Application of Financial Analysis to Three Retina Practices
Dr. Dugel: Now that we have an overview of how practice patterns have changed and how the demand for services and reimbursement scenarios is changing for the retina subspecialty, we can discuss how all of this affects individual practices. As discussed, Quorum Consulting conducted Practice Efficiency Studies. These studies, which used the ABC methodology, provide us with some very interesting data. My practice and the practices of Drs. Tornambe and Murray were evaluated using this methodology.
EXAMINING ABC RESULTS FROM PRACTICE NO. 1
Dr. Dugel: In my practice, we examined and compared our financial records for the years 2005 and 2007. We chose 2005 because it was before the anti-VEGF treatment era in AMD. We chose 2007 because it was right in the middle of the anti-VEGF era.
When we looked at top-line revenue, we found that our services changed tremendously from 2005 to 2007. Our practice had been surgical and laser-based, but during that time period, it became an injection and diagnostic-based practice. The top-line analysis showed our revenue had increased by 42%. However, when we looked at operating costs, we saw they increased by 64%. Interestingly, our collection rate for drugs, when only ranibizumab was being used, was 100%. We had a high reimbursement rate for injections as well. Despite that scenario, which would normally be considered a best-case scenario for drugs, our profit-loss margin was down. Our margin declined by 14% from 2005 to 2007.
Applying the ABC methodology, we were able to ascertain which services were profitable and which were not, and this explained why the profit-loss margin declined. From the perspective of contribution margin and efficiency margin, the most profitable service we provided was laser surgery. The second most profitable service was nonlaser surgery (vitrectomies and major procedures). The least profitable service was intravitreal injections. Finally, the analysis demonstrated that our practice was losing money on office visits, fluorescein angiograms and OCT testing. It was clear what happened. Our traditional services, which had been major surgical procedures before and during 2005, had been replaced by less profitable services, thus the decrease in our profit margin.
|From the perspective of contribution margin and efficiency margin, the most profitable service we provided was laser surgery. The second most profitable service was nonlaser surgery.|
— Pravin U. Dugel, MD
MODELING VARIOUS FINANCIAL SCENARIOS
Dr. Dugel: The Practice Efficiency Studies also allow for the modeling of different practice financial scenarios — "what if" scenarios if you will. For example, we modeled what would happen if we did not change the practice at all and reimbursement for intravitreal injection declined by 20%. The result would be a decline in profit of 12%. If injection reimbursement declined by 50%, profit would decline by 31%. If all reimbursement declined by 22%, then profit would decline by almost 100%.
|Another aspect to consider when it comes to performing more OCT testing is the ancillary cost of staffing, room space, scheduling, billing and collections. The office must have this infrastructure in place to support increased volume.|
— Kuo Bianchini Tong, MS
|Most doctors are surprised to learn what they are paid for an OCT test once the cost of capital, maintenance contracts and other ancillary costs are factored in … the biggest factor is the clinical staff time.|
— William L. Rich III, MD, FACS
|We have found that having additional OCT review stations increases efficiency tremendously … we believe the power of OCT lies in the digital representation, both for patient education and the ability to move from one test to another.|
— Paul E. Tornambe, MD
Extremely interesting to me was what would happen if we left the practice infrastructure intact, but used a more durable treatment for AMD. This scenario would actually impact profit margin more negatively than a reimbursement decline. If we were administering a drug every 3 months instead of every month, profits would decline 80%. If we gave a drug every 6 months, profits would decline more than 100%.
It is important to note that while I do have an ownership stake in an ambulatory surgery center (ASC), the ASC was not included in this analysis.
I would like to have Mr. Tong, founder and president of Quorum Consulting, address another aspect of the Efficiency Study results for our practice that were surprising to us. Why is diagnostic testing in general, OCT in particular, not profitable? It would seem that once the equipment is paid for, testing more patients would translate into more profit.
