this case, does matter—and that size is correlated with magnitude of disease, measured by impact on quality of life. A fat disc of pathology may represent a displaced fracture that occurred within the past 24 hours, whereas a thin disc of pathology may represent the incremental worsening of knee arthritis that a future patient has developed during the past 24 hours (Figure 1).
Figure 1. Each pathological entity is represented by a different-sized entry on the coordinate system above. Size, in this case, does matter and that size is correlated with magnitude of disease, measured by impact on quality of life.
Payer relationship
Understanding this initial component, we can now add the second dimension to our model. Each of the individual components of the TDOPCm — every torn ligament, broken bone, or arthritic joint — is attached to a person, and this person has a relationship to a payer (eg, Medicare, BCBS, self). Multiplying the aggregate pathology (TDOPCm) by the aggregate payer component (y axis) yields the “total daily orthopedic revenue created in the market” or TDORCm. The TDORCm creates a planar object with loci of high revenue (eg: the torn ACL in a patient with a strong payer) and low revenue (eg, 4 days of axial back pain in a patient with a weak payer) (Figure 2).
Figure 2. The entity closest to the origin has a relatively small x measure (perhaps representing an ankle sprain), but has a large y measure (a strong payer). By contrast, the eighth entity from the origin has a large x measure (perhaps a displaced fracture), but has a small y measure (a weak payer). By combining these two variables, we can appreciate a good visual representation of the revenue opportunity for each potential orthopedic encounter created in the market during the past 24 hours.
Notice that there is no specific correlation between magnitude of pathology (x-dimensional size) and magnitude of payer relationship (y-dimensional size). In the above diagram, the entity closest to the origin has a relatively small x measure (perhaps representing an ankle sprain), but has a large y measure (a strong payer). By contrast, the eighth entity from the origin has a large x measure (perhaps a displaced fracture), but has a small y measure (a weak payer). By combining these two variables we can appreciate a good visual representation of the revenue opportunity for each potential orthopedic encounter created in the market during the past 24 hours.
Market equation
In final consideration of the opportunity side of the market equation, we consider the practice equity component of total market. Practice equity represents the downstream practice benefits derived from working with important people in our markets. Patients are not islands. They are attached by societal bonds to two critical populations of interest to our practices: primary care referral sources and other potential patients. In every clinical encounter, we not only fix the problem at hand and collect that revenue, we also influence that patient and his referring doctor to recommend our practice to other patients in the future. These two practice equity components, our community reputation and the ease of patient referral process, are what build the relative market value of an established practice compared to the market value of a new practice. “Practice equity” is thus represented on our model by the z-axis. Combining equity value with TDORCm creates a volume of total daily orthopedic value created in the market, or TDOVCm (Figure 3).
Figure 3. “Practice equity” is thus represented on our model by the z-axis. Combining equity value with TDORCm creates a volume of total daily orthopedic value created in the market or TDOVCm.
TDOVCm is a critically important concept within the orthopedic private practice business framework, as it defines the total volume of orthopedic value that is created every day in our market, expressing the opportunity side of the market equation. An extremely important concept to recognize in the diagram above is that TDOVCm does not resemble a homogenous collection of equally sized encounters. Rather, it resembles a lumpy, irregular mass with “slices” of high value and “slices” of low value where the volume of each “slice” is visually representative of orthopedic value for each potential clinical encounter. Within this mass of aggregate orthopedic value that is newly created every day, our business endeavor should be to concentrate on harvesting both a large share of that value, as well as targeting the specific masses of highest value within the volume.
In next month’s blog, we will derive the delivery side of the market equation and use that understanding to examine how our practices can manipulate the equation to better serve our markets.
John “Jay” Crawford, MD, is a partner at Knoxville Orthopaedic Clinic and founder of nextDoc Solutions, a software company that builds custom apps for orthopedic surgery practices. His primary interest is helping private-practice orthopedic surgeons discover and implement strategies to ensure robust and sustainable business performance in a consumer-driven health care environment.