Economies of scale, scope will help you survive

Many factors are driving up the cost of providing health care in the 21st century. Understanding these trends can help orthopaedic surgeons position themselves for success.

Traditionally, AAOS membership included four groups, in roughly equal proportions: solo practitioners, partnerships or small groups, large groups, and academics. But this is changing. Smaller physician groups are organizing into larger groups, through mergers, sales, or acquisitions. The exception seems to be the small group in a geographically limited area. As “big fish in a small pond,” these physicians are able to better negotiate with insurance plans and to form partnerships, joint ventures, and agreements with hospitals that are generally better for their bottom line.

Is bigger better?
Large practice situations are increasingly popular due to the economics of scale and scope. Generally, the larger the group, the better the deal and the better the leverage in business negotiations. These economies of scale are essentially economic efficiencies realized by the virtue of size or capacity. Larger groups may also benefit from economies of scope—efficiencies or economic gains realized by virtue of the breadth of services or capacity that they offer.

Economies of scale could result in better deals on everything from computers and computer paper to fees for cleaning services, legal advice, and accounting services. Larger groups have a lower “cost per doctor” for these items than smaller medical groups.

Economies of scope would enable a practice to retain most—if not all—patients due to the breadth of services offered. For example, a practice with general orthopaedic surgeons, sports medicine surgeons, total joint surgeons, foot and ankle surgeons, hand surgeons, spine surgeons, and ancillary services such as physical therapy and magnetic resonance imaging (MRI) would be able to handle almost any orthopaedic condition. Obviously, a one- or two-person group would be unable to offer as many of these services.

Suitable scale or size is often necessary to add ancillaries and make them economically viable side businesses, not only because of the large, up-front capital outlays that are required but also for utilization. Larger groups may have a negotiating advantage for insurance reimbursements, paid emergency call, supplies, and joint ventures with larger groups. The group purchasing program the AAOS has with eSurg, however, puts smaller practices on a more equal footing for medical and office supplies (see “Are you spending too much on supplies?”).

Larger practices may also develop a better “brand” to attract patients. Large-scale purchases such as electronic medical record systems, digital radiograph systems, and MRI equipment may also require the scale of a large group to makes them economically viable.

Demographic trends
The major demographic driver affecting orthopaedic practices in the 21st century will be the “graying of the population.” As the Medicare population increases, physician reimbursement will essentially be controlled by the government. In today’s political climate, with the economy sputtering and with unemployment on the rise, all physicians should be concerned.

“Boomeritis” involving “bionic boomers” as well as “cyberchondriacs” will continue to drive the sports medicine and reconstructive markets.

Health care in the United States is a $2.4 trillion market—the largest in the world—and is grow­ing at a rate of 7 percent to 10 per­cent annually. Since 1970, health care has grown from approximately 9 percent of the gross domestic product (GDP) to approximately 20 percent of the GDP. The rate of growth is much higher than in other developed countries with similar medical technologies. Technology, pharmaceuticals, and biotechnology offer patients better treatments, but new tech­nologies are exceedingly expensive.

Medicare will be a major economic driver. The fixed budget provisions under Medicare will result in lower reimbursements on a per case or per procedure basis as the number of individuals in the program increases. Insurance companies that use Medicare payments as benchmarks will lower their reimbursements.

As a result, physicians are increasing the number of services and procedures they perform (“working harder”).

Playing politics
The next president has plenty to worry about—a weak economy, falling stock market, and wars in Iraq and Afghanistan. But he has also said that health care will be a major issue. Physicians must be aware of the issues and options, and must advocate for ourselves and our patients on these positions.

For example, health savings accounts and consumer-driven health plans that make patients responsible for thousands of dollars of care could tend to drive down elective surgical procedures. It could also lead to slow collections or unpaid bills. Physicians must be vigilant and ensure that collection functions are up to date and efficient.

The drop in the number of Americans covered by employer-sponsored health plans, increases in deductible and co-payments, and the growth of health reimbursement arrangements may decrease utilization of healthcare in the future.

In her book Who Killed Health Care? Regina Herzlinger, a Harvard professor, points to hospitals, politicians, insurance, and industry—not doctors and patients. It’s an excellent explanation of the difficulties we face going forward.

Healthcare revenue trends have tended to favor pharmaceutical and device companies, health insurers, and hospitals during the last several years. Although the healthcare market continues to grow and attract more money, physicians are getting less and less of the pie.

What’s a doctor to do?
To achieve financial stability going forward, the well-prepared orthopaedic surgeon will have to be adaptable and open to change. Strategies such as working harder, leveraging, not leaving money on the table, ancillary development where appropriate, optimal utilization of technology, procedural strategies, marketing, and branding are all important.

I would argue, however, that minimizing costs is even more important. Reducing costs gives you a larger “bang for your buck” than increasing revenue and is much more effective in today’s environment. The AAOS online Practice Management Center (www.aaos.org/pracman) is an excellent source of ideas for organizing your thinking along these lines. In addition, some basic principles can help prevent you from getting into dire financial straits.

First, make sure you are saving for your retirement. Maximize the amount you save, have a good plan, and find good advisors. Diversify your personal investments. Putting all your “eggs” in one basket can be disastrous. Invest regularly. Make sure you live within your means.

As physician reimbursement margins (the difference between what it costs you to provide a service and the amount you collect) continue to erode, you will need to be more efficient in providing care. Technology can help, but remaining current and proficient in the latest procedural techniques is also important.

My crystal ball
I boldly predict that solo and small groups will disappear, except in smaller geographic areas where they are more insulated from pricing pressures and competition. Although the number of academic practices may remain the same, I believe that at least 50 percent of physicians will be employed by hospitals or health systems and that approximately 30 percent will be in entrepreneurial large group private practices that will deliver a very high level of care efficiently and will be reasonably rewarded for their efforts.

In Louisville, Ky., approximately 10 orthopaedic surgeons (about 10 percent of the market) have some type of employment relationship with a hospital—and the num­ber is growing. Hospitals are offer­ing higher salaries than orthopaedic surgeons can make in private practice as well as more access to technology, staffing, and other benefits. This is an increasingly popular option for physicians in smaller practices who have trouble re­cruit­ing new talent because they are un­able to offer a breadth of ancillary services and a reasonable call schedule.

In an employment arrangement, however, the physician gives up some degree of autonomy and independent decision making. I urge you to pay attention to these trends and incorporate them as appropriate in your practice.

Stephen P. Makk, MD, MBA, chairs the AAOS Practice Management Committee. He can be reached at smakk@lbjs.net