Mr. Tong: Regarding OCT testing, there is an accounting methodology that assumes the biggest part of OCT cost is the equipment itself. Once it is purchased or leased, the costs can be amortized over the number of patients tested, and it might appear that the incremental cost of doing one additional test is quite minimal. However, you have to consider the capacity of the instrument. This may vary among practices, but we have found that in most cases, there is not much unused OCT capacity. In fact, additional testing often requires leasing or purchasing additional equipment.
Another aspect to consider when it comes to performing more OCT testing is the ancillary cost of staffing, room space, scheduling, billing and collections. The office must have this infrastructure in place to support increased testing volume. Under ABC accounting, all of these activities need to be factored into the cost of performing OCT.
It is not necessarily a black-and-white answer, but every practice needs to have a firm grasp on all of the different elements in order to accurately evaluate whether a test is profitable and whether doing more tests is more profitable.
Paul E. Tornambe, MD: In our practice, we have found that having additional OCT review stations increases efficiency tremendously. We are computerized with electronic medical records, and we believe the power of OCT lies in the digital representation, both for patient education and the ability to move from one test to another, which paper does not provide. Before we obtained the review stations, we had a major bottleneck at the OCT machine. Obviously, the technician could not test the next patient while we were reviewing results with the previous patient. Our patients began to expect to see their OCT results when we made our treatment decisions, whether or not another injection was needed.
We did not have the extra reviewing stations at the time of our Practice Efficiency Study, so the efficiency gains they provided were not reflected in that data. I would encourage any practice that wants to improve the efficiency of OCT to allow for several reviewing stations.
Mr. Tong: That is a good point. The key is to really understand the dynamics of the current situation, have a baseline set of information, and measure as much as possible. From there, a practice can increase volume or change infrastructure or work flow or adopt other strategies to change the financials.
Dr. Rich: Most doctors are surprised to learn what they are paid for an OCT test once the cost of capital, maintenance contracts and other ancillary costs are factored in. On a national level, the doctor gets paid $4.54 to use the instrument, and the room and rent cost $2.54. But the biggest factor is the clinical staff time.
Dr. Dugel: From an efficiency standpoint, it would seem that one could perform many more OCT tests than surgeries in a given amount of time. For surgeries, we have to travel to the OR, wait for room turnover, and so on, which would seem to be less efficient than performing OCT scans. Why is the testing less profitable?
Mr. Tong: How the location of different services, office-based vs. ASC/hospital-based, affects their profitability is a function of different practices. It may be a function of how far the physician has to travel between home and the office and the OR. It may be a function of efficiency and scheduling when the physician goes to the hospital or ASC. Is he doing one procedure and having to turn around and go back to the office? Or is he able to schedule multiple surgical procedures back to back?
Every practice and every physician may be a little different, but the key is to consider all of the variables. We cannot assume that an office-based procedure is somehow inherently more profitable than a procedure that requires travel time. Many variables must be considered.
BIGGER PUSH TOWARD SURGERY CENTERS COULD PROVIDE EFFICIENCY GAINS
Dr. Dugel: What this seems to indicate for the future is that because we will have more reimbursement pressures on office-based procedures, we will be forced to be much more efficient in our offices.
On the other hand, perhaps we will find more opportunities for performing major procedures in surgery centers. Is that correct?
Timothy G. Murray, MD, MBA: That is absolutely correct. The retina subspecialty has not been able to participate in the increases in productivity that the rest of ophthalmology has achieved. In a 10-year period, every other subspecialty in ophthalmology has increased its productivity — procedures performed per hour — by about 35%. In retina, productivity has increased only about 10%. Why? Retina has been married to the outpatient department of the hospital. We have been unable to participate in the efficiencies of ASCs. Hopefully, that will change in the future.
