The ins and outs of outsourcing the optical shop

Doubling the profits and halving the stress — but with a cost.

By Brian P. Dunleavy

The Eye Care Institute needed to make a change. The six-doctor group practice, in Louisville, Ky., had been running its own optical department for 10 years, and it had been a bumpy ride. For every month the optical ran at a net profit, it would end another at a net loss, and the ophthalmologists and administrators at the practice were spending a great deal of time managing the department.

“We have always considered optical to be ancillary to the medical and surgical eye care we provide,” notes practice CEO Mark Prussian. “We know good quality eyewear is vital to the vision needs of our patients, but it is not our main, core business. We found that we were spending a disproportionate amount of time managing our optical compared to our medical and surgical practice, and it wasn’t working for us.”

Mark Prussian, CEO at The Eye Care Institute in Louisville, Ky., reports optical profits have doubled since the practice outsourced its management.

TAKING IT OUTSIDE

Why outsourcing made sense

Three years ago, The Eye Care Institute decided to outsource its optical, effectively handing the management of the department over to a third party. In exchange for a percentage of revenue from the department, this outside entity employs the staff and manages the inventory. It is ultimately responsible for delivering patients’ finished eyewear.

“Our optical has had a net profit every single month since we made the switch,” Mr. Prussian says. “Profits have doubled and our stress is halved.”

Until recently, relatively few ophthalmology practices opted for outsourcing. In fact, industry experts estimate that fewer than 5% of all ophthalmologists in the United States do so. This may be starting to change, as practices like The Eye Care Institute attempt to find new ways to cut costs and improve efficiencies in a tumultuous economic climate and increasingly complex retail market. So, is the approach right for your practice and, if so, how does the process work?

The major players in optical outsourcing

Although outsourcing the management of the optical has been an option for ophthalmologists for decades, the concept is relatively foreign to many in the profession, particularly those in the Midwest and on the West Coast. That’s because the four biggest optical management companies —Vision Associates, Partners in Vision, Medical Eyeglass Center and EyeCanHear — are all based on the East Coast. Historically, they have focused their business efforts on ophthalmology practices close to their offices.

Now, though, most of these companies have a national client base. In addition, some independent opticians have set up smaller management companies to manage ophthalmology-based opticals, particularly on the West Coast.

Looks and feels like part of the practice

For some, the term “outsourcing” has certain negative connotations: Calling the toll-free number of a bank or credit card company and being routed to a call center in a foreign country, for example. However, outsourcing the optical department in an ophthalmology practice isn’t the same thing.

First of all, patients seeking eyewear don’t have to leave the practice premises, even when the ophthalmologist has decided to outsource. Instead, optical management companies open and/or operate the optical on-site, as if it is a part of the practice. Yes, the business is, effectively, a separate entity from the practice as a whole, but it is still owned by the practice; only the management of the facility has been contracted out. Patients visiting the optical have no idea it is being run by a separate company — and they shouldn’t, if the outsourcing arrangement is managed effectively.

“The opticians in our optical worked for us when we ran our own optical and the management company hired them when they took it over,” explains Mr. Prussian. The Eye Care Institute works with Vision Associates. “But, they still have our practice name and phone number on their business cards,” he continues. “As far as the patients know, the optical is still part of our practice.”

The optical dispensary at The Eye Care Institute still carries the practice’s name even though a separate company manages it.

Pros and Cons

Seamless isn’t flawless

This seemingly seamless arrangement has advantages and disadvantages. Patient complaints about products and/or services in outsourced opticals still go to the ophthalmologist or practice administrator. On the plus side, this means the practice can still track issues within the department and, hopefully, address them with the management company. On the downside, if the management company does not respond or the patient complaints fall outside the contractual arrangement between the manager and the practice, the separation can be a source of frustration.

So practices opting to outsource should not think the arrangement means they can ignore the operation of the optical entirely, according to practice management consultant Carolyn Salvato, director of optical consulting at Incline Village, Nev.-based BSM Consulting. In fact, she says, for outsourcing to work effectively, ophthalmologists need to ensure the management company they are working with shares the same philosophy with regard to patient care and practice performance.

“Ophthalmologists who are considering outsourcing need to do their due diligence,” she explains. “Every vendor, when asked for references, will refer you to their best and most loyal customers. But ophthalmologists should try to talk to, and maybe even visit, as many practices working with a management company as they can before signing the contract.”

John Hofbauer, MD, a private practitioner in Beverly Hills, Calif., found the quality of eyewear slipped when the optical manager sold its contract to a new company.

Outsourcing at a cost

Speaking of the contract, the costs associated with outsourcing are not insignificant. Most optical management firms — both the big companies and the small, optician-run sole proprietorships — prefer to contract with client practices for a minimum of 18 months, although some push for three-year agreements.

In exchange for managing the optical, they typically charge a fee based on a percentage of the department’s total revenues, usually in the 70% to 80% range. Management companies pay the salaries and benefits of optical employees as well the cost of goods sold. However, practices still have to pay for the rent and utilities associated with the facility.

For some, the cost is worth it. Although practice management consultants such as Arthur De Gennaro, owner of Arthur De Gennaro & Associates, say they rarely recommend their client practices explore outsourcing, they do acknowledge that it works for some. Ms. Salvato, for instance, says outsourcing may be a good option for a new practice that has no optical management expertise on its staff, or for an older practice that just can’t seem to find the right product mix.

Still, Mr. De Gennaro warns that practices that opt to outsource the management of their opticals because they lack the retail expertise internally will likely find themselves in the same position down the line when or if they find that outsourcing doesn’t work for them. “If you outsource for 10 years, guess what? You’re still not going to know how to run an optical after 10 years,” he notes. “When you decide to outsource, you are deciding to not learn that skill, and you pay a premium to have others do it for you.”

Questionable returns

As a practice management consultant with an optical retailing focus, Mr. De Gennaro does not believe the rewards of outsourcing are worth the costs associated with the approach. First, he notes that the fees paid to management companies often significantly exceed what the practice would have paid to inventory and staff the department itself.

In addition, he believes that ophthalmologists should focus more attention on optical as a profit center, rather than less. “If it is run well, optical should generate 30% of practice revenues,” he says. “In today’s managed-care environment, cataract surgery generates far less than 30%.”

WHEN MANAGEMENT COMPANY SELLS

After more than 10 years in practice, John Hofbauer, MD, a private practitioner in Beverly Hills, Calif., says he decided to open his first optical when a local optician approached him and offered to manage the new department. After 10 years, the optician sold the contract — he charged a management fee of 80% of gross profits generated by the optical — to a larger management company. It was then that Dr. Hofbauer started to notice a difference in the performance of the department.

“We have a Beverly Hills practice, and the patients expect a certain level of quality,” he says. “When they went to our optical, they found that the frames we had in our inventory weren’t the type of high-end products they were looking for. We liked our optician, but her hands were tied; the management company governed most of the products she could order.”

Two years ago, Dr. Hofbauer decided to fire the management company and manage the optical within the practice. They even hired the optician away from the management company. “Now, the profits from our optical pay the rent for our entire office, and it accounts for less than one-sixth of the space,” he said. OM