Here, a practice management expert and three doctors in different types of practice situations share their experiences and insights regarding the reasons for this trend, the pros and cons of consolidation, and advice for anyone thinking of becoming part of a group practice or health-care organization.
Coming Together
“The world of medicine is changing,” notes Robert J. Noecker, MD, MBA, in private practice at Ophthalmic Consultants of Connecticut in Fairfield, Conn., and an assistant clinical professor at Yale University School of Medicine, whose practice has acquired a number of other small practices in the past few years. “Thirty years ago, most ophthalmologists were solo practitioners. If you wanted to practice medicine somewhere, you set up your office and started doing it. These days, that’s rare. I don’t think any residents start out with their own practice anymore, and practice consolidation is occurring at a number of levels.
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“In the old days you could just practice as long as you wanted to, because nothing changed for decades,” he adds. “But now every year the ante is being upped, in terms of reporting metrics and compliance with programs to avoid having your reimbursements cut, et cetera. All of these changes are largely handled administratively, and when you’re getting toward the end of your career, you may not want to take on all of that additional cost by yourself. So these doctors think about selling or joining a bigger group. At the same time, health systems are also starting to move in and acquire practices.”
“The biggest reason for consolidation at this time is declining reimbursement coupled with the increasing cost of practicing medicine,” says Kenneth J. Rosenthal, MD, FACS, surgeon director at Rosenthal Eye and Facial Plastic Surgery in New York, attending physician at New York Eye and Ear Infirmary of Mt. Sinai and associate professor of ophthalmology at the University of Utah School of Medicine. (Dr. Rosenthal has been in solo practice for many years, but is now considering joining with other practices in his area.) “A larger practice allows doctors to achieve efficiencies of scale, makes it easier to comply with regulatory burdens and divides up some of the costs. The reality is, a large percentage of the costs involved in medical practice are per-practice fixed costs, not per-doctor costs.
“Part of that is the increasing cost of medical equipment, especially in the field of ophthalmology,” he continues. “If I want to buy a new OCT as a solo doctor, I have to spend $80,000. If you’re part of an eight-man group, then your cost is $10,000, so you’re definitely not taking as much financial risk. You can afford to purchase the sophisticated and increasingly necessary equipment needed to maintain a state-of-the-art practice. Meanwhile, your reimbursement for each procedure will be exactly the same.”
Dr. Rosenthal notes that a group practice has other advantages, including combining different skill sets under one roof. “For example,” he says, “if one physician in a group does complex surgical case management, other members of the group will be able to keep those cases in the practice instead of referring them out. Consolidation is also a defensive move in the face of acquisition of smaller practices by big hospitals and HMOs. In the event that a group is purchased, it’s in a much stronger position. A larger practice also brings with it a better retirement plan, a greater degree of security and better health insurance. For example, some practices are now dropping standard disability insurance in favor of self-insuring; if someone gets sick, they keep paying the individual a preset amount of money. If a group is large enough to afford that, it saves them the cost of an insurance plan that may never yield any return on investment. With a group practice you also have a built-in retirement strategy because your patient load can be assumed by other members of the practice.”
Dr. Rosenthal notes that size also makes a difference when it comes to negotiating rates. “I’ve never had a managed care plan seriously sit down with me and negotiate a fee structure,” he says. “They just don’t care. That’s one of the impetuses that’s made me consider joining with other practices.”
Dr. Rosenthal acknowledges, however, that there are downsides to becoming part of a group. “You lose some independence in terms of deciding practice style, the hours and days you work, when you take vacations and choice of technology,” he notes. “In a big group, if you want to buy that OCT but nobody else wants to, you can’t buy it, or you’ll have to pay for it yourself. In a solo practice, you can do whatever you want.”
Historical Perspective
“Consolidation of any kind, whether it’s a merger or an acquisition, and whether it involves joining a private equity company or a larger practice or aligning with a hospital, is ultimately driven by two principal emotions,” says John Pinto, president of J. Pinto & Associates, an ophthalmic practice management consulting firm. “It’s either driven by fear: ‘If we don’t merge, something bad is going to happen’; or by a kind of greed: the belief that something better could happen for me if I go in with you.