Dr. Tornambe: For once, retina specialists might be positioned correctly. There is no question that the more procedures that are performed, the less the government wants to pay in reimbursement. That tends to happen with any medical service. However, we were trained to do vitrectomies — to stamp out blindness. Not to demean intravitreal injections, which can achieve wonderful things, but if surgeons can be reimbursed fairly for performing surgery, it would certainly offset reimbursement cuts for office-based services.
|Retina has been married to the outpatient department of the hospital. We have been unable to participate in the efficiencies of ASCs. Hopefully, that will change in the future.|
— Timothy G. Murray, MD, MBA
Mr. Tong: Economists assumed that when reimbursement for retina surgery decreased, physicians would offset that by performing more surgeries. That did not happen. The frequency of major procedures has grown only 0%–1% per beneficiary per year, based on our studies. Economists are becoming aware of that now and are taking another look at how surgery is valued. I believe strongly that with payment reform, both primary care services and major procedures are going to benefit. I agree with Dr. Tornambe that retina subspecialists are well positioned for the future.
Julia A. Haller, MD: Except that some retina specialists have hired more people to do injections, so they are spending more time in the clinic and have moved away from doing more complicated surgeries.
EXAMINING ABC RESULTS FROM PRACTICE NO. 2
Dr. Dugel: Drs. Murray and Tornambe, as you present the results of the ABC analyses for your practices, please include what you expected the studies to show, what they did show, whether the results prompted any practice modifications, and how the results will help you to assess future treatment models.
Dr. Murray: I would first like to point out that the analyses we are discussing today were performed in 3 different settings: a large, single specialty retina practice, a smaller, single specialty retina practice and our academically based, hospital-derived retina practice. Therefore, they cover every practice pattern for retina that is currently in place in the United States.
Quorum Consulting applied its ABC methodology to financial data from the Bascom Palmer Eye Institute at the University of Miami for 2006 and 2008. We provided the data from both our hospital and our physician-based practice. We examined our major hospital and physician services, nonlaser surgery, laser surgery, evaluation and management services, outpatient visits, OCT diagnostics, non-OCT diagnostics and intravitreal injections.
Going into the study, even with my MBA background, I did not truly appreciate how important the ABC approach is for determining profit and loss centers within these group services. My preconceived notion was that our volume had increased five-fold in that 3-year period and that volume would be associated with significant increases in revenue. That was indeed the case. However, because of the way the hospital and the practice work, the expense side of this is much less tangible to the individual clinician. I did not appreciate the associated marked increase in our operating costs to deliver typical services.
In terms of our charges and collections, we saw significant increases in the interval from 2006–2008. We were focusing only on increases, which suggested that our clinical practice was in good stead and quite profitable. We attributed much of that to the increase in imaging and intravitreal injections.
However, the ABC methodology gave us a much clearer picture of the cost of providing services, and it was striking. What I found particularly interesting was what distinguishes an academic hospital-based practice like ours from a physician-based practice. Most of our operating costs are, in fact, borne by the hospital. We have little control over how operating costs are allocated by the hospital to our practice. The assumption had been that the clinical practice would derive a benefit from a shift of the costs of operations away from the practice and to the hospital. In fact, what we saw was that the operating costs significantly increased during that 2-year window, which is exactly what Dr. Dugel saw in the analysis of his practice.
The increased costs came from a rise in our capital spending for imaging equipment, a need to expand our staff to provide services and front and back office time for scheduling patients. There were also billing and cost increases to provide a nursing-based, physician-directed injection service, which is what we offer in our practice. We saw significant increases in charges and collections, and a significant decrease in our relative overall profit. The biggest expense for us was related to the delivery of injection-related imaging and services.
|So, for physicians who are looking to improve efficiency, the first step should be to consider the insurance plans in which they participate. Having a waiting room full of patients does not necessarily guarantee that you will be successful.|
— Paul E. Tornambe, MD
Our major profit center was our laser and nonlaser surgeries. We had a significant loss in our outpatient visits in terms of our expense. We had moderate increases in our OCT diagnostics, a significantly greater increase in our non-OCT diagnostics and a moderate increase in our injections. This was a time when we were using bevacizumab, not ranibizumab, for the vast majority of our anti-VEGF injections. We were utilizing bevacizumab in 60% of cases in 2006 and in 90% of cases in 2008.
