The race is on. Since mid-1999, health maintenance organizations (HMOs) have been contracting with corporate laser centers to provide members with refractive surgery --at discounts of 10% to 25%. So far, more than 100 million HMO members, out of a U.S. population of 270 million, have gained access to refractive surgery as an HMO benefit. If this trend continues, it could threaten the independent, doctor-driven business models that have played a large role in developing the refractive surgery market.

The possible disadvantage to you? It could wrest away your control over pricing, access, marketing and surgical opportunities, making refractive surgery a much more consumer-driven service. The possible benefit to you? It could rapidly increase procedural volume. As a result, more ophthalmologists will be needed to perform more surgeries.

Here, we'll report on the drivers of this trend, their plans and the implications you need to consider.

What is driving the HMOs and corporate laser centers into partnership? It creates a win-win situation for both groups. (See "Recent Corporate-HMO Refractive Surgery Deals" on page 40 for more details.)

Corporate laser centers, hoping to increase procedure volume, are happy to bend on fees to grab more market share.

HMOs, looking for a competitive foothold in a consolidating payer market, can add refractive surgery to their roster of benefits to attract new business. These HMOs take on no risk when signing up laser corporations as providers of refractive surgery. That's because the HMOs don't pay a penny to supplement discount fees. (Although that could soon change, as we'll explain.)

Being able to offer refractive surgery discounts also helps HMOs attract young and healthy patient populations, typically low utilizers of healthcare services. (Most motivated refractive surgery candidates don't have cataracts, glaucoma and other diseases.)

These alliances also help HMOs win care contracts with major employers, which can use refractive surgery discounts to recruit and retain top talent.

"The Proctor & Gambles of the world are asking for refractive surgery to be in their healthcare plans," says Stephen N. Joffe, chief executive officer of LCA-Vision, a laser corporation that now offers refractive surgery to about 50 million HMO patients. "We're beginning to see what happens when the job market gets as tight as it is right now."

Out of nowhere

Until recently, few people expected HMOs to enter the refractive surgery arena -- especially so rapidly. As you know, refractive surgery has always been a unique service that you could charge for independently, in arrangements between you and your patients. Surgical success drove business success, building surgeons' reputations and generating word-of-mouth referrals. Besides satisfying patients in a way few other vision care providers could, refractive surgery provided a hedge against the practice-eroding effects of managed care and Medicare cuts.

But the refractive surgery business model that once worked so well in private practice has evolved into a more complex undertaking. It now seems to favor HMO-aligned laser corporations with tons of capital.

Not only can these corporations readily buy refractive lasers; they can use their marketing muscle to saturate markets more effectively than independent surgeons with fewer resources. At least some of these corporations plan to lure HMO patients with localized marketing, similar to the strategy independent refractive surgeons have used to attract private-pay patients.

"Our plan is to study every market, and design a pricing and marketing plan suitable for the specific markets we're in -- based on the local competitive environment," said TLC President and Chief Operating Officer Elias Vamvakas in a recent press conference. "In some markets, the annual marketing spent will be as little as $100,00 -- and as much as $2 million in another."

Another advantage for HMO-aligned laser corporations is their multiple access sites, which can attract high volume. Such volume provides them with economies of scale that can help them compete aggressively for patients.

The pricing of refractive lasers also seems to favor laser corporations. In the new business model of refractive surgery, high volume translates to lower cost for capital equipment. Many lasers today are leased under a pricing structure that offers a lower per-procedure cost for high-volume providers.

What discounts really mean

The advantages laser corporations enjoy will not necessarily assure them market dominance, however. These companies will face the same competitive pressures -- primarily driven by shrinking procedure fees -- that bear down on independent refractive surgeons.

The good news is that most of the HMO-aligned laser corporations want to hold up the market and avoid deep discounting -- at least for now. Many of the 10% to 25% discounts they're offering are based on bilateral pricing of $4,000 to $5,000.

