“Recession” is a fear-engendering word, and for good reason. In business sectors less resilient than medicine (especially the construction trades, RV manufacturers and publishing), recessions lead to steep sales declines, layoffs and even bankruptcy for the unprepared.
Fortunately in America, there are 650 million eyeballs — about 40,000 for every practicing ophthalmologist — and a nearly unlimited market demand to see clearly and not go blind.
That doesn’t mean that practice owners and their staff will ride through the next recession unscathed. Ophthalmic practices and owners are more vulnerable than ever for several reasons:
- With rising costs and generally stagnant fees, percentile profit margins have been falling for two generations. The typical practice operating with 50% profit margins in 1990 could better absorb business reversals during that decade’s recession than the typical practice in 2020, with 35% profit margins.
- The drive to introduce more direct-to-patient charges for glasses, premium IOLs and elective cosmetics works great in a roaring economy ... much less so as the music stops.
- A larger proportion of ophthalmologists than ever before are in their last productive years of practice and heading toward retirement. Such doctors have two clear objectives: to find a successor and top up their retirement funds. Both will be impeded in a recession.
- Health insurance benefits for the 40% or so of our patients who are not on Medicare are still tied to employment. When jobs go, so do third-party payment dollars.
The current business expansion since the “Great Recession of 2008” has been going on for more than twice the usual growth period of under 5 years. Although the government is nominally tasked with managing the business cycle, its levers to do so are imperfect. Indeed, some commentators believe that the expansion phase of the natural up-and-down business cycle has been artificially sustained and that this could lead to a greater drop when the bottom eventually falls out.
Economist Nouriel Roubini, who predicted the 2008 Great Recession, says that “conditions will be ripe for a financial crisis and a global recession by 2020.” In addition, according to a Duke University CFO Global Business Outlook Survey, more than 80% of U.S. CFOs believe a recession will hit the economy by the end of 2020.
No one knows when the next recession will occur (we could even be in a recession by the time you read this — definitive reporting typically lags), and no one knows how deep it will be. But, everyone can prepare for the inevitable next recession. Here are 20 practical steps you can take to pass gracefully and with less anxiety through the next recession.
1. START KEEPING METICULOUS TRACK OF PRACTICE PERFORMANCE.
This is not an era to be looking at your financial and volumetric performance stats once a quarter. Spending on elective health-care services (glasses, refractive surgery) is a pretty reliable leading indicator of a looming recession. And remember that conditions in your individual market could be very different from rosy national stats.
2. EVALUATE STAFF UTILIZATION.
Review lay staffing levels, and push benchmarking responsibilities to department heads so those closest to the scene can best gauge the real needs of the practice. Make deeper seasonal adjustments in labor levels than you have in the past. Test the limits of each department to do with one fewer person (or even fewer hours) than once thought essential for the job. Reward supervisors for labor cost containment. Don’t reduce staffing to a degree that harms patient accounts work, reduces provider efficiency or diminishes customer service to the point of being diseconomic.
3. CONTINUOUSLY REVIEW AND WORK TO IMPROVE UTILIZATION.
This should be by provider as well as for the entire practice. Under-testing, under-coding, poor cross-referral between subspecialists within the same practice, excess time between appointments, insufficient encouragement to shop in the optical department and other gaps can materially reduce marginal revenue and leverage a disproportionately large drop in profits. Gaps here are well tolerated by your practice in strong economic times. Perhaps not a year from now.
4. RAMP UP PARTNER AND PROVIDER COMMUNICATION.
Business challenges in a practice commonly result in a reduction in doctor-to-doctor harmony. Providers fight over expenses, access to patients or perceived referral slights. Increase doctor meeting time, and be proactive in addressing discord.
5. ELIMINATE BUSINESS OR CLINICAL PROCESSES THAT DON’T ADD PROPORTIONAL VALUE.
Eliminate data gathering and reports that are not used to make management decisions. Reduce patient movement. Check to make sure that doctors and technicians are not duplicating history taking or testing steps. Don’t eliminate value-added services to patients that could lead to better care or (appropriate) higher charges. Eliminating such services will result in lower patient satisfaction and reduced profits
6. LIMIT CAPITAL OUTLAYS.
Until the trajectory of the next recession is clear, table nonessential purchases. For purchases you do make, adopt formal economic thresholds. For example, “We purchase in a timely fashion all equipment required to deliver contemporary care in our community. For other equipment that is not obliged by this quality mandate, the purchase must be forecast to generate a net profit after all expenses are considered: staffing, promotion, maintenance, lease or interest payments, depreciation and obsolescence, etc.”
7. EXAMINE THE VALUE ADDED BY EACH MEMBER OF MIDDLE MANAGEMENT.
Most successful practices require a head tech, a manager of billing and reception services (or one for each area), a bookkeeper, someone to coordinate marketing and outreach efforts, an optical supervisor and site managers for each office location. Are all of these positions required? Is there something unique about the talents of the current team that would allow them to do more with less? Could we have a “flatter” organization?
8. FOCUS ON THE TOP LINE.
Since most practices today are already careful about expenses, key profit gains are largely driven by incremental revenue gains. Beyond ramping utilization, practice revenue is driven by raw patient volumes. The bar has been significantly raised in this area in the past decade. Generalists who once topped out at 35 or 40 patient visits per day now routinely see 50+ encounters. Just serving three more patients a day can result in a six-figure annual net profit boost.
