How is Medicine Different?
Practice succession is harder and less leveraged than ordinary business succession. Successful restaurants have a ready buyer pool, paying many multiples of annual earnings. Ophthalmic practices sell today for their net tangible asset value plus a modest goodwill value, and the latter is slowly eroding. The new restaurateur can hold onto the dream that he’ll have a winning franchise concept and go public one day, netting tens or hundreds of millions of dollars. Few eye surgeons harbor such dreams. When a restaurant chain gets larger, its variable costs for food (which are high as a percentage of revenue) come down in percentile terms. In ophthalmology, most costs are fixed, not variable…so economies of scale are difficult to achieve.
Ophthalmology is not an orthodox service business. In most service businesses—a chain of restaurants, let’s say—the capitalist entrepreneur takes a predictable pathway. He invents a new service delivery model…a new kind of restaurant in this case. He outlays the needed costs and opens one outlet, often at great personal risk. This trial outlet is operated long enough to prove the business model, and polished all along the way. The food service entrepreneur then gets secondary financing to open additional outlets, each of which can eventually stand on its own without the daily ministrations of the owner because a growing management team is in place. There are subsequent rounds of growth, finance, and product improvement. If successful, the owner can readily find a buyer, either a private party or even the jackpot of an initial public offering. If the owner is young, he can readily start all over again at the beginning, and invent a new concept, this time with a much larger personal capital base This pathway is rarely followed by ophthalmic entrepreneurs for numerous reasons: Eye surgeons by their nature are more risk adverse than the average business entrepreneur. (This is paradoxical, of course—when an eye surgeon’s business fails he or she can typically secure a six-figure job offer in a few weeks.) Eye surgeons are raised up in a culture of perfection. Inasmuch as growth necessarily begets imperfection, growth can be restrained because “we’re not perfect yet.” Restaurants need managers, chefs, wait staff and bookkeepers…all of whom are readily available at modest cost on the open market. Practices need surgeons, specialist-managers, experienced techs, billing and coding experts, etc. Restaurants have a relatively low level of enterprise complexity: a few dozen products, modest regulatory oversight, at-will pricing, simple accounting systems. Practices have a profoundly high level of enterprise complexity at all levels. With the right manager and chief chef, a restaurant owner can drop back from daily involvement and still collect a paycheck. It’s far more difficult for an ophthalmologist-owner to run his practice passively—most qualified fellow surgeons are unwilling to generate passive incomes for owner-employers beyond a brief partner-track associate period.
A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets. Steve Jobs, Co-Founder, Apple Computer
Most growing practices hit a developmental wall at around 8 to 12 surgeons, or about $10 million or so in annual collections. Although there are mild economies of scale that attend growth—more intense equipment, staff and facility use; better pricing for supplies; a degree of leveraged marketing—there can be even greater diseconomies of scale. These are largely driven by the logarithmic rise in complexity and doctor-to-doctor conflicts which bubble up to the surface as a practice grows. As a result, profit margins tend to peak in practice with about $8 million to $10 million in annual collections, and then dip somewhat until a much, much larger scale is achieved. There are only three possible responses to this well-documented difficulty seen as groups grow larger: 1. The group can revert back to a smaller scale where it’s easier to achieve consensus, develop and execute a strategic plan, and preserve shareholder harmony. 2. The owners can plow ahead with modest levels of practice growth, and live with the resulting operational frustrations and mild to moderate diseconomies of scale…continuing to ask, often in vain, “Where are we going?” This is the most common state of affairs for larger practices. 3. The group can work hard and consciously to manifest the harmony and leadership needed to derive an intelligent, inspirational growth plan and armor the owners for any necessary sacrifice, hard work, risk tolerance, and delayed gratification the plan may require. Such manifestation is the exception rather than the rule in eye care today.
A t every size and stage of his or her business, every thoughtful owner asks, “How much larger should we grow? What risks am I willing to take? Will the rewards of growth be proportional or better to the hard work and sacrifice? This is as true for ophthalmologic entrepreneurs as it is for those in other fields. The correct answers to these questions can only emerge from an intersect between individual preferences, collective agreement in a multi-owner practice, available leadership resources, limits imposed by your individual market environment, and the “natural economic laws” of the business of eye care. This is a highly nuanced area, with a large component relegated to the “feelings” category. You can’t plug a few facts into your laptop and expect to have the best large-or-small answer emerge. The best growth game plan in the world is not going to be executed effectively unless the stakeholders are emotionally invested in the outcomes. This is why your accountant or financial advisor may not be able to guide your practice’s growth trajectory as well as you can, yourself, given a bit of quiet reflection and a candid discussion among the partners about where your priorities and values lie. Beyond time and reflection, experience shows that leadership is a key resource for effective growth management. If you are stuck in your strategic planning, ask first, “Do we have a trusted, admired, energetic leader urging us forward?” Experience shows that until you have at least one such individual, you’re just going to be wandering randomly as a company, growing by opportunity, perhaps, but not by plan. Even the largest practices grow ever-larger not through the unified consensus of disparate owners, but the unwavering, energetic urgings of a single individual who enjoys the trust and admiration of the group. This one leader is a foregone conclusion in a solo practice. It’s much tougher in groups to pick someone. But whether the leader of your group practice is the oldest, the highest producer, or the doctor with the most free time, a leader is an essential precursor to planned, successful growth. Growth from big to bigger rarely feels uniformly successful. Taking on new doctors, services and offices generally results in transient drops in profitability. The more growth investments you pack into a given year, the more that odds increase of a sharp profit drop. The faster you choose to grow, and the more risks you take, the more your trusted, admired, energetic leader has to give everyone the confidence needed to stay the course….much less change course and move in a new direction if you’re on the wrong path. To overcome this natural business rollercoaster, practices need several additional resources beyond great leadership: • True physician engagement, rather than the usual “presenteeism” evidenced on most doctor boards • Partners who are managing their personal affairs so as to be able to live every month on far less than what they make, so that normal, transient business reversals are not so scary • A strong practice administrator supported by deeply skilled middle managers • The sense of control that comes with ever-improving daily operations • A general momentum indicating success, despite occasional failure • Capital reserves to overcome periodic reversals • The judgment to change the growth plan when conditions change Every practice-owning surgeon, like every private business owner, has different ways of measuring whether efforts to grow are a success or a failure. Absolute financial measures are the core metric. “Are we making more each year as we grow?” But this is a very shallow measure. You have to look more deeply. In many practices I visit, partners in a growing organization will complain that their incomes have flattened. Sometimes this is due to macro-economic issues over which the practice has little control—fee reductions or local wage inflation. But more commonly, flat or falling partner income is due to a reduction in work hours and patient visits. It can be very helpful to measure each partner’s net average profit per hour worked over time. A partner with no change in annual salary who has shifted from 5 days to 4 days of work per week, has actually enjoyed a material pay raise. For wise practices, successful growth is not measured in financial terms alone. There can be security and strategy rewards flowing from better contract access or larger community influence. There can be professional/intellectual rewards, working among a more diverse team of sub-specialists. And, not to be overlooked, there can be ego rewards from a growing market share and even a measure of national prominence. Unlike a publicly owned company, where “enhancing shareholder value” is by definition the highest goal, these metrics are personally and individually prioritized in a private ophthalmology practice.
Should we downsize, stay on the current plateau, or grow larger?
How Big is Too Big?
Mr. Pinto is president of J. Pinto & Associates, Inc., an ophthalmic practice management consulting firm established in 1979, with offices at 1576 Willow Street, San Diego, CA 92106. He can be contacted at 619-223-2233, [email protected] or www.pintoinc.com
PRACTICE MANAGEMENT Should we downsize, stay on the current plateau, or grow larger? by John Pinto A lot of companies have chosen to downsize, and maybe that was the right thing for them. We chose a different path. Our belief was that if we kept putting great products in front of customers, they would continue to open their wallets. Steve Jobs, Co-Founder, Apple Computer At