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AAOS Now

Published 3/1/2011
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Robert Garroway, MD, MBA

Death of an orthopaedic group

By Robert Garroway, MD, MBA

How could a busy, six-surgeon orthopaedic practice that had been in business for more than 45 years simply fall apart over a 2-year period? Could the problems that undermined this practice have a similar impact on your practice?

Many factors may contribute to such demise, including inefficient or untrained management, old behavior patterns, an inappropriate expense ratio, lack of productivity, unwise investment in and use of ancillaries, and hospital relationships. It’s not a happy story, but it offers a number of lessons.

Management problems
From an initial two-surgeon practice, the group gradually grew to six surgeons, including a fellowship-trained specialist. But while the qualifications of the physicians increased, the same was not true of the practice management. The physicians overlooked the fact that as a small practice grows, so does the need for a trained business manager.

In many small practices, the physician is the business manager. The office manager might be someone who started as a receptionist, picked up billing and collection duties, and finally advanced to office manager. While “street” smart, these employees have little or no business training. They can oversee day-to-day operations, but cannot help in business growth, efficiency decisions, or in business changes.

For example, even though our physicians had meetings with the office manager every 2 or 3 months, the decisions made at these meetings were based on the partners’ “gut feeling” rather than sound business practices.

A practice can thrive in spite of inefficiencies. But a major move can deplete resources and upset the balance between revenues and expenses. This practice moved to a new office 15 years before its demise, but with such poor planning that physicians took no salary for 4 months. This event caused salaries to fall behind the growth of groups in the area for several years, made adding ancillary services difficult, and made it almost impossible to add younger partners.

Adding a formal business manager may be a valuable maneuver, but older partners might veto it because it is “too expensive,” and the practice may suffer in the long term. When hiring a manager, older partners must agree to accept advice that is based on sound business principles. Continuing to hire or use office managers who worked themselves up from a front-desk job does not serve the practice well.

Old practice patterns
As a practice grows, the physicians must be open to trying new systems and changing practice patterns. Saturday and evening hours can increase patient volume and thereby increase revenue. Such a suggestion in this group, however, attracted participation by only the youngest physicians. Without productivity incentives or support from the majority of the physicians, it’s no wonder that these added hours did not last.

When revenues fall, every partner must be willing to make “sacrifices,” whether it’s giving up a day off midweek, adding evening hours, or spending some Saturdays in the office.

Meetings should be regular and business-like. Meetings that last from 7:00 p.m. to midnight and address only minor problems while major problems remain unsolved are a troubling sign.

Productivity incentives
A practice with several older partners and a few junior partners may face issues over productivity incentives. Younger physicians would probably favor productivity incentives, while older physicians might fear that such a system would encourage “stealing” of patients. But unless the practice addresses the work balance between older and younger physicians, it will take another step on the road to failure. In orthopaedics, as in any business, productivity and quality need to be rewarded. This group was never able to agree on a productivity system.

Expense ratios
Knowing the ratio of expenses to income is key to keeping a practice profitable. Knowing why expenses are increasing is just as important.

In 1983, expenses in this group were 62 percent of revenues; by 1988, expenses were 68 percent of revenues. This occurred even with cost-saving measures recommended by accountants, including a drastic restructuring of the pension plan and reductions in medical benefits for employees. The addition of a successful physical therapy division helped this group, but still did not offset the rising expense ratio.

Physicians may think that adding ancillary services is the answer, forgetting that these too have associated expenses. Ancillaries can improve expense ratios but must be well planned and must be created for the amount of volume the practice feels will use these services. This must be done using sound business principles.

Benchmarking your practice expenses against similar practices locally or nationally is a way to measure how well your practice is doing. The Medical Group Management Association and the American Association of Orthopaedic Executives, as well as several other groups, can provide that information for members.

Review of ancillaries
Physical therapy, magnetic resonance imaging (MRI), and ambulatory surgery centers are frequently seen as appropriate ancillary services for an orthopaedic practice. But these, too, are businesses, and if the practice brings the same mismanagement to them that it has used in other ventures, they will fail.

For example, halfway through its life cycle, in the early 1980s, this practice added physical therapy services. A physiatrist was added to the staff, but the group failed to maximize on this service, and it did not do as well as some more efficiently run physical therapy programs.

For more than a decade, discussions about the pros and cons of adding MRI services continued. Without a proper business plan to show the impact on revenues, the majority of doctors would not agree to the expense of purchasing MRI equipment. Bone densitometry was added, but was not used enough to be profitable. Thus, despite apparent growth (the addition of physical therapy services, purchase of bone densitometry equipment), this practice was faltering.

Hospital relationships
The group had an excellent relationship with a local community hospital. The group was responsible for 80 percent of the orthopaedic work done at this hospital. This relationship, however, never resulted in any marketing efforts that would have helped either the hospital or the practice. Meanwhile, many competing hospitals and other orthopaedic or specialty private practice groups were introducing joint marketing efforts.

When two other hospitals tried to establish relationships with the group, old practice patterns (each senior partner had one weekday off and was unwilling to give this up) meant that the group had insufficient coverage to handle the new hospitals. The group never joined the staff of those hospitals. Young physicians who became aware of the group’s problems and wanted productivity incentives, which the group would not consider, refused to even consider joining this group. In the end, falling salaries, increased expenses, and limited management forced the decision to dissolve, and the physicians went their separate ways.

The message for today
I hope this discussion alerts some practices of the need for change. The healthcare delivery landscape is changing so rapidly—and will continue to shift under healthcare reform—that for groups to remain successful, they need solid business management to guide them. We physicians are smart and well educated, but few of us have been trained in business.

I encourage orthopaedic and other specialty groups to take a hard look at their management practices. Are you still stuck in the 1980s? Are you still unwilling to give management of your practice over to a professional manager who has the business acumen and the skills to run it as a medical business?

The days when physicians could successfully manage their group practice are over. Doctors need to step back and allow the practice to be managed. If we truly desire to manage our practices, we must have advanced business training and be willing to limit our clinical practice so that we can be effective managers.

After the group’s dissolution, Robert Garroway, MD, went on to get his Masters in Business Administration and currently practices in a 17-surgeon orthopaedic group, managed by a nonphysician CEO. He can be reached at sportsorthodoc@yahoo.com