Communication is the chief antidote to recessions
Whether the threat is recession, fee reductions or the ordinary urgencies that come with running a business, your practice’s response time can be slowed if communication is impeded. It’s especially at moments of stress — financial, provider injury, contract loss — that practice boards and managers can be inhibited and not speak as frankly as conditions demand.
Here are some things you can do to break through these barriers, “get real” and accelerate your response time to whatever may be coming your way in 2020.
- Establish good meeting habits. Meetings should be scheduled in advance and not skipped when “things get too busy” or “one of our doctors is out of town.” The managing partner and administrator should meet weekly. The board and administrator should meet monthly. The management team and managing partner should connect at least biweekly. Department meetings should be held monthly. And, depending on the size of your practice, an all-hands meeting should be held several times a year. A written agenda and follow-up minutes keep the meetings focused and remind stakeholders about what was agreed upon during the meeting.
- Create what we term for clients a high level of “strategic intimacy” between the managing partner and administrator. This means the two of you are aligned on practice goals and their priorities (as directed by the board) and hold each other accountable to highly specific written expectations and deadlines. Lots of meeting time helps you develop a comfort level with each other. Over time, you will be able to speak your mind and hold uncomfortable conversations on the small stuff, so that when the big stuff arrives you will be able to handle the thorniest issues.
Under the stress of reduced fees and an economic recession, it is important for every part of the practice to function at its highest capabilities. The details matter more than usual as profits narrow.
Administrators, mid-level managers and providers must communicate and collaborate closely to extract the greatest value from facilities, advisors, referral sources and support staff. The era ahead will demand that all levels of the practice are capable of doing more with less.
9. BOOST ANCILLARY FEES.
A generation ago, refraction fees were minimal or nonexistent. Today, fees range to $100+ and in a general practice are charged routinely in about 25% of patient encounters. The fee now averages about $45. We have never seen a practice that raised a refraction fee to $45 then rolled back prices due to patient complaint.
10. DON’T SHORTCHANGE MARKETING.
A common instinct as an economy softens is to reduce advertising and promotional outlays. While it’s perfectly reasonable to audit the results and investment return of every marketing activity — and eliminate lagging tactics — your practice’s marketing costs as a percent of collections should remain the same in good and bad years alike (2%-4% in the typical general practice).
11. EXAMINE SATELLITE PROFITABILITY.
As professional fees have softened and some travel costs have climbed, your remote service sites may no longer be profitable. Calculate the average monthly profit per office location (applying the best allocations of revenue and expenses you can) and divide this figure by the average number of MD hours (including travel time) per location. This exercise may point out sites that should either be eliminated, put on a “watch list” or more vigorously turned around.
12. REVIEW PROFESSIONAL STAFFING AND RECRUITMENT PLANS.
If patient growth falters with the next recession, the existing provider base may be able to handle patient volumes. If visits actually decline, it may be time to consider downsizing associate or semi-retired providers. In addition, consider that the typical peri-retirement provider may decide to work longer than planned to offset worries about the sufficiency of retirement funds in a falling equity market.
13. BRACE YOURSELF FOR A RESUMPTION OF FEE REFORM.
A prolonged recession could provide the political cover needed to make unpleasant Medicare fee reductions.
14. DEVELOP WRITTEN, STAGED RESPONSE STRATEGIES
These strategies are intended to reduce your anxiety about the future. Stage I (reducing excess staff hours, for example) might only include a few light adjustments, while Stage III is the difficult choices (terminations, office closure, etc). This approach to staged responses should be mirrored in your family’s financial planning.
15. ASSURE LIQUIDITY.
Examine your balance sheet for a quick ratio (current assets divided by current liabilities) that materially exceeds 1.0. Make sure you always have ready access to a minimum of 3 months’ average operating expenses in your working accounts.
16. LOCK IN ACCESS TO CAPITAL.
While you are still in a strong business position, negotiate the most durable possible lines of credit with your commercial bank(s). One month’s core operating expenses before owner compensation should be the minimum figure.
17. REVIEW INSURANCE COVERAGE.
Think through all the “what-if” scenarios. If you lost a high-revenue provider, could the remaining doctors cash-flow the business? If not, purchase appropriate insurance to hedge against this potential adversity, which could be all the more difficult in a falling general economy.
18. REVIEW PRACTICE CONTRACTS.
Buy-sell agreements are commonly negotiated then left to molder in the files until a doctor dies or is disabled. Are the buyout provisions still reasonable in the context of practice scale and the generally falling value of goodwill? If you are unsure, visit with your practice’s general counsel for a possible document “tune-up.”
19. STAY INFORMED.
When a patient is critically ill, the doctor examines his vital signs frequently. The same applies when the “patient” is the U.S. economy, on which you depend for your practice’s success. Read widely. Educate your board. Limber up your ability to respond to both threats and opportunities.
20. MEET WITH YOUR PERSONAL FINANCIAL ADVISOR.
Discuss whether your retirement funds are appropriately hedged. While the conventional wisdom is to not try to time the market, locking in gains and lightening up leveraged holdings may be indicated. OM
About the Authors
![]({"src":"/media/y4bjjiaw/cover_omd_0220.jpg","focalPoint":null,"crops":[{"alias":"thumbnail","width":1110,"height":700,"coordinates":null}]})