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Up Front | Sep 2003

Profitability and Patient Care

How a statewide eye care delivery system structures its business and finances.

To view Figure 1 of this article please refer to the print version of our September issue, page 41.
When you care for patients for a living, viewing your medical practice as a business sometimes seems cold, but I feel the business mindset is critical to providing patients the best care. Like any other business, in order to grow, acquire new technology, and expand services, the practice must be profitable. I believe that good patient care entails a serious business approach to watching profit margins and ensuring the practice is operating as a responsible business.

FOCUS
The mission of Barnet Dulaney Perkins is to provide the highest level of quality eye care that we are able to deliver. Toward that end, we decided not to follow the LASIK-only crowd and remain diversified in general ophthalmology. We have also invested heavily in our subspecialty care and expanded it to include cataract, retina, oculoplastics, and glaucoma specialty and surgical care. Although we are primarily a surgical practice, a few of our offices have opticals as well. Remaining comprehensive in all the subspecialties of ophthalmology is, I think, one of the best decisions we have made from a business model perspective. Diversifying has tremendously reinforced our stability.

NEW OFFERINGS
Like other practices, we have begun offering customized wavefront treatments. We currently work with CustomVue (VISX, Inc., Santa Clara, CA), CustomCornea (Alcon Laboratories, Inc., Fort Worth, TX), and the INTRALASE FS laser (IntraLase Corp., Irvine, CA). Also, our practice is an investigational site for the Allegretto excimer laser (WaveLight Laser Technologie, AG, Erlangen, Germany), and we have been very impressed with the laser's results since the clinical trials began. One of the most promising new technologies we offer is the Implantable Contact Lens (ICL; STAAR Surgical Company, Monrovia, CA). We have been deeply involved in the clinical trials for the ICL, and David Dulaney, MD, has implanted more of these devices as part of this clinical trial than any other surgeon in the country. We expect the ICL to earn FDA approval sometime this year, particularly for myopia.

ACCOUNTING STRATEGIES
I believe it is important for practices to divide their accounting records between each business area. Any practice, regardless of its size, must fully understand (1) which elements make money and which lose money, (2) which are the company's true profit centers and how they perform compared with previous years, and (3) what the cost centers (those departments that incur overhead without directly generating revenue, such as an accounts receivable department) cost the company.

For example, 52 individual divisions compose Barnet Dulaney Perkins Eye Center (BDPEC), and every single aspect of our business has separate accounting. Each clinic has its own financial statement. Each subspecialty (retina, glaucoma, and oculoplastics) is a division of the company, and both their revenues and individual costs are allocated directly into that division. Even our administrative cost centers, such as Accounts Receivable, Transportation, Credentialing, Finance, and Human Resource, are considered individual enterprises. This business model allows us to evaluate the profitability of each division. Of course, just because one division may not make money does not mean we would eliminate it; it may have strategic or resource value. We are aware of what each division either contributes to or drains from the bottom line, however.

Each division of the company rolls up into various entities that ultimately constitute the single company called Barnet Dulaney Perkins Eye Center. Our refractive center entity, for example, breaks down into its own marketing and surgical arenas. All of our ASCs (we are currently building our tenth) combine into an entity known as Barnet Dulaney Perkins Surgery Centers (BDPSC). We can either examine each surgery center's performance individually or that business as a whole. Of course, all of these divisions are wired together with managerial services provided by the other entities. On the practice side, each clinic is evaluated individually but also as part of a division. Essentially, this approach applies corporate-type infrastructure to a medical practice.

Our company has approximately 275 employees, each of whom clocks into or out of a computerized timekeeping system of the department in which he works. For example, an individual who works with the doctor in the clinic during the morning expenses and codes his time to that clinic location. If that person then works with the physician in the ASC in the afternoon, he will clock out of the clinic and clock into the ASC. Properly allocating the staff's time to the department in which they work provides a much truer sense of whether each department is running properly, and it allows the partners and management to create an internal benchmarking system. Is one ASC more profitable than another in terms of line-item expenses as a percentage of revenue? Why is that center running better? This benchmarking can also be applied to the clinics.