It was surprising to me that despite significant increases in our charging activities, significant increases in our collection revenue and significant increases in our patient volume, our incremental profits decreased in the 2-year span that was evaluated.
EXAMINING ABC RESULTS FROM PRACTICE NO. 3
Dr. Tornambe: We learned quite a bit from our ABC analysis as well. Several aspects of the results turned out differently than I had anticipated. It shows that unless you examine your data, you really do not know exactly what is happening in your practice. We know how to take care of retina problems very well. But we often have no idea what we are facing from a business management perspective. In truth, we did not need to be good business people to survive 20 or 30 years ago, because so much fat was built into the system. Today, it is vastly different. If we do not manage our costs, especially our drug costs, we could be looking at bankruptcy.
We analyzed our financial data across 2005 and 2007. Around that time, we made a practice decision that had some significant effects. We decided to stop participating in HMOs and to rid ourselves of all insurance carriers that did not pay a certain amount. The results were interesting. For example, from 2005 to 2007, our office visits increased only 2%. However, our revenue improved 21%. The reason is that we were no longer accepting the lower paying plans, and we were getting reimbursed at higher rates for the patients we were seeing. So, for physicians who are looking to improve efficiency, the first step should be to consider the insurance plans in which they participate. Having a waiting room full of patients does not necessarily guarantee that you will be successful.
Our laser surgery situation was also very interesting. Laser procedures were down 37% between 2005 and 2007, because we had moved away from thermal laser treatment for AMD in favor of photodynamic therapy (PDT) and anti-VEGF injections. Even though the number of procedures decreased by 37%, revenue from those procedures dropped by 53%, because we were no longer getting reimbursed for the focal laser treatments at a higher rate. We were doing more PDT, which was more time-consuming, and we were not collecting on all of the drugs. We took a double hit from less revenue generated, and from not collecting well on some of the PDT drug expenses. That was an eye opener.
The number of OCT scans we performed in the time period analyzed increased by 80% in volume, although the revenue was up only 40%, because, during that time, the government kept decreasing reimbursement for the testing.
As expected, our biggest volume increase was in intravitreal injections. That was up more than 300%, and the revenue almost kept pace. Our revenue for injections increased approximately 236%, which did not surprise us too much. Even though we were getting reimbursed less, we were more comfortable with the injections. We did them more efficiently as time went by. As the volume mandated, we became more efficient in bringing patients in, performing tests, reviewing data, administering injections and moving patients through the office.
|I believe that it does not really matter which drug we use, ranibizumab, bevacizumab or perhaps VEGF trap in the future. What matters most is the infrastructure required for this particular AMD treatment model.|
— Pravin U. Dugel, MD
With regard to surgery, vitrectomies, pneumatics, scleral buckles and so on, the number we performed remained flat. As Dr. Rich mentioned, we did not increase our surgical volume at all during that time. Our revenue dropped about 1%, as Medicare reimbursed less. Furthermore, we did not perform fewer procedures because we were being paid less. When patients needed surgery, we did it. When they did not need it, we did not do it.
We learned that we managed our anti-VEGF drug costs well. We predominantly used bevacizumab, and we did not need to hire additional staff members. In general, practices that use a great deal of ranibizumab need to hire a full-time employee just to manage the drug billing, which could easily be equal to all other billing in a month. If you are off only 2% or 3% of the collections for the drug, you are going to have severe financial consequences. Dr. Dugel, you had a 100% collection rate for ranibizumab, but you hired another person in order to track usage and hit that percentage, correct?
Dr. Dugel: That is correct. However, I believe that it does not really matter which drug we use, ranibizumab, bevacizumab or perhaps VEGF trap in the future. What matters most is the infrastructure required for this particular AMD treatment model. Next, we will discuss the ramifications of that concept for both private and academic practices. RP