“Waves of consolidation occur whenever our industry is under stress, as it is now,” he continues. “The last major wave of consolidation occurred in the mid-1990s when Hillary Clinton was pushing for health-care reform. Everyone was concerned that reform might sweep us away. After the 1990s, those concerns and the merger-consolidation activity waned dramatically. Everybody sort of dusted themselves off and said, ‘Well, that wasn’t such a great idea.’
“Today, we have the same sort of tensions arising as we did in the 1990s,” he notes. “We’re seeing the same kind of opportunistic corporate activities taking place, both in terms of large practices acquiring smaller ones, and in terms of providers joining private equity companies. The numbers are even greater today because we have a larger cohort of ophthalmologists in their last few years of practice who are looking for an exit strategy. If they’re not already in a group practice, where the succession is automatically to the younger doctors, they’re coming up out of the trenches and looking for other practices or private equity companies that might be interested in buying them.”
Mr. Pinto likes to think of these periods as two epochs of consolidation. “Epoch I was in the 1990s,” he says. “Now we’re in epoch II, where it’s occurring again. Of course the big difference between these two epochs is that in the 1990s the general economy turned around very nicely and consolidation dampened sharply as the economy improved. This time we may see an ongoing trend toward consolidation. Also, health-care costs as a percentage of GDP are much higher than they were in the ‘90s, partly because the baby boomer wave is beginning to gobble up Medicare resources. And, the government also prefers larger practices that can be more efficiently regulated from above.”
Choosing an Option
So, if you’re in a small practice and want to become part of something bigger, which option makes the most sense? “A lot depends on how many years you want to practice, post-transaction, and how much control or lack of control you can tolerate,” says Mr. Pinto. “For example, in a typical transaction in which a practice is being bought up by a hospital, multispecialty clinic, private equity company or large, private regional eye-care provider, I tell clients not to go through with the transaction unless: 1) they’re nearing retirement and the proceeds they receive will put them over their retirement finish line; and 2) they’re no longer emotionally connected to their practice, so that whatever the new owner does with it won’t throw them for a loop.
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Here are some considerations that accompany the different options doctors may be considering:
• Joining an existing multidoctor practice. Dr. Noecker points out that the scope of the group you join can make a difference in how happy you are in the new situation. “If you become part of a multispecialty group, interests start to diverge very rapidly,” he says. “That can be true even within ophthalmology, because each subspecialty has its own concerns. I think that’s why you tend to see, for example, retina-specific groups. Retina specialists have a lot of retina-related issues that have to be watched very closely, such as managing their medications inventory; that’s really important in terms of earning revenue and not losing money. An anterior segment surgeon might not be as tuned in to that. Glaucoma specialists have different concerns about what needs to be billed, patient throughput, patient experience, what diagnostic tests are done, and so forth, than LASIK surgeons. The more subspecialties that are subsumed within a group, the more likely it is that you’ll encounter inertia and find it harder to move the needle.
“At the same time, of course, a larger organization has more purchasing power; you can get better deals when it comes to equipment and more favorable rates with payers,” he notes. “You can also afford to have a full-time administrator and billing specialist, because you can spread out the cost of that administrator over a number of doctors. So deciding what type of organization to join is always a balancing act.”
• Consolidating with other small practices. Mr. Pinto notes that one potential pitfall when combining two or more practices is failing to consider the issue of leadership. “There’s a tendency to have two practices that are not particularly well-led decide to come together for some kind of strength-in-numbers benefit,” he says. “They don’t gain any strength from coming together because they still don’t have the leadership or business skills to run a practice, and now the practice is larger, with even greater need for coherent leadership. I often advise a couple of doctors thinking about a merger to consider whether they really will be more successful together than separate. Sometimes it’s just not the case.”
