The Conversion Conundrum

THE SILENT CRY FOR A NEW MODEL TO SUPPORT PHYSICIANS IN THE “POST-CONVERSION” ERA OF PRIVATE MEDICINE

By Tom Blue, Co-founder of n1Health

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The private medicine industry is poised for a long-awaited change. Since the dawn of the movement, private (“concierge”) physicians have failed to capture the real demand for their services. While the number of private physicians is growing at an accelerating rate, and market forces are converging to drive consumer demand for private medicine, across the country, private physicians mysteriously struggle to grow their practices into profitable enterprises.

Ironically, the industry that has propelled the growth of the movement has created a generation of practices that lack the basic prerequisites for growth.

Since the movement began in the late 1990s, most private physician practices have spawned from practice “conversions.” Established physicians convert their over-crowded practices that rely on insurance and Medicare reimbursements for their survival into practices caring for smaller populations of patients willing to pay their doctor privately for something better.

Without exception, newly minted private physicians emerge from the conversion with new-found liberation from the payer system and a greatly reduced patient panel consisting of people willing to invest outside of their insurance premiums in a committed relationship with a physician.

That the majority of conversions do not yield the number of patient members required to fulfill the business plans and budgets of private physicians is a fact that is seldom if ever mentioned in the practice conversion industry. Conversion companies have cleverly distanced themselves and their underlying economics from any real accountability for post- conversion practice growth. And the fruits of that structure are evident in the stagnant growth rates of converted practices across the country.

It is intuitively and factually obvious that in order for private physicians to realize their potential in the marketplace, the relationship structure between private physicians and the firms that assist them in transforming their practices must be overhauled. Entrepreneurs seeking liberation and prosperity from the wellspring of private medicine must awaken to the fact that the practice conversion is the beginning – not the end – of the support that practices require to thrive.

The post-conversion era of private medicine will define, demonstrate, and multiply the movement’s contribution to American healthcare.

Breaking with the Past: Two Ways to Convert a Practice

Holding aside the potential in certain areas for doctors to be employed by larger organizations to serve as private physicians, those seeking to convert their practices to a private medical model have had two general options from which to choose. For the private physician who aspires for their converted practice to grow and expand, neither has proven sufficient to enable the practice to realize its potential.

DIY: The Do-it-yourself Approach

The first approach to practice conversion has been for physicians to assemble the necessary legal, marketing, sales, and other resources to convert their own practices.  Effectively, these physicians serve as their own architect  and general contractor in converting their practices.

As many physicians have discovered, this approach is extremely labor-intensive, as throughout the process they must continue to care for patients and conduct business as usual while planning and executing the conversion. While it can, and has, been done with varying degrees of success, most practices emerge from the DIY process acutely aware of the value of experienced consultative help in facilitating the transition.

Practices observe that a successful conversion involves the navigation of a number of legal and business decisions that are understandably daunting for the uninitiated.   Whether or not to accept insurance and Medicare, how large the patient panel should be, pricing the patient membership, and defining the scope of the service are all issues that the aspiring private physician must adroitly resolve to lay a foundation for future success. Then begins the planning and execution of an intense sales and marketing campaign that largely determines the fate of the practice.

Practice Conversion Firms

The exhausting rigors and frequent, avoidable mistakes made in the course of converting practices have established the need and defined the service propositions of practice conversion firms.

The first and best known of these firms is MDVIP, formed in the late 1990s and later acquired by Procter & Gamble. The heroic efforts of MDVIP’s founders in the early days of the industry paved the way for the field of private medicine, and the industry will forever owe this firm a debt of gratitude. Its early success also forged a mold that has shaped most, if not all, of the firms that comprise the practice conversion industry.

Filling an obvious need for aspiring private physicians, these firms bring experience and muscle to the gauntlet of liberating a medical practice from its dependence on third-party payers.

The established compensation model for practice conversion firms calls for most,  if not all, of the firm’s remuneration to be paid as a function of the practice’s gross membership revenue (generally approximately one third) for a period of time ranging from three to ten or more years.

