Market demands determine whether to add physicians to a medical practice

Regardless of the method of reimbursement, the importance and relevance of increases in local market demand for health care services, such demand being the major economic factor that creates opportunities for business growth, is often under-appreciated by busy physician practices.

The trigger for adding a physician to a practice is typically either a response to being unable to sustain the current workload with existing personnel or a desire to proactively add partners to establish a more significant competitive presence in anticipation of future needs.

It is a well-appreciated truth in business that failure to anticipate or recognize and respond to the opportunities of a growing market will often result in a quantitative service/product gap that reduces the barriers to entry for competition. Either way, the decisions made at this juncture are likely to become self-fulfilling prophecies. If your market grows and you fail to grow with it, someone will step in to fill the gap. Unfortunately, the consequence of added competition is reduced market share, resulting in erosion of business volume over time. And that is something from which it is difficult to recover.

Emotionally charged concerns that adding physicians to a practice’s payroll will only increase fixed costs that cannot be hurdled for the economic value added benefit of existing partners are often cited as reasons for decisions to stand pat. Such concerns, even when refuted by facts that clearly establish that such growth has always resulted in increased revenue diversification opportunities and physician compensation, persist in those who find themselves experiencing what I think is fair to characterize as cognitive dissonance, i.e. the experience of seeing the truth but refusing to believe it because it doesn’t jibe with existing, contradicting beliefs. One sees the numbers, and even experiences the financial benefits, but this experience can’t possibly be a result of a contradicting scenario.

Let’s look at a nephrology practice that starts out with revenue coming exclusively from patient fees in the office and hospital, and steadily grows to also include physician services for patients in one or more dialysis facilities. Soon an opportunity arises to assume a Medical Director position, adding to practice revenue. A new partner is added as above, and the process repeats itself. Now an opportunity arises to invest in a de novo joint venture dialysis facility, further expanding the probability of revenue diversification and enhancement. As the practice grows in patient numbers, an opportunity to partner with another group of similar size in a Vascular Access Center further diversifies and expands revenue streams. New partners are added and the process becomes self-reinforcing. Perhaps the 2 groups merge. Now their combined size allows greater administrative efficiencies (lower overhead as a percentage of revenue), the ability to explore other clinical revenue areas such as acute dialysis service contracts, added medical director agreements, clinical research participation, care of patients with kidney transplants, more joint venture dialysis opportunities, etc.

Whereas patient volume per FTE physician is not likely to have changed significantly, revenue per FTE from all sources has increased, and practice expense per FTE is likely to have been lowered. This gives the practice greater leverage to invest in more such service lines, sometimes in new, neighboring markets. As long as the practice’s (expanding) market demands more than the practice is presently able to supply, the opportunity exists to grow, steadily and prosperously.

In such a scenario, an individual’s prosperity is protected and enhanced by the prosperity of the growing collective. “Zero sum” turns out to be a myth.

Michael Shapiro is a nephrologist who blogs at Your Practice – Your Business.

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  • http://www.cadencerelations.com Matt

    The author makes a number of solid points. One of the safest ways to expand without bearing too much risk and a low overhead is to develop an online presence so that the practitioner’s reach can be farther in the event that his/her current local panel of patients shrinks unexpectedly.

    If a doctor is considering expansion, I can’t emphasize the importance of looking at key metrics before taking the dive. I would recommend hiring a financial analyst or a business consultant to run the numbers, research the local demographics and anticipated levels of future demand, and collate their findings in a sensitivity analysis.

    Expanding sounds good, but if done haphazardly, it could just lead to the downfall of a larger group of doctors.