THE BUSINESS STRUCTURE
We broke out all of our administrative and infrastructure services into a separate company, called Medical Management Resource Group (MMRG). At face value, this company is similar to any management service organization that a practice creates specifically to support itself, although we have taken the concept a few steps further. MMRG provides all of the infrastructure and operations services for BDPEC. The company houses our accounts receivable, finance, human resources, executive operations, purchasing, and transportation divisions. It also leases all of the employees to BDPEC, which is our medical practice, BDPSC, and Barnet Dulaney Perkins Refractive Center (BDPRC) (Figure 1). The only employees left in the medical practice are the doctors.

The purpose of this structure is to create value. Medical practices hold little value, especially in the wake of physician practice management company (PPMC) industry. Facilities, however, are valuable, as is a management company such as MMRG that maintains contracts with medical practices, runs medical facilities, and provides other bona fide services. Creating this management company gave us a platform from which to spin off our IT department as a wholly owned entity of MMRG, called E-Practice Connect. E-Practice Connect is a reseller for NextGen's software packages, both electronic practice management and electronic medical records. It also provides IT infrastructure solutions and delivers the product on an application service provider (ASP) platform to other medical practices. The ASP provides a low-cost solution for smaller medical practices to access these new, robust software packages such as NextGen.

We took the same approach with our biomedical department. Run by a biomedical engineer, this department managed the service and support for all of our ophthalmic instrumentation. We expanded that department into its own company, which is now called CBD Ophthalmic and currently has five employees. MMRG is an equity partner in CBD Ophthalmic with the biomedical engineer who was running the department. CBD Ophthalmic now takes on regional maintenance and service contracts for everything in ophthalmology, from lanes to lasers, and is a distributor for a large number of products. In fact, it is the importer for all Tomey Corporation (Nagoya, Japan) products, and it services that company's distribution network. CBD Ophthalmic is now independently profitable, and Barnet Dulaney Perkins has become its customer.

We also bought a company called EyePa (Dallas, TX; moving to Phoenix, AZ), a third-party administrator, in order to manage and service capitated contracts. Although many practices have shied away from capitated contracts, we have continued to grow that segment of our business: on the medical side, as much as 10% of our consolidated revenues come from capitated plans. Not only is EyePa able to provide this service for specialties other than ophthalmology, but it also is creating other specialty networks to provide contracting opportunities as well as credentialing services and claims processing for managed care groups.

In addition to these ventures, MMRG has begun to invest in starting up private practice optometric clinics or purchasing optometry practices and providing the seed capital for young optometrists to enter private practice. In addition to the obvious strategic value in creating referral relationships, this business strategy will also create customers for MMRG's administrative services as needed. In summary, Barnet Dulaney Perkins needed these infrastructure and services for itself, so it turned cost centers into profit centers.

CREATING AN EXIT STRATEGY
One important, additional motive exists for creating these strategic enterprises. When two senior partners have invested so much of their careers and finances into creating a large medical practice, what is their exit strategy? With a practice the size of Barnet Dulaney Perkins, creating buy-in strategies is difficult. Therefore, consolidating much of the company's infrastructure into a management company and reducing some of the value in the medical practice allows the senior partners to retain some of their investment in the management company long after they have retired—something otherwise difficult to accomplish. As a shareholder in a management company that makes a profit selling services to medical practices for fair market consideration, the physician can enjoy the value and profits of that company long into retirement. Further, a management company with revenue and profits independent of the medical practice may eventually be valuable in consolidation efforts or to public companies, particularly if its purchase is unattached to that of a medical practice, yet has contracts to provide these services. Finally, devaluing the medical practice somewhat by spinning off its infrastructure and IT services allows at least the potential for buy-in strategies from younger doctors.

Mark Rosenberg is Executive Director of Barnet Dulaney Perkins Eye Center based in Phoenix. Mr. Rosenberg may be reached at (602) 508-4808; mrosenberg@bdpec.com.
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