Will Private Equity's Bull-Rush Into Ophthalmology Drive Growth?

Will private equity’s bull-rush into ophthalmology drive growth? Dick Lindstrom, MD addresses this notion in a podcast he did with Tom Salemi from OIS. Stated investment reasons by doctors (MDs) are access to capital and business expertise. Profit growth, cost reduction, and services aggregation are success drivers for private equity (PE) that I’ve heard. Will these two forces play well together today and in the future?

To create growing enterprise value, I believe PE and their MD partners will wrestle seven market forces. These trends tie back to the increasing commercial cast to Ophthalmology. In the new order, some MDs will thrive and others may whither. Marketing, patient experiences and outcomes will power success and the new PE partners, to generate the white-hot returns on equity they seek, will need to whip the market of upgraded procedures from a meager 15% adoption to 30%.

To attain the returns sought by their investors, PE must saddle the following elements:

Most Doctors are Reluctant Sellers

I wrote about MDs lack of interest in selling products and services on my blog. Often share a story of an MD who told me he didn’t go to medical school to become a salesman; I don’t blame him, but I feel sorry for him. He was thinking about it incorrectly and is not alone in his views.

That was in 2004 and many still feel the same today. Some are strident in their belief that asking patients to pay for upgraded procedures is unethical. This is short-sighted and a sure way to cause practice demise. To achieve the highest ROI, PE must derive systems to counteract this view.

Today many tools exist to help MDs educate patients about their custom vision options and offer an opportunity to make a once-in-a-lifetime decision. This is not unethical, it’s good business. After all, MDs get paid for what they do and medical practices are commercial enterprises.

Legislation That Shifted the Landscape

When Patient Shared Billing was enacted in 2004, market pundits expected that within 5 years the adoption of advanced technology IOLs would be 30%. Adoption hangs at around 13-15% and the introduction of the Femtosecond Laser for cataract surgery is not accelerating demand as fast as it could. This is because the MDs are reluctant sellers, not a limitation of the technology.

I realize I may be ostracized for writing the above statement. That’s okay. I don’t want to listen to one more MD talk about how the “Technolgy is not ready,” or “my patients won’t pay.” This is wrong and evidenced by the high percentage of LASIK surgeons who came back into cataract surgery in the mid-2000’s and now convert 65-75% of patients to upgraded procedures. They’re not better surgeons, they are comfortable talking to patients about money and create an experience in their practices more akin to a spa than a hospital or ASC.

Successful practices use strategies and tactics focused on delivering on a promise of custom vision, not government reimbursed operations. You may call these semantics, I think it’s strategy and commitment to execution. Plain and simple.

To get the “Whip” PE seeks on their investments, they must crack this code.

A Possible Built-in Ceiling on Repeat Transactions

Because people only have two eyes, cataract and LASIK surgery are rate limited. What I mean is that each patient is an independent event and may only be modeled to produce a certain amount of revenue. This is why the ability to upgrade procedures is so important. As a result, the business metrics tracked for eye surgery businesses will align with this market dynamic.

PE firms are metrics driven and have voracious appetites for data. Below are two metrics I believe will be of interest to them that are not so obvious in ophthalmology, may be new to MDs and will require some creative thinking to see how/if they apply:

New Metrics?

Customer churn? Every customer will have no more than two cataract extraction procedures – a100% churn rate on this customer segment. This is why upgrade strategies are key growth drivers and the ability to turn patients into advocates is imperative. And it’s also why it is important to stay in contact with these patients because while they may churn for one procedure, the opportunity to engage them with other revenue streams from the practice is important for success.

Length of relationship (LOR)? This is a popular metric where practices will do well to focus. Will a new metric be developed to couple LOR with churn?The value of a patient lies in their care and those close to them. Healthcare is a family decision and that’s why foundational marketing to patients about all services offered is important. Some do it well, most poorly or not at all.

Let’s use LASIK and Radial Keratotomy (RK) as an example. From the early ’90’s to the mid 2000’s, roughly 10,000,000 people had LASIK or RK in the United States. In this period, the average age of the patient was about 35 years old. These are child bearing years for most people so it is reasonable to assume, using US demographic information, that these people gave rise to 20,000,000 people who grew up witnessing the life-changing effects of LASIK on someone they love.

A Real Example of How This Works:

I know this is true because it happened in my house. My wife had LASIK in 1999, the procedure changed her life and our four kids were the direct beneficiaries. Jean is an ardent evangelist for the LASIK procedure and one of our kids already had LASIK before she went to teach in Thailand for a year. For two of our other three kids, it’s “when ” not “if” they’re going to have LASIK. In case you’re interested, one of our boys doesn’t need any correction.