"As the market moves forward, we anticipate reducing our 15% to 25% refractive surgery discounts to 10% to 15%, depending on local market conditions," said TLC's Vamvakas. "When competition drives down the price of the procedure, the profit margins also go down. So you can't afford to give as big a discount anymore."

TLC, which operates 58 laser centers across the country, is one of the leading players in this new, corporate-HMO business. The publicly traded company has signed up more than 50 million HMO patients and is finalizing contracts for 30 million more. TLC aims to increase its number of procedures for HMO and private pay patients from 95,000 in 1999 to 300,000 by the end of 2001.

Vamvakas predicts that development of this corporate-HMO market segment will progress through the following three steps:

• Laser centers will offer discounts through HMOs (current status).
• HMOs, motivated by competition, will begin offering a co-payment option, meaning HMOs will pay at least some of the surgical fee.
• HMOs will ultimately provide refractive surgery as a covered benefit, perhaps expecting a minor co-payment from patients.

"When refractive surgery becomes a regular part of employee benefit programs, it will take away the mystic of this being a new procedure. It will make it part of normal, accepted health care," said Vamvakas.

Of course, not everyone sees the trend going this far.

"Think about what kind of expense the HMOs would be taking on by doing this -- at a time when most of them are trying to cut costs," said John Wright, D.O., a veteran independent refractive surgeon from Colorado Springs, Colo. "It would be surprising to see very many managed care organizations actually paying for LASIK, given the size of the potential market and the financial impact that this would have on their bottom lines."

Another important consideration: Most of the contracts HMOs are signing with laser corporations are in the untested, embryonic stages. The HMOs still need to sell refractive surgery -- as part of renewal care plan contracts -- to major employers in the months and years ahead.

For example, TLC, the perceived leader of the corporate-HMO model, has provided only 4,000 procedures to HMO patients during the first 2 months of this year. That averages out to only 24,000 for the year -- roughly 17% of the 140,000 procedures TLC plans to perform on private-pay and HMO patients in 2000.

"So far, all we've heard about is the millions of HMO lives TLC and others have signed up, but what do these numbers mean?" asked Dave Harmon, president of MarketScope, a leading tracker of the refractive surgery market. "It remains to be seen if this initiative will bear fruit, in terms of increased procedures. So far, it hasn't."

Long-term effect on pricing

However the trend develops, it will keep all eyes focused on the price index for refractive procedures.

For now, most experts agree that deep discounting is only a ripple in the pond. Most of the major corporate players are emphasizing:

• good outcomes (LCA-Vision is currently planning major outcomes-based marketing initiatives)
• surgeons' experience, reputations and credentials
• the quality of technology, including lasers and microkeratome blades.

This strategy bodes well for all surgeons, independent and corporate alike, because it maintains refractive surgery as a premium service. Even at the corporate laser centers, where discounts cut into surgeons' fees, surgeons can profit more by increasing volume. In fact, corporations expect increased participation from independent surgeons, especially those who don't want the headaches of acquiring a laser and creating their own laser vision correction centers.

"Our business growth will dramatically help our subcontracted, independent surgeons," said LCA-Vision's Joffe. "We're already getting calls from providers who are interested in participating."

But as you probably know, not every laser corporation plans to hold up refractive surgery's premium position. What remains to be seen is how much deep discount centers will drive the refractive surgery market.

Leading the charge at the lower end of the price scale are such corporations as international laser vision correction provider ICON Laser Eye Centers. ICON, one of the few corporations now competing strictly on price, recently signed a contract that will provide LASIK at $749 per eye through an HMO in Utah.

Another player is LASIK Vision of Vancouver. In Canada, the company offers bilateral surgery for $999. It recently announced plans to open centers that will offer LASIK at $1,000 per eye at several sites in California and one in Alaska.

TLC's Vamvakas and other executives at laser corporations are watching these low-end corporations warily.

