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Bruce Maller on the Future of Eye Care: 'The Market is Ripe for Consolidation'

Wednesday, May 31, 2017 9:00 AM

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Written by: Bruce Maller

Bruce Maller
President and CEO

Although most eye care meetings are dominated by clinical and surgical advancements, there are also recurring business topics that corner hallway discussions. At this year’s ASCRS-ASOA meeting the buzz was all about industry consolidation fueled by private equity (PE) investors.

Over the years, I have learned not to react to meeting chatter or market activity but, instead, to focus on the “why” and carefully analyze whether a current fad is likely to be a sustainable trend. So, why is it that many eye surgeons seem so interested in “selling out” to a financial investor? I think the answer is multifactorial.

Why providers are selling

Clearly, the business of medicine has gotten increasingly complicated. At every turn, it seems a new law or regulation needs to be considered. Unfortunately, most of these laws and regulations serve to increase overhead and do little to advance the quality of the patient’s experience. These seemingly regular occurrences reside in a world where third-party payers exert greater control over patient access and provider reimbursement.

For many providers, keeping up with these changes has become a financial and emotional burden. In some instances, the providers simply get to the point where they choose to sell out and transfer the responsibility of managing the practice to a larger entity that presumably has the resources to manage these challenges in a more efficient manner.

Why investors are buying

The biggest factors in PE investors coveting investment in ophthalmology include the changing demographic landscape and the disparate nature of the specialty. In the eyes of an investor, the aging population represents a “bull market” in the prevalence of eye disease. Also, it is not lost on investors that technology is advancing in ways that will improve the efficiency and effectiveness of treatment modalities for cataract, glaucoma, and retinal disease.

As a nonhospital-based specialty, ophthalmology has not experienced the same level of consolidation as other medical specialties that are more closely connected to the hospital or health system. Ophthalmology is a specialty that still has many solo and small- to medium-sized groups (two to nine physicians). Looked at differently, there are relatively few ophthalmology groups with 10 or more providers. This environment provides an opportunity to consolidate and, theoretically, bring greater efficiency to practices.

"The market is indeed ripe for consolidation, and I would venture to bet that we will see some success." — Bruce Maller

To understand PE, it is best to consider it as a “vehicle” to facilitate consolidation: Partnering with a large practice, the PE investor brings capital to strengthen infrastructure and acquires additional capacity (both ophthalmology and optometry practices) to create a more integrated network of providers and facilities. The theory is that the network becomes the “product” that can be leveraged to deliver a comprehensive scope of service that will be more attractive to patients and payers.

Ripe consolidation market

So, the question is — can this model deliver on the promise? Of course, no one can answer this question. Investors and early-stage practices will point to comparable investment in dermatology, dentistry, and physical therapy as benchmarks for eventual success. There is some truth to the apparent success in those specialties; however, the fact pattern and environmental factors are different in eye care. Additionally, there is still a “legacy” leftover from failed attempts to consolidate the eye care space that goes back to the mid- to late-1990s. There are many skeptics that do not see that this current activity will have a different outcome.

I would not be so quick to come to that conclusion. The market is indeed ripe for consolidation, and I would venture to bet that we will see some success this time around. The current group of investors have done their homework and learned a lot from the failed attempts of years past. Additionally, the market is also different, and in my opinion, we are more likely to see success this time around if the focus is on using resources to build a great business that can indeed focus on delivering a better patient experience in a more efficient way. This will require enlightened leaders who are not distracted by promises of wealth accumulation in the short term. This needs to be viewed as a long-term investment that will pay dividends for the next 20 to 30-plus years.

Many practitioners will conclude that consolidation is a good thing; however, many will still choose to “go it alone” and not align with an investor partner to achieve this objective. There is no right or wrong answer, but the interest from PE is likely to be a radical force in the market for several years to come.

YOUR TURN: What do you envision for the future of eye care? Do you think PE investors and consolidation will be successful? Please leave your comment in the section below. 

2 Comments

  • Steve Kreitman said Reply

    Does BSM know about 401K plans and how much the company should match in these trying times?

    • BSMAdmin said Reply

      Hi Steve,

      Thank you for your question! Employer contribution plans are varied across industries and employers. According to Forbes, Vanguard estimates that it has more than 200 different employer contribution formulas across its products. However, you can use trending data to make a good decision about your practice’s 401K matching contribution. Here are some current trends that may assist you:

      Ophthalmology Information
      • According to the HealthCare Group, 79 percent of ophthalmology groups that have a 401K plan make an employer contribution.
      • Ophthalmology practices spend 2 to 8 percent (25th – 90th percentiles) of total gross revenue to fund staff fringe benefits. These benefits will include health, disability, life, dental, continuing education, and retirement.
      • Our BSM Consulting ophthalmology benchmarks indicate that the healthy range for the burdened payroll ratio is 26 to 32 percent. (Total employee wages + fringe benefits divided by net collections [total collections less patient refunds]).
      • Unscientifically, I recently attended an ophthalmology meeting where a small group of practices shared that they contribute between 3 to 6 percent employer match; 80 percent of these ophthalmology practices also participate in automatic employee enrollment.

      Retirement Plan Trends
      • A new 2018 survey published by Callan reviewed data from 152 retirement plan sponsors from all industries. Here are some key findings:
      o 71 percent of plans now use auto-enrollment. This service automatically signs employees up for contributions when they become eligible. Employees have to opt-out of the program.
      o 27.3 percent of plans expect to increase their company match in 2018, and no plan sponsors expect to eliminate the match in 2018.
      o 25 percent of plans match employee contributions $1 for $1. However, other plans match a percentage of the employee’s contribution. The type of match is dictated by the type of plan that your practice has.
      • According to the Society of Human Resource Management, one-third of all employers increased their benefit offerings in the past 12 months to stay competitive. Of those, 13 percent plan to increase retirement savings and planning.

      To gain a few more data points, you might also contact your 401K plan and talk with your practice’s accountant. They may also have some data that can help you make an informed decision.

      I hope this information is helpful. Please let us know if you need anything else.

      Regards,
      Elizabeth Holloway
      BSM senior consultant

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