In exchange for this recurring  compensation,  firms provide hands-on assistance with the practice conversion followed often by certain support services. These follow-on services may include  the billing and collection of membership fees, electronic health  record  software, a brand  identity and marketing collateral, production and distribution of e-newsletters, and a commitment to monitor the legal and regulatory environment to ensure the practice’s membership agreement remains compliant with current  state and federal laws.

While there are outliers on both ends of the continuum, professionally converted practices typically generate $400,000 – $600,000 in gross membership revenue yielding $80,000 – $200,000 in annual income to the conversion firm for the term of its contract with the practice. Given the limited cost of the ongoing service commitments of conversion firms, as long as the converted practice is merely viable, this compensation  structure makes it nearly impossible for the conversion firm to lose.

This arrangement gives rise to the most apparent shortcoming in the service offerings of conversion firms  – the absence of meaningful support in acquiring new members following the conversion.

The substantial financial interest these firms have in the converted practice’s patient membership revenue suggests that  conversion companies would be motivated to grow the practice indefinitely. Experience, however, has demonstrated that it is far more lucrative to invest resources in practice conversions than in post-conversion growth and expansion. The difficulty and cost of converting a physician’s existing patients is significantly less than the cost of acquiring new patients forthe practice after it is converted.

As a result, practices that  have been professionally converted as well as those that have converted independently  generally  struggle  to  grow significantly beyond the membership base that they achieved following the conversion. Private physicians are able to earn a living working as a solo provider, and generally they are more satisfied with the nature of their work than they were in the payer- dependent  practice model. However, their  practices rarely realize their true market potential in light of growing consumer and employer demand for private medical services.

Inequity of Risk & Reward

An analysis of the allocation of risk and return between physicians and conversion firms reveals a glaring need to revisit the structure of the relationship model. Physicians bring to the table their life’s work in the form of their patient panels, their reputations, and at the very least their own legal and other costs associated with memorializing the terms of their contracts with conversion firms. Their patient panels comprise the entire prospect universe to be mined by the firm, and a poor conversion is crippling to the future prospects of
the practice.

The firm generally invests its time, expertise and money in the planning and execution of the practice conversion. This process represents a significant amount of effort on the part of the conversion firm over a period of approximately six months. It will likely incur legal expenses, personnel costs, travel costs, market research costs, and the cost of promoting the practice conversion to patients of the practice (marketing collateral, direct mailings, telemarketing, and group events).

From a financial perspective, the risk being taken by both parties is motivated by the potential return in the form of recurring practice membership revenue produced by the conversion. The problem lies in the fact that it is possible, and actually common, for the firm to profit handsomely from the conversion while the physician struggles in the aftermath.

Assuming a five-year contract between a physician and a conversion firm paying a fee of $500 per member per year to the conversion firm from an average membership price of $1,500 per member per year, a conversion of 250 patients yields $125,000 per year for a total of $625,000 in compensation for the conversion firm over the five year term of its agreement. This calculation assumes only that the practice acquires for itself enough new members each year to neutralize its member attrition rate.

Meanwhile, the physician is left to operate his or her practice with annual membership revenues of $250,000. Assuming the practice bills insurance for covered medical services, average reimbursement revenues of approximately $75,000 would produce a total operating budget of $325,000.

In instances such as the one illustrated above, it is likely that in exchange for six months of hard work at the start of the relationship, the conversion firm would profit handsomely for the term of the agreement while the physician struggles to stay afloat under the weight of the obligation to the firm coupled with the overhead of the practice. This inequity of risk and return strongly favoring the conversion firm clearly illustrates a need for a new model to support established doctors in launching and growing their practices as private physicians.

PROS AND CONS OF TRADITIONAL  PATHWAYS TO PRIVATE MEDICINE

Practice Conversion Firms

PROS:

• Shared workload. Practice conversion, under any circumstance, places a great many demands on the converting physician, but relative to an independent effort, conversion firms offer a less burdensome approach to practice transition.

• Improved conversion rate. Conversion firms offer a valuable dose of experience and expertise that should save time and can increase the resulting patient conversion rate.

• Conversion sales support. Conversion firms often provide hands-on support in the form of onsite sales personnel and/ or call center support to provide much needed assistance for practice staff before and during the conversion.