"We think there will be significant market support for a high-end procedure fee," said Vamvakas. "But the analysis is all over the place. We're looking at it from all ways. It will be a question of what the consumers want. If they want high quality, they'll be willing to pay for it. If they only want price, that changes the business strategy altogether."

The deep discount model is fairly easy to construct, executives say. "You hire a lot of young doctors, put them on a fixed salary and do a lot of procedures," said Vamvakas. "It's not a complicated business proposition. But it's also not a business we necessarily want to be in."

How you could be affected

Lost in all of this discussion is the fact that more than 5,000 entrepreneurial refractive surgeons have significantly helped drive refractive surgery's recent growth, which reached just below 1 million procedures in 1999 and is expected to soar to 1.6 million procedures in 2000.

Dave Harmon, the tracking expert at MarketScope, noted that independent surgeons accounted for about 40% of the procedures done in the last quarter of 1999. Corporate surgeons performed 40%, with institutional surgeons (at universities, hospitals, etc.) trailing at 20%.

Using existing patient bases, local advertising and effective public relations, many independent surgeons have positioned themselves as market leaders across the country. And many other surgeons have grown their practices by allying themselves with these independent market leaders. Independent surgeons have built their refractive surgery practices in much the same way they've built their cataract surgery empires.

These surgeons -- and those who emulate them -- can still expect plenty of support in the market, in terms of start-up programs and leasing arrangements. (See "Keeping Refractive Surgery Independent" on page 39.)

Besides momentum, surgeon-driven refractive surgery business models have another advantage -- the ability to adopt new technologies quickly.

A case in point: David Brown, M.D., has a progressive ophthalmology practice, Eye Centers of Florida, in a 13-county region of southwest Florida. As Dr. Brown moves forward, he's ramping up with a variety of existing, new and investigational procedures, including LASIK, phakic implantable contact lenses, laser thermal keratoplasty, Intacs intrastromal corneal rings, pseudophakic refractive intraocular lenses and photorefractive keratectomy (PRK).

Although many laser corporations profess to embrace new and diverse refractive technologies, the reality is that their business planning is pretty much locked into the capital equipment and standardized routines associated only with LASIK.

LASIK accounts for nearly 90% of today's procedures. But there's no guarantee any one procedure will always dominate, as we saw when LASIK quickly overtook PRK after FDA approval of the refractive laser in 1995. New lasers (such as the recently approved Technolas 217 by Bausch & Lomb) and new procedure approvals will free up the market for aggressive players -- independent and corporate.

"The successful refractive surgeons of the future will be differentiated by the addition of newer technologies, such as the implantable contact lens, and other technologies on the horizon that will get back to having good hand skills," noted Dr. Wright of Colorado Springs. (See "Independent vs. Corporate Refractive Surgery: Who Will Win?" on page 36.)

Look down the road

However these issues play out, keep in mind that you still have time to respond to this trend, whether you are a novice or an established Goliath in your market. The effects of HMOs offering refractive surgery will not be felt in a significant way until at least 2001.

As the future unfolds, we recommend that you pay close attention to local trends in your market. Understanding the forces at work will help you to make better business decisions down the road.

"By the end of this year, we'll know whether the HMO model is working or not in refractive surgery," said Harmon of MarketScope. "Right now, the impact of all of this is negligible. But that doesn't preclude it from being the biggest factor ever in the long-term."

Independent vs. Corporate Refractive Surgery: Who Will Win?

As more HMOs offer refractive surgery through corporate laser centers, many believe it will put independent surgeons at risk.

"As this industry develops, it will be much harder for surgeons not affiliated with a larger group or structure to compete in this marketplace," said Elias Vamvakas, president and chief operating officer of TLC Laser Eye Centers.

But not everyone accepts this premise.

"Let's turn the question around: How can the big laser centers possibly compete with individual LASIK surgeons?" asked John Wright, D.O., a refractive surgeon since 1984 who has performed more than 13,000 LASIK procedures.

