W hile it might surprise you (and then again, maybe not) dermatology and ophthalmology have a lot in common. Since 1984, my firm, The Health Care Group, has classed these two specialties along with obstetrics-gynecology practices as “primary care, surgical practices.” The reason for this unique classification is that these practices share common, underlying economic characteristics. In each specialty, many patients visit the practice and regularly return, forming a relationship similar to that of a primary care physician. Patients often present with pathology that the physician will treat with (relatively) high-priced surgery. This shared economic characteristic results in a number of common traits between dermatology and ophthalmology. Which brings me to discuss a trend that had devastating consequences in ophthalmology — laser vision correction discounting. You might recall the “price wars” for refractive surgery fees that resulted in a good number of ophthalmologists — those who drastically lowered their prices to try and compete — actually losing money by performing the procedures. In some markets, ophthalmology refractive surgery pricing fell from $2,400 per eye to $490 per eye. How did this happen, and could dermatology also experience this trend with regard to elective cosmetic dermatology procedures? As a practice management consultant, and as an attorney, I’m often asked this question by dermatologists who offer cosmetic