• Reduced up-front conversion costs. In exchange for their interests in the practice’s membership revenue, practice conversion firms generally absorb or defer their up-front service and materials costs to lighten the initial financial strain on the
converting physician.

CONS:

• Cost. Over time, conversion firms generally prove to be expensive relative to their ongoing contribution to the practice.

• Event focus. By definition, conversion firms are focused on the practice conversion, a window of time spanning approximately six months in preparation and execution. Following the conversion, practices are largely on their own with respect to further growth initiatives.

• Contractual restrictions. To protect their future interest in the practice’s membership revenue, conversion firms often require that physicians enter into agreements that impair the ability of the physician to add physicians to the practice or transfer the practice to a successor for its fair market value.

Do-It-Yourself-Approach

PROS:

• Long-term cost savings. Serving as their own general contractors, physicians who take the do-it-yourself approach to converting their practices generally avoid the long-term revenue sharing commitments required by conversion firms.

• Independence. This approach is well suited to physicians who understand the nuances of private medicine and desire complete independence in designing and pricing their service offering and managing their own communications to patients without any contractual obligations to third parties.

CONS:

• Workload. The work involved in converting a practice while also operating the practice day-to-day is onerous and can be overwhelming to many practices resulting in reduced conversion rates.

• Lack of expertise. Practice conversions involve a wide variety of functions and demand expertise in such areas as sales, marketing, legal and regulatory matters related to private medicine, business planning, financial forecasting, private medical service design, and staff training. Lack of knowledge or access to expertise in one or more of these areas often leads to mistakes in the conversion process.

• Practice growth. Similar to practices converted by conversion professionals, these practices generally struggle to grow after the initial conversion.

• Conversion and start-up financing. Practices that manage their own conversion are faced with the need to finance independently every aspect of the conversion and start- up, from legal, sales, and marketing costs to improvements in space and equipment.

A Generation of Stillborn Concierge Practices

Less apparent than the inequity of risk and return is a more serious and fundamental problem that appears to be endemic to most converted practices. The longstanding model for converting practices has created a generation of concierge medical practices that are not equipped to grow. The problem appears to stem from two issues.

First, because of the way in which they are generally compensated, practice conversion firms and consultants focus their efforts solely on the yield of the practice conversion. Most of these firms select their physician clients on the basis of a careful analysis of the physician’s active patient roster. This initial expenditure of time and effort is well justified by the hope of minimizing the odds of the only scenario that could produce a loss for the firm – a failed conversion.

Commonly, these analyses use data gathered from practice records, third party data compilers, and patient surveys to answer two fundamental questions. How many of the physician’s patients value their physician enough to pay a membership fee to retain the relationship? And how many of these patients can actually afford to pay the proposed practice membership fee

As would be expected, conversion firms have discovered that older, wealthier Medicare patients are generally more inclined to pay to retain their physician. Often, practices are turned away by conversion firms for the simple reason that they do not serve a large enough Medicare population.

The problem with this myopic approach to screening and selecting physicians for private medicine is that it produces practices that have little or no appeal to new patients who have no prior relationship with the physician.

While the proposition of convenient access to a “concierge” physician is valuable, the unspoken truth about most converted practices is that what their converted members have really purchased is the privilege of not having to leave the practice to find another physician.

Converted physicians that later survey their members to determine why they decided to join the practice will generally discover that their patients joined for one main reason – to keep their doctor. While many physicians are flattered by this revelation, they later discover that with little other than time and convenience to offer members, it is very difficult to acquire new patients following the conversion.

Further compounding the growth challenges posed by an anemic value proposition is the fact that converted practices generally lack the capital and talent resources required to drive future growth. In short, it takes money and know-how to grow, and these costs are seldom contemplated in the budgets of new private physician practices.

Recognizing the vital importance of professional promotion to achieve a successful conversion, conversion firms commonly underwrite and staff the sales and marketing effort during the conversion. Once the conversion is over however, they depart the practice generally leaving physicians to fend for themselves with respect to further growth.

