Smart Practice Development in Today's Uncertain Environment

BY JOHN B. PINTO

How about this not-so-fun, imaginary field trip to the future, written late at night in my San Diego ivory tower, 37 days before the presidential election, the evening after yet another trap-door day on Wall Street, and yet more dithering in Congress. Could things get any worse or any stranger? Of course!

It is September, 2010. The McCain-Obama coalition presidency, forced by a dead-even result in the 2008 election, is in gridlock…and so is the country. Electoral turmoil that helped throw the nation into a deep recession for the past 2 years shows no sign of reversal. The dollar is now trading at just over 4-to-1 against the euro. Senate Majority Leader Clinton, who now also heads a blue-ribbon health crisis reform panel, is floating a proposal to cap all U.S. doctors at a $150,000 per year salary, with the excess dollars going to fund care for the uninsured. So it goes.

My predictable work as a practice consultant has now been given over to several weeks of patient consolation and redirection of those clients whose development projects have been thrown off course by the increasingly alarming news of the day. Plans are being rewritten briskly:

► Slated start-ups by young doctors are shelved for fear that financing will be more expensive and harder to secure, while the competition for patients will rise

► Building projects still only on paper are standing by for the accountants to re-validate and re-shuffle the underlying financial assumptions

► Buildings with foundations already poured and rising up in the air are being given another eleventh-hour run at value-engineering to reduce costs

► Practice buy-in, buy-out, divestiture, merger and acquisition pricing under an old, stable set of market conditions abruptly make less sense

► Doctors long on the verge of recruiting, and once finding it hard to hire quality providers, are now reconsidering their need for more doctors, just as labor markets begin to flutter

► Doctors who were once fast approaching retirement are pushing back their "date" as their portfolios collapse and they see the wisdom of saving up a somewhat larger cushion in volatile times.

What Now?

Ophthalmology, as professions go, is decidedly "fun." Building your practice is fun. Hiring smart new people and coaching them as a team is fun. Growth and development is fun. But how about shrinking and saying "no" to new projects, purchases and people? Not so much fun.

It's bad enough when your development dreams are held back for localized reasons that you stand a chance to control … and when you can readily understand and forecast the future environment. We can all take things in stride when a local competitor thwarts our plans or steals a critical staffer. We understand when a tornado wipes out a section of town.

But the present environment — a worldwide market meltdown and a monkey-wrenched banking system — is as far beyond our individual comprehension and control as the other biggies of our time: petroleum depletion, climate change, and a gathering storm in the Middle East.

Still, we don't have to stand still. We can continue to operate push ahead, so long as we follow the five "rules" described at the end of this article.

Here's What You Can Do

What can we do? Here's a partial list, with commentary:

■ Add obvious, missing, low-risk ancillary services. Optical dispensing, if not currently present in your practice, can add 10% or more to the bottom line, while helping to secure patient loyalty. If warranted by case volumes and local regulations, add an ASC, which boosts cataract care profitability about 100%, while creating a better experience for both doctors and patients. Both of these ancillary services have a very high level of business success and can deliver a significant passive return on your investment as a physician-entrepreneur.

■ Consider higher-risk ancillaries. Staffing up optometrically in your practice, while much more complex and less certain to bring success, is a wonderful, unrealized opportunity in most practices today.

■ Purchase missing equipment and provide missing care. A simple review of almost any practice's utilization rates of surgery, treatment and special testing will reveal missed opportunities. A large and simple example? Refraction fees. Loose practices in this area only charge out refractions 10% of the time or less, with a fee of under $25. These figures should be 25+% and $35+, respectively.

■ Upgrade computer systems. If you're holding back in this area, and still clinging to DOS-based or under-supported systems, patient accounts and continuity of care will suffer.

■ Right-size staffing. Apply widely available industry benchmarks to assure that you have just the right number of staff. (If you don't know what there are, just write me an e-mail and I'll send them to you.) Too many staff and you're bleeding profits. Too few staff and collections, patient care and special testing will lag. Strike the right balance.

■ Add space. It's false economy if your practice is booked out a month or more for new appointments and the choke point is not enough exam rooms.