Mr. Pinto also points out that the size of a practice impacts the individual profitability of the practice. “The most efficient practices—in terms of net profit delivered to the doctor/owner per hour of time worked—are three-to-seven-doctor practices,” he notes. “Optimal profits seldom occur in the largest practices, or in the small one-or-two-doctor practices. There’s a kind of ‘sweet spot’ there, with the possible exception of situations in which there are difficulties with access to contracts or difficulties responding to regulatory reform.
“Small practices don’t do as well financially, because a few doctors have to carry large, fixed costs, whether that’s computer systems or sophisticated administrative oversight or regulatory response,” he continues. “On the other hand, once a practice has eight to 12 doctors, there are some pretty well-recognized issues that occur. The enterprise becomes more complex; there are more people in the boardroom, more locations, slower decisions, and more conflict and controversy, generally speaking. An eight-doctor practice is four times more complex to run than a four-doctor practice, so a larger group puts a real burden on doctor leadership and lay administrative leadership, both of which are increasingly difficult to find in today’s world. I get many calls from practices that have doubled in size saying that things were going great when they had three, four or five doctors. The boardroom was intimate, they made decisions fluidly and everybody had their eye on the ball. Then they doubled or tripled in size, and now nobody knows what’s going on. They don’t have enough business leadership to be able to run an organization at this scale, and they’re kind of folding in on themselves.”
Mr. Pinto notes that this reality isn’t combining well with current trends. “If someone wanted to make ambulatory health care as efficient and effective as possible, they’d be putting together regulations that encouraged practices to have three to five doctors, because those are economically the most efficient, in my experience,” he says. “What’s happening, however, is that payment reform and all the regulations and all the demands for IT are pushing practices into much larger groups with all the aforementioned problems, and into hostile settings where the cost of delivering care is higher. And of course, the individual provider has less control in this setting.”
• Assembling a new group. Dr. Rosenthal notes one advantage of starting a group from scratch: the ability to set it up following any model you choose. “A group practice may be in a good position to own its own surgical center or other type of health-care facility,” he says. “You can engage both ophthalmologists and optometrists, so that optometry referrals of surgical cases flow to the ophthalmologists in the group.
“Some groups offer potential members different options,” he continues. “For example, they can become an affiliate practice, in which the larger group manages their practice, taking care of billing, appointment scheduling, even providing technicians. The doctor shows up for work; the organization bills the patients for him—in his name, not the group’s—and provides support services. The group takes a percentage of the practice’s income for providing the services; the doctor, meanwhile, pays his own rent and does his own marketing. The doctor can leave the core group any time he wants to.
“In the end, when the doctor is ready to retire, his practice would become part of the larger group, by default,” he adds. “This arrangement could work for someone who still likes practicing by himself but is tired of hiring people and managing the paperwork.”
• The private equity model. “Private equity firms are looking to cobble together practices to wring out some efficiencies of scale, run them well for a while and improve their prospects, and then flip them back into the public markets,” explains Mr. Pinto. “The private equity model is relatively new. It’s been going on for a few years now, quietly, under cover of night. Nevertheless, there are easily 20 or 30 of these companies that are in that space or about to be in that space. I get a call every two or three weeks from one of the new, emerging companies trying to find out what’s happening in eye care, so it’s a pretty hot area right now. However, I believe it will become increasingly difficult for private equity companies to get much of a foothold in the current environment. Ophthalmology is a lot more difficult to centralize because ophthalmologists are rare, and it’s difficult and expensive to create new ones.”
Mr. Pinto points out that very little of the consolidation activity in ophthalmology consists of hostile takeovers. “That was true in the 1990s as well,” he says. “Ophthalmologists are seen as a very small part of the premium dollar; maybe three percent of the total. It’s just not enough for hostiles to be all that interested.”
Joining a Large Organization
Some ophthalmologists have chosen to become part of much larger health-care entities, although others find this option worrisome. “In those situations, you basically become an employee,” notes Dr. Rosenthal. “Very few doctors in those circumstances maintain any sense of either ownership or control, including hiring and firing. If you join a hospital, for example, there’s no guarantee that they won’t come to you five years down the line and say, ‘You’re too old, you’re too inefficient, your outcomes are too poor,’ or ‘We just don’t want you.’ I’ve actually seen that happen, more than once. In a group of doctors you can maintain partial ownership. There, you’re more likely to get a guarantee that you can stay as long as you want.”