Dr. Wright noted that the independent surgeons could acquire their own lasers and increase volume substantially. There's no need to sacrifice portions of their fees by performing procedures at a "middle man" corporate laser center, he added.

"The independent is more efficient, using cross-trained staff, and he better understands his true cost of doing business," Dr. Wright said. "I believe the successful independent will be able to compete on price more effectively than corporate laser centers because his practice will have no tiers of middle and upper management."

Dr. Wright predicts that we'll see "an endless procession of surgeons" who will start careers at corporate centers and then forge out on their own.

"After all," he asked, "who wants to shoulder 100% of the liability for $100 per case indefinitely?"

Even if the public makes price a top priority, "success will ultimately be determined by quality of care as well as a competitive price," according to Dr. Wright.

He said he also saw a bright future for independent surgeons who want to provide refractive surgery through HMOs, just like the laser corporations are now.

"If the independent LASIK surgeon creates lower overhead than the corporate laser providers, then the independent LASIK surgeon will remain viable competition," he said. "Undoubtedly, discount laser centers will survive, just as Americas Best and Wal-Mart have survived, but not everybody will shop there."

Keeping Refractive Surgery Independent

At least one company is rallying behind independent surgeons, in response to managed care's infiltration of refractive surgery. The Hillside Group, based in Ocala, Fla., is offering the Hillside provider network to help the independents compete.

"We think that both managed care and the direct-to-patient corporate laser centers are poised to reduce doctors' control of their environment, poisoning the well of profitability for independent practitioners," said William W. Curtis, managing director of The Hillside Group.

Curtis said Hillside's provider network will provide the scope and market power currently enjoyed only by national corporations, while keeping the independent physician in charge of his practice and his patients.

The program will kick off in the second quarter of this year. The plan is to generate patient referrals through Hillside's national patient marketing program, which will include direct response television, radio, e-commerce, employer/association contracting and more. Using Hillside's Internet-based patient management software, surgeons will be able to financially qualify patients coming from the network.

From that point forward, the practice will be in charge of the patient. Besides providing patients from the Hillside network, the Hillside software will let surgeons track and manage their patients -- and also receive a host of management reports to ensure stronger practice performance.

"Hillside believes the greatest threat to the laser vision correction market is not price reduction but patient consolidation at the national level," said Curtis. "National companies capable of advertising to or negotiating contracts for national patient populations deprive local practitioners of those patients on a local level. This concentration of power is dangerous to the consumer and potentially fatal for the independent medical professional."

Curtis emphasized that the Hillside provider network will charge no front-end costs. Network management fees will be collected only after the network has delivered practice revenue.

Recent Corporate-HMO Refractive Surgery Deals

• Vision Service Plan

has contracted with laser surgery facilities and doctors, including TLC Laser Eye Centers, offering its nearly 29 million members access to refractive surgery at a reduced cost, a 20% to 25% discount on average. Larger discounts or total coverage of refractive surgery are available through VSP's Preferred program. The agreement between VSP and TLC took effect in January.

VisionAmerica Incorporated

implemented its first national contract for refractive surgery. The company's national co-management panel of ophthalmologists and optometrists is providing refractive surgery services to the more than 7 million enrolled members of Coast to Coast Vision, a marketer of ancillary health services to employers and other groups nationwide.

LCA-Vision Inc

. launched the National LASIK Network (NLN), a joint venture with Cole National Corporation, which will make laser vision correction more available and affordable to tens of millions of potential new patients. The NLN currently has participating providers in 63 major markets. Cole Managed Vision is a leading provider of vision care benefits, managing more than 50 million covered lives.

• International laser vision correction provider ICON Laser Eye Centers entered into a joint marketing agreement with TruVision. TruVision has contracted with Regence Blue Cross/Blue Shield of Utah to offer LASIK at $749 per eye to be performed at a new ICON center in Salt Lake City. TruVision markets value-added vision care through managed care organizations, large employer groups, and insurance broker affiliations currently representing 17 million contracted lives.