Can you imagine a more powerful referral source or target rich environment? Yet when I travel around the country and ask MDs what strategies they use to stay in touch with past patients, most give me the same head-cocked look my Silver Labrador retriever, Walt, gives me when he hears certain noises. It boggles my mind. Here are 10,000,000 people who have raised their hands and said, “I trust doctor _______” and most do nothing to farm this fertile ground.

Another interesting metric tied to the two above is Customer Lifetime Value (LTV). An interesting Forbes article discusses the importance of the metric and that only 42% of businesses believe they can calculate the metric. My guess in Ophthalmology is that the number of practices tracking LTV is close to zero.

Of all commercial metrics, LTV may be the most interesting one to study for future growth attribution. And yet almost no one is paying attention and I believe private equity will fix this. Quickly.

Poor Marketing Machines

When I visit with MDs around the US about creative services for marketing offered by Sightpath, the most common response I get is, “We don’t do advertising because we can’t afford it.” Huh?

PE must illustrate to their new MD practice partners that advertising is a channel of marketing. Marketing as a general term refers to commercial activities such as segmentation, positioning, pricing, and strategy. It’s work and I understand how hard it can be to produce all day as a doctor and then be expected to create as a marketer, too.

Many practices are not in a position to maximize an investment in consumer marketing because they don’t have the marketing machinery in place to harvest a lead. This is not meant as a put-down, it’s what I’ve seen. This is why Pharma and Med Device companies hesitate to invest heavily in consumer marketing for their products. They don’t control the buyer path, struggle with end-to-end attribution and determining ROI is difficult.

Getting the phone to ring isn’t hard. Coaxing someone to ask questions, take action and become an evangelist for the practice is a vein of gold that few practices have the tools to mine. I believe PE will hire consultants to stake a claim in this rich territory that is unmarked in most practice markets.

Recently, I saw an ad for a large ophthalmology practice on the TV at the gym where I exercise. The patient used for the testimonial was wearing glasses. How does someone let this happen? I do not believe in TV advertising for medical practices under any circumstances. It is a rare medical enterprise committed to the expense of effective TV advertising – every day this medium becomes less effective.

Video content, however, now that’s a different story than advertising. Video content works great to use in many different channels. Marketing 4.0 is an excellent new book to help practices.

Reimbursement Challenges in Ophthalmology

Accelerating demand portends a shift in reimbursement that is not in favor of the ophthalmologist. Daily the media regales us with stories of the pressure on Medicare and reports about aging demographic trends. Stayed for years is a significant cut in reimbursement for cataract surgery. How long until the doomsday predictions become reality?

An ophthalmic practice consultant, John Pinto, spoke about the challenges facing MDs several years ago at the Royal Hawaiian Eye Meeting. His predictions and advice are both good and have stood the test of time.

He does not predict the entry of private equity into ophthalmology and this is not surprising because he lived through the period in the nineties and early aughts of PPMC’s and consolidations that went bad. Mr. Pinto does not say anything about this trend and I am using him as an example and nothing more may be inferred.

Added to this mix is a changing demographic of the ophthalmologist population, too. I wrote about this on my blog, Joelgaslin.com, last year.

Commercial Enterprises Are Made Up of People

At its core, any business is people. Many do not, however, depend on people as the engine for economic output. Think, software, for example. Software never gets tired, has a bad day or decides it doesn’t want to work with the other software in the Database. And if it does, in the form of a bug or breakdown, you fix the code. The software doesn’t get hurt feelings or hold resentments.

It’s not the same with MDs.They’re highly educated and specialized individuals. A spreadsheet may suggest one way makes a MD more efficient or profitable, and the person who is the MD may not agree and decide to do something else. When software does this, you iterate the code. When this happens with an MD, you will have a significant drain on output and an economic impact not easy to solve.

What will happen in the future in these new mega practices when the senior partner is retired, the practice continues to grow and the work now falls on the recent partners to backfill the production of the former MD? The economic incentives are no longer the same and now a “corporation” is pulling a large percentage of the pie. It may be nothing, but I doubt it.

For some, this will be frustrating and lead to problems. Others will embrace the new model as a great way to achieve a work-life balance coveted by millennials. Time will tell how this impacts the enterprise.

Time Leads to Changing Views

I saw situations similar to this in the early days of MDs building their own ASC’s. Some did the work themselves, took the financial risk, built the center and then enjoyed the fruits of their labors and risk. Others mitigated their upfront capital risk and reduced work by partnering with a company such as Amsurg to build and operate the ASC.

The strange stuff started to happen about five years after the center opened. One day, the MD looks around, realizes she is doing a lot of work to drive the enterprise and the “corporate partner” is nowhere to be seen. They forget the work the corporate partner did on the front and the risks they assumed – as well as the work still being done behind the scenes by the corporate partner.