As growth rates among converted practices clearly indicate, unfortunately, physicians generally emerge from the conversion having neglected to plan for, staff, or capitalize the ongoing sales and marketing efforts required to grow their practices.

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A New Model for the Post-Conversion Era

For the private medical movement to flourish, a new model for the relationship between private physicians and the firms that support them must be created. This new structure must accomplish five things:

1. It must deliver the benefits offered by first- generation practice conversion firms. The conversion of a medical practice is far too complex and demanding of an exercise for most physicians to undertake independently without making critical errors that could impact the long-term success of the practice.

2. It must be sufficiently pliable and analytically driven to ensure the patient membership structure and pricing supports the value-creating vision of the physician while also accounting for the needs and demographics of the patient population the practice seeks to serve.

3. It must satisfy the capital requirements of the practice to ensure it can deliver the value it promises to patients, recognizing that the practice will likely require new or improved office space, equipment, training, technology, changes to staff, and ongoing sales and marketing.

4. It must correct the imbalance of risk and return that has been prevalent in the relationships between practice conversion firms and their physician clients.

5. It must provide physicians the ability to expand their practices to include additional physicians and create transferable equity value in their practices.

In private medicine, as in most every collaborative endeavor, the structure of the relationship between the collaborating parties determines their behavior and the ultimate fruits of the relationship. Of equal importance to prospective private physicians, these structures also reveal the intentions of their designers.

Social Responsibility in Private Medicine

While not a definitive business requirement, it is the opinion of the author that in the post-conversion era of private medicine, private physicians along with the business partners that support them in achieving and sustaining their success must recognize the privilege and responsibility of their roles at this moment in the course of American health care. The health care system will not transform itself from the top down. Change will occur one visionary physician at a time until the winds of the free market fill the sails of the Third Era of Medicine.

While often mistaken for a value proposition to patients, private medicine is a powerful, enabling business model – nothing more. The business model accomplishes only one thing with perfect consistency. It creates the most scarce and precious commodity in medicine – time for physicians to focus purely on the needs and interests of their patients.

Following the conversion of a medical practice, one thing is certain. The practice will emerge with fewer patients than it previously served and therefore has more time to offer to the remaining patients.

At a time when there are not enough physicians to serve the ballooning health care needs of the aging and ailing American population, those who are chosen by their patients to be private physicians must be good stewards of the time with which they have been entrusted. They must answer with thoughtful integrity one question.

How will I use the time and liberty afforded to private physicians by this business model to
set in motion the transformation of medicine –and the health of my community?

Similarly, the business partners that serve private physicians must not absolve themselves of this responsibility. They must commit themselves to supporting private physicians in achieving success both as entrepreneurs and as creators and protectors of health. They must design thoughtful business models, processes, and support structures that enable private physicians to deliver transformative value that far exceeds the simple convenience proposition of “concierge” medicine.

Finally, they must tirelessly attack the challenge of enabling private physicians to restore, grow, and protect the health of more people tomorrow than they can responsibly serve today.

About the Author

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Tom Blue is a veteran and pioneer in the field private (“concierge”) medicine. As a builder of private physician practices since 2002, he has a unique perspective on the history and evolution of the industry and the ingredients for success at the practice level.

In 2009, Tom accepted the role of Executive Director of the American Academy of Private Physicians, the national professional association for private physicians. Under his
direction, the Academy has re-branded itself, found its voice in the national media, and grown significantly to serve the ever-expanding ranks of physicians who are reinventing themselves and their practices across the United States.

A strong believer in the need to redefine the relationship and incentive structures between private physicians and the firms that assist them in converting their practices from insurance- based models, Tom co-founded n1Health in 2011. n1Health is the first enterprise of its kind to make active capital investments in partnerships with aspiring private physicians to launch their practices, equip them for long-term success, and grow them to their potential after they open.

To contact Tom Blue or to learn more about n1Health please contact
Rhoda Rizkalla Couvaras, National Director of Membership Acquisition & Strategy: rcouvaras@n1health.com

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About Concierge Medicine Journal

Concierge Medicine Journal (CMJ) curates breaking concierge medicine news, and editorial opinion on a wide variety of topics relevant to the practice of Concierge Medicine.

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