Practice Value

Overvaluing
Avoiding the Trap of Overvaluing Your Practice
BY JOHN M. B. RUMPAKIS, O.D., F.A.A.O., Lake Oswego, Ore.

No O.D. wants to get a few years down the road, get ready to retire and find that he's overvalued what his practice is worth. Yet, many optometrists hitting retirement these days are finding that they've done just that.

It's common for a retiring O.D. to rely on the sale of his practice for a significant amount of retirement income. And, unfortunately, because of the dramatic demographic and economic changes in optometry over the last decade, many of today's retiring practitioners aren't seeing the level of practice value they'd anticipated. Often, this is because they've relied on typical practice valuation formulas, but they haven't kept in tune with current realities within the marketplace.

Don't get caught in a bind finding that you've done the same thing. Know what to expect in today's optometric climate -- which has greatly changed in last decade.

Your Practice PART 2
If you understand how optometric income trends and managed care have affected practice values, then you're already one step ahead of the game.

Last month, I talked about some of these dramatic changes. Specifically:

• changes in the gender balance -- about 50% of all students and new grads today are women
• the impact of the goals and ideals of Generation-X -- they emphasize quality of life and expect higher salaries, to name just two examples
• the significance of changes projected by workforce studies specific to the optometric field. For example, we're going to have a net gain of O.D.s, despite the number expected to retire.

In part two of this series, I'll look at trends in optometric income levels and managed care and how these factors have had an impact on the value of practices for sale in today's marketplace. If you're aware of how all of these things can influence the value of your practice, you're one step ahead of the game.

Decline in solo practitioners

For many years, solo practitioners (meaning one doctor in one office) represented the majority of O.D.s -- nearly 70% of the optometric workforce. Presently, this percentage has decreased to less than 50% of the workforce, according to the AOA's 2000 study, "Caring for the Eyes of America." Of course, this doesn't take into account the optometrists who have partnered in group private practices.

The economics of recent times have certainly favored other modalities of practice, and we're seeing changes in our practice infrastructure, such as the increase in group practices vs. solo practices and the increase in the number of employed O.D.s. Many factors have contributed to the dip in the number of solo practices, including:

• higher levels of student debt
• competitive salaries for other practice settings
• fewer O.D.s willing to risk greater debt by practicing solo.

It's not surprising that optometrists' salaries have climbed within the last decade, but it's only been in recent years that the average or mean optometric income has come close to the six-figure level. See the tables depicting mean and median net incomes on page 49 and above. But despite this overall increase in optometric income, many new grads won't earn this kind of money after graduation if they opt for private practice until they're established.

Even when you compare the mean salary for O.D.s who are self employed (all O.D.s, not just new grads) with those who are employed, you'll find that the self-employed optometrists aren't making that much more than the employed O.D.s. For example, the mean salary for a self-employed O.D. in 1998 was $112,365 compared with the mean compensation package for an employed O.D. in 1998, which was $97,397. See "Compensation for Employed Optometrists, 1998 on the previous page. If most self-employed O.D.s are truly earning only about $15,000 on average more than employed O.D.s, you can see why solo practice numbers have steadily declined since 1990 -- from 57.9% in 1990 to 40% by 1998. For more information about income vs. practice setting, see "Total Individual Net Income by Practice Setting, 1998" and "Total Individual Net Income by Practice Type, 1998" on the previous page and to the right.

Another interesting income statistic to consider is the natural decline over time in mean net income for those who've been in practice for more than 25 years. See "Total Individual Net Income by Years in Practice, 1998" below, right. The obvious significance of this finding is that income is declining at the very time you're typically trying to get maximum value for the practice.

ILLUSTRATION BY MARCIA STAIMER

Evaluating managed care's impact

I'm sure we've all felt the pinch of managed care; this healthcare delivery system has obviously had a major impact overall on optometry. Keep in mind that it's managed care from the patient's perspective but managed competition from our standpoint. We need to change our mindset about our contractual obligations. What we accept from those contracts will significantly impact on what our practices will ultimately be worth.

For example, I've come across many examples in consulting where an O.D.'s practice value as determined by traditional valuation methods has been significantly greater than the actual selling price because of the uncertainty that managed care contracts will transfer over to the new owner.

Today, more than 80% of optometrists are affiliated with at least one managed care plan. Optometrists are significant participants in health maintenance organizations (HMOs), Preferred Provider Organizations (PPOs) and other healthcare delivery systems. See "Mean Percent Patients Covered by and Practice Revenue from Third-Party Sources, 1998" at right. Managed care has forced us to look more closely at our practices and how they operate.

We face many challenges under managed care:

• getting access to patients
• differing reimbursement schedules
• qualifying for plans
• getting access to plans
• competing with large super-groups.

Managed care is a system developed by economists for controlling costs and outcomes. In order for us to not only survive but also succeed in the marketplace, we must change with the times. We've seen many practices merge and combine resources to more efficiently deliver health care. In family practice, nearly 50% of all M.D.s in general practice are in group settings.

In optometry, many of us have experienced increased patient loads while at the same time we've seen our average reimbursement for services decrease. See the table "Managed Care Patient Volume, Gross and Net Income" at bottom right.

In some areas, the cuts in reimbursement have been as much as 30% from traditional reimbursement schedules. Differential reimbursement rates for M.D.s and O.D.s for providing same services exist. Constantly changing dynamics in this area and contract restrictions have had an impact on the values of the typical optometric practice.

Staying on top of the situation

It's important for you to be aware of optometry's income levels, as well as the changes in managed care. With income levels and managed care constantly changing, you should stay on top of how these factors are affecting your practice. Such knowledge may make the difference in ensuring that you always know the true value of your practice.

In part three of this article, which we'll publish in May, I'll discuss information regarding traditional factors taken into consideration while valuing a practice.

I'll debunk the mysteries about all of these formulas and explain why you should take them at face value. They're only one piece of the practice valuation puzzle.

Dr. Rumpakis is chairman and CEO of Practice Resource Management, Inc. in Lake Oswego, Ore. He was previously in solo practice for 13 years. This paper was submitted in partial fulfillment of fellowship in the American Academy of Optometry. You can reach Dr. Rumpakis via e-mail at success@practiceresourcemgmt.com.