In my experience, once this picture is planted in an MDs mind, the relationship tilts and tension builds. As Yogi Berra said, “It’s easy to predict the future. It’s hard to be right.”

Outcome Based Demand in Ophthalmology Requires Technology Investment

Technology in Ophthalmology changes rapidly is expensive and necessary to compete in a future landscape defined by patient outcomes. This is isn’t new, but it is different.

Contrary to what some new MD PE partners imply, there will not be an easy source of capital to fund the next “cool technology.” Capital will be available and rigorously modeled for both ROI and risk assessment. Gone are the days of partners getting together to buy the next $50k device for each office, calling the rep to order and moving on. I predict CapEx committees, technology review boards, and supply chain systems.

This is not a bad thing, just different for MDs and industry, too. I believe medical enterprises will begin to look for ways other than CapEx to fuel expansion. Will surgical equipment go the way of most software today and live “in the cloud?” Why own anything when it changes fast, requires expertise for operation, is expensive to maintain and is obsolete before the depreciation is complete?

Will Alcon, J&J Vision or Bausch and Lomb decide the best way to serve the market is to offer Cataract Surgery as a Service (CSaaS), Refractive Surgery as a Service (RSaaS) and Laser Cataract Surgery as a Service (LCSaaS). We already do this at Sightpath and people are starting to notice.

What Will Private Equity Look at?

PE may study the unused capacity of the idle equipment in the OR’s they acquire and seek a way to leverage these assets. Analysts will study the efficiency of capital expenditures, time and staff by shining bright lights in every nook and cranny.

PE and MD incentives are in lockstep alignment on the outcomes focus front, too. MDs measure outcomes with visual acuity and patient satisfaction. The only PE outcome that matters is a version of ROI.

As a refractive surgery pioneer once told me in the early days of Radial Keratotomy surgery for nearsightedness, “Outcome produces income.”

EMR in Ophthalmology is used backward, growth looks forward and data mining

The US government foisted EMR on MDs with little guidance and allowed software companies to shape the industry. For the most part, things have turned out like most entrepreneurial ventures – they’ve taken twice as long and cost twice as much as forecast.

I know several MDs who are on their third EMR implementation. They were early adopters, but still, that’s crazy. Others have not gone to an EMR system because they prefer to accept the penalty and do things their own way. It’s old school, but for some, it works.

Implementation of EMR caused an internal focus of information and data gathering. Now Ophthalmology needs to shift to “the front of the house.” They can achieve this with software designed to improve the flow of commercial information and related analytics.

Many of the EMR software companies recognize this need, but they’re not in a position to offer a sturdy solution. Unfortunately, many practices use platforms provided by these vendors to understand commercial activity because they are free. Or, at least they seem to be free. A worthless tool is still worthless even if it’s free.

What Do Practices Need?

What smart practices are seeking is a software platform to help them transition to a selling focused entity. This will include a method to mine data on the backend, coupled with front end information and create a springboard to begin studying attribution points in the path to conversion. Most MDs avoid the term, “conversion,” but I don’t think the PE teams will have an issue using this vernacular.

Salesforce.com (SFDC) is the market-leading Customer Relationship Management (CRM) software and MDs may consider this as a solution. SFDC is slowly expanding into the practice growth market and in ophthalmology specifically, they’re beginning to get some traction as they’ve shown good results in dermatology and dentistry.

Surgiorithm is a new software platform I learned about featuring Artificial Intelligence (AI) as the engine. AI and machine learning are entering medicine for predictive analytics and care. Surgiorithm seeks to help surgeons upgrade more patients entering their practice. It’s exciting technology, meets a demand of the “reluctant seller” by making selling easier and fits with an increased commercial focus needed for future success.

David Alpern of Varsity Capital said from the stage at the recent Ophthalmology Innovation Summit, “We’re in this for the money.” Doctors are, too; Brett Katzen, MD was sitting right next to Mr. Alpern and said as much. What he also said is that MD’s also are in it for their patients.

There are physicians who scoff at what they call “money grabber” doctors and cast them as unethical and greedy. I don’t buy this because these curmudgeons spouting this pablum are choosing not to seize a commercial opportunity. Physicians who believe this make less money. Sometimes a lot less.


Hippocratic oaths and altruistic motivation aside, doctors sometimes operate large enterprises. Private equity groups look for new markets with growing platforms to produce returns on their investor’s capital. To me, this seems like a strategic match indeed. I think it’s great and wish both sides of the transactions all of the success they can muster. How these unions play out is up to them.

If one group helps the other accomplish its vision, let the results and time determine the answer about whether or not the marriage will last. What impact do you think this new trend will have on ophthalmology?


  1. Billy White on May 15, 2017 at 9:47 am

    This post is a wealth of knowledge, Joel. I intend to read it again. Keep it coming!

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