Nevertheless, many ophthalmologists who have joined large organizations are quite happy with their choice. Tommy Korn, MD, FACS, chose to join Sharp Rees-Stealy Medical Group in San Diego after finishing his fellowship rather than enter private practice. “At the time, others thought it was not a good move,” he says. “But looking back 15 years later, it was the best decision I ever made. I’m a firm believer in the team concept. You accomplish more as a team. When doctors first join a large group, they tend to notice the things that seem negative, such as no longer having total control over the practice, and probably less income. But if you’ve chosen your group wisely, the benefits soon become apparent.” Dr. Korn notes several of those benefits:
• Getting regular feedback from peers and co-workers. “Getting feedback bothers some doctors at first, but in my experience, that feedback helps doctors to innovate and adapt the practice to challenging environments,” he says. “Without it, you’re more likely to stagnate and fall behind. Getting good feedback makes a big difference.”
• Being better prepared to deal with regulatory challenges. “We have great providers and great support staff, so we’ve been able to face whatever regulatory challenges come up,” he says. “When changes like health-care reform happen, we’ve often already implemented many of the ‘best practices’ they require. And, we have lots of support. If I have a billing problem, we have an entire department to take care of that. If there’s a problem getting authorization for a medication, I don’t have to worry about it. We have a department that handles that.”
• Less likelihood of burnout. “I have people to help me out when I have a problem,” he says. “Burnout is a big problem among physicians, and doctors in solo practice may not have someone to talk to. They may not have the sense that other people are facing the same problems. In a group practice you always have camaraderie and a dialogue among the doctors. You know you have support.”
• Many minds working on the big problems. “In a large organization you have a collective, ‘hive mind’ that’s able to address multiple problems and bring the best ideas or solutions to the top, because they been vetted by many people coming from many directions,” says Dr. Korn.
• Having more time for yourself, your patients and your family. Dr. Korn says this is the single most important benefit that comes with being in a large group. “It’s not uncommon to make more money as a solo practitioner, and some doctors focus entirely on that when considering joining a group,” he says. “But I don’t believe you should make life choices based on numbers alone. You should look at the entire situation. Being in a group practice allows me to spend more time with patients. It allows me to have more time to do productive things like research projects. I can take vacations without worrying about someone covering for me, or worrying about the practice losing income while I’m away. Most important, it allows me to have more time with my family. You can have all the money in the world, but if you have no time, you won’t end up happy. To me, it’s a no-brainer. I’d rather be with a good team than by myself.”
Dr. Korn acknowledges that if you’re planning to join a group, it’s important that the group recognizes the value of every member. “When you’re part of a group that’s in sync and not afraid to have disagreements, things can really take off,” he says. “People assume that joining a group means you have to conform to some set of ideas. In our group, different opinions are always welcome. Even with more than 500 doctors in our medical group, I always feel that my voice is heard.
“Of course, being part of a group means that sometimes the majority won’t agree with you, and you have to be brave enough to accept being voted down,” he admits. “But in a good group, your voice will be heard, and you may be able to sway the group to agree with you if your argument is sound. Mainly, you want to know that your opinion has been heard and treated with respect.”
Will Solo Practices Disappear?
Given the mounting pressures faced by solo practitioners, many believe this way of practicing may become a thing of the past.
“I think the solo practitioner will go the way of the dinosaurs,” says Dr. Noecker. “Consolidation is a societal trend—you see it everywhere. Furthermore, the government wants it to happen because it’s inefficient for the government to contract with so many individual doctors. They’d rather just negotiate with one group in a region, give them the money and let them disperse it downstream.
