This is a bimonthly column by Andrew Lovewell, CEO of Columbia (Mo.) Orthopedic Group. This is the first installment.
Orthopedics has never been busier. Volumes are up, access points are expanding and most organizations can point to year-over-year growth in visits, procedures and even top-line revenue. If we believe everything we see online, Orthopedics is a booming industry with great success.
However, on the income statement, many practices are telling a very different story.
The disconnect between the industry narrative and the financial reality is now one of the most dangerous blind spots for orthopedic leaders. Growth has become a false comfort and one that many leaders are embracing. But growth isn’t the end-all be-all that we should be chasing. Growth does not guarantee profit! In some instances, growth can hide the wounds beneath the surface, and those inefficiencies can compound over time.
One of the most common patterns organizations are experiencing is margin compression driven by labor. Practices are still staffing for yesterday’s workflows while paying tomorrow’s wages. Clinical throughput has not kept pace with payroll growth, particularly in clinic settings where visit counts are up but RVU yield per visit is flat or declining. Volume is great, but it doesn’t guarantee that you can pay the bills. Staffing models must shift with the times, or your profit per encounter will continue to erode.
Another issue is that ancillary services look good, but when they are fully burdened with the true costs, many don’t produce at the level we expect. Imaging, DME, physical therapy and even ASCs are often evaluated as profit centers rather than integrated business units. Groups that own ancillary services and fail to fully integrate them are often spending money twice. Hiring a management company when you could leverage the internal resources you already have is a great example of this. When you properly allocate overhead, leadership time and capital costs, many ancillaries deliver far less value than assumed.
Payer mix is also shifting faster than many organizations acknowledge. Take our ASC for example, we catapulted from 20% to 25% Medicare to well over 55% today from a payer mix standpoint. This isn’t a bad thing, but organizational adjustments need to be made in response to this. In addition, commercial payers continue to tighten reimbursement, increase audits and implement policies that hinder patient care.
What makes this moment particularly challenging is that none of these issues are paramount in isolation. Individually, higher wages, tightening reimbursement from Medicare and commercial payers, and rising supply costs are manageable. Collectively, they create a perfect storm that leaders have to address before it’s too late.
The practices that are navigating this environment successfully are taking a different approach. First, they are measuring contribution margin at the provider and service-line level, not just aggregate results. Second, they are abandoning their dated staffing models and aligning with throughput and outcomes. Third, they are willing to exit or restructure service lines that no longer meet return thresholds. Fourth, they are ensuring that all internal referrals remain inside the practice to avoid service leakage. Lastly, they are evaluating related practices to see if aggregation or mergers make sense to create economies of scale and gain market share.
Most importantly, practices need to focus on data and transparency so they can have open and honest conversations with physicians. Sharing practice financials and data transparently will only strengthen practice alignment. Physicians do not need to become accountants, but they do need to understand the financial repercussions of operational decisions.