■ Close operational gaps. Eye care is a massively complex and braided enterprise. Something is always falling between the cracks. Now is the time in the typical practice to audit to make sure your "cracks" (recall systems, appointment reminders, billing protocols, etc.) are not too wide. Whatever you do, don't reduce staffing during these stressful times in a way that leads to sloppy operations and even lower profits.

■ Scour your market for alliance, merger and acquisition opportunities. The largest and best-led practices in the most fortunate environments (e.g., low-cost, low-competition rural practices, practices with little or no dependency on elective care, etc.) may actually be in for boom times.

Five Simple Development Rules

Which of these development, upgrading and expansion opportunities is right for you? To determine this, apply five simple development rules I wrote several recessions ago to help keep clients out of trouble:

■ One: Understand and prepare for the cash flow consequences of any proposed initiative before you act. If such analysis indicates you may be treading financial water for a while, you must assure in advance your access to any needed capital. This could, with relatively little notice, become more difficult in the future if capital markets continue to seize up. Here's a pertinent and common example. A two-surgeon practice hires a new subspecialist. There are immediate costs for marketing, equipment and generally setting up a new nest for the doctor. Then problems hit. There's a clerical snafu and a holdup in securing a Medicare provider number. Credentialing for managed care contracts are slow in coming. In situations like this, especially in a low-profit-margin practice, carrying a new associate can make it hard to make payroll for the existing doctors and staff. The time to go to your banker to negotiate a bridge loan or line of credit is before you need the money.

■ Two: If you aim to make your business larger or more diverse, be prepared to manage the resulting complexities. Even small, simple, solo practices have lots of moving parts and squeaking wheels. This enterprise complexity grows logarithmically with scale. You and your management team should master your current practice first. In the case of a merger or acquisition, you hardly have any standing to run another doctor's practice if you can't yet master your own company. The faster you intend to grow, the more you have to be over-staffed in this area. In particular, a fast-growing $5 million practice needs an administrator who is growing just as fast, and will be ready to manage a $10 million practice one day.

■ Three: Every practice initiative should, within an acceptable timeframe, be accretive to the net earnings of every owner. That's just a fancy way of saying that your business decisions should be made with the aim of eventually resulting in more profit per hour per owner/doctor. Let's take an example. In a five-surgeon practice, Dr. Smith's suite is going to be built out with two more exam rooms at a cost of $75,000, charged evenly to the partnership. On the face of it, seems like Smith is getting a great deal and his partners are disadvantaged, right? Wrong. If in the next year, Dr. Smith uses these rooms to produce another $300,000 in collections, both Smith and his partners will get a pay raise; Smith gets the money directly as a producer, of course, but he and his partners also get an indirect benefit by having more of their fixed overhead covered. Following this rule doesn't promise that every doctor will get an [equal] benefit from every development decision, but that every doctor will be better off at the end of the day.

■ Four: When developing, you must align the incentives for all of the stakeholders in your practice. As a surgeon-owner, it's reasonable for you to ask first, "What's in it for me?" But just after this you should also ask, "What do the patients get? What do my partners get? What does my staff get? What does the doctor whose practice I merge with get?" If the incentives are markedly unbalanced, your plan may be destined to failure.

■ Five: Remember that healthcare is a local business. Don't over-extend your supply lines to distant operations unless you have abundant capital and proven operational competence. For most surgeons, staking out satellite operations more than 25 miles away without planting a homeroom doctor in the subject market is becoming a very diseconomic business model as fees continue to erode and practice costs and complexities continue to rise. Try to have the discipline to keep remembering that success is measured in profit per surgeon-hour (including travel time), not cases per month.

Follow these simple guidelines, count to "100" before making any costly commitments (at least until the present storm blows over), and you'll get through the next few "interesting" years just fine. OM

John Pinto is president of J. Pinto & Associates, Inc., an ophthalmic practice management-consulting firm established in 1979. 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: How to See More Patients, Provide Better Care and Prosper in an Era of Falling Fees, The Women of Ophthalmology and a new book, Legal Issues in Ophthalmology: A Review for Surgeons and Administrators. He can be reached at (619) 223-2233, e-mailed at pintoinc@aol.com or found on the web at www.pintoinc.com.