Management Essentials

That Sinking Feeling

By Farrell “Toby” Tyson, MD, FACS

Does the current economic state of ophthalmology give you that overwhelming sinking feeling? You would not be alone. Ophthalmology has dealt with cuts from Medicare over the last several decades and usually has compensated with increases in efficiency and volume. Unfortunately, that model of response is quickly coming to an end. We cannot buy high and sell low and make it up on volume. A close introspection of our practices is necessary to help get us out of the quicksand.

Slow and Steady

We know that in quicksand, sudden movements only cause you to sink quicker. In your practice, you should heed the same advice. First, evaluate the extent of a problem before making any rash decisions. Many doctors do not realize the impact that even small reimbursement cuts can have on their bottom line.

In the good old days, a 65% overhead meant that 35% of the revenue was going home. This year, we need to factor in inflation. Energy costs are up 7.3%. Most businesses will see, on average, a 4% increase in the cost of doing business; medicine is usually higher. That means our overhead will swell to 67.6%.

This wouldn't seem so bad if it were a onetime occurrence, but this trend has been going on for years. After five years, inflation alone would raise overhead to 79%, not to mention CMS's ongoing threats about Medicare reimbursement cuts. Let's be optimistically conservative that we will only see a 5% reimbursement cut next year with a 4% inflation rate. That quickly propels a practice from a 65% overhead rate to a 71% rate, dropping net revenue by 22%.

An Alternate Answer

We need to find a way to limit our Medicare/insurance exposure. Most practices have about 60% of their revenues coming from Medicare or Medicare Advantage programs, leaving these practices at the mercy of Medicare rates. In order to break some of these bonds, diversification is needed. Premium-channel IOLs have allowed many practices to lower dependency on Medicare dollars to 40%. While I believe this market will become widely adopted, this only buys us time. Long-term planning should consider having some of the practice's providers participating in Medicare while others opt out. This will allow for a true premium pathway that is not restrained by Medicare guidelines, without abandoning the Medicare patient base.

Practices need to start thinking like Southwest Airlines. Southwest buys large quantities of jet fuel so that it can predict costs years into the future. At best, ophthalmologists look at costs on a yearly basis. Longer-term medical contracts should be evaluated for discounts and free shipping to protect you from swings in fuel costs and price inflation. Evaluate “fixed costs” like utilities—your monthly electric bill may surprise you. The increase in incentives and tax breaks for solar energy may help you lock down your electrical costs. Solar hybrid air conditioning systems can save you up to 66% of your HVAC electric bill. At least you should be installing programmable thermostats.

Fifteen to 30% of your business cost is administrative costs. These can be hard to stabilize as ever-increasing regulations, mandates and paperwork drive up staffing needs. Evaluate whether it is truly financially worthwhile to be on all the different insurance plans. By dropping your bottom 20% of plans, you will probably get rid of 80% of your headaches. This allows for reduced and more productive staffing. Your volumes may initially drop, but your bottom line most likely will improve. The reduction in volume allows you to provide better service to your better-reimbursing patients. This leads to increased word of mouth and your lost volume is quickly replaced with a more financially viable patient base.

Ultimately, supply and demand will be the stick that pulls us out of the quicksand. The baby boomers are coming and the physician workforce is stagnating. This means that there will not be enough of us to go around. We need to start planning for a steady transition from Medicare dependency to a more financially viable two-tier medical delivery system. OM

Farrell C. Tyson, MD, FACS, is a refractive cataract/glaucoma eye surgeon at the Cape Coral Eye Center in Florida. He may be reached at tysonfc@hotmail.com.