“In general, it’s much harder to be a solo ophthalmologist,” he continues. “Startup costs are a problem because ophthalmologists use a lot of special equipment. Being on call is another issue. If you’re part of a group, you can spread out the on-call requirements among a number of doctors. A solo doctor may be game to deal with that at the outset, but over time it wears thin. Meanwhile, the billing side of practice today is so complex, and the pitfalls are so large, that you need to have extra staff just dedicated to dealing with all the HIPAA paperwork. Many of these rules and requirements didn’t exist five years ago, and every year more of them come out. In some ways, taking care of the patient is the easiest thing we do.
“So I think solo practices are going away,” he concludes. “I don’t see any new ones are being created, and it’s just a matter of time before the existing ones retire or consolidate. In my market, I know of one oculoplastics person who recently started a solo practice after leaving a larger group, but that’s it. I haven’t seen any other new ones.”
Dr. Rosenthal believes the future of solo practice will depend on the environment. “For example, there are still a lot of doctors in New York City that don’t accept insurance,” he points out. “If your clientele is able to pay you cash for an office visit, you can keep on doing your thing. But younger doctors are just not doing that. And in rural areas with few doctors and few patients there will still be small practices. But even there, the small practices may become a branch or satellite office of a larger corporate entity. Even if solo and small practices continue to exist, I don’t think they’ll make as much money or have as much security as the larger practices, so I think it will become increasingly rare for people to go out on their own.
“When I started in practice I really never thought about anything except starting my own practice,” he adds. “It was what doctors did. Back then, the largest practice in this area had three doctors in it.”
Mr. Pinto believes the solo practice still has a future, despite all the pressure to consolidate. “It’s true that it will be increasingly challenging to be a soloist, just because the regulatory obligations are rising and it’s harder for a soloist to play strength-to-strength with all of that,” he says. “But in secondary and tertiary markets, small markets in which there are more people than doctors, I think the solo practice will be preserved as an enterprise model. In fact, I think markets all over the country will continue to see private, independent, small group practices do just fine. Today there are roughly 7,000 ophthalmology practices, and the vast majority of them consist of one, two or three doctors. A generation from now we might see that number shrink to 5,000 discrete, individual entities, and the average entity may be somewhat larger—perhaps five, six or seven doctors. But health-care reform in the past failed to sweep our worlds away, so I doubt that the current trends are going to change the profession as much as many fear. I think there will still be a place at the table for the private, independent, smaller practice, even 25 years from now.”
Making Your Way Forward
So, if you’re still in a solo or very small practice, should you be thinking about growing? And if so, which way forward makes the most sense?
Dr. Rosenthal clearly has some mixed feelings about moving from solo to group practice—feelings that are probably shared by many ophthalmologists. “I like being my own boss,” he says. “I really would prefer not to do any consolidating. But en balance, a properly structured group practice can still hold the promise of retaining much independence and has many advantages.”
“This is a tough decision that involves careful consideration,” says Dr. Korn. “Of course, you have to talk to family, friends and advisers, but in the end, I think an ophthalmologist has to trust intuition. When I made my decision to join a large medical group, I asked myself what would make me happy. What was my purpose in life? To generate maximum income? Help other people? Feel good about myself? In the end, I went with my gut. I wanted to be in a position to focus on being the best physician I could be, without the financial pressures of running a medical practice. Looking back now, joining a large multispecialty medical group was one of the best decisions I ever made.”
And what of ophthalmology as a whole? “Where this trend toward consolidation will lead remains to be seen,” notes Mr. Pinto. “Back in the 1990s, ophthalmologists thought that within 25 years we’d all be working for one of three American eye-care companies. That obviously didn’t come to pass; we still have more than 7,000 private practices and thousands of different health-care systems. Likewise, I don’t think the current wave of consolidation is going to follow a linear course to the endpoint of one megalithic health care delivery system in this country. But consolidation is an appropriate trend for many doctors and practices to be following right now. It isn’t a good or bad thing; it just rises and falls with the mood of the industry. Whether it makes sense for a given doctor or practice depends on the individuals and situation in question.”
As to the demise of solo practice, Mr. Pinto says he doesn’t see that happening any time soon. “The field of ophthalmology is like a battleship,” he observes. “It turns slowly. I don’t think we’re going to see ‘lights out’ for a long, long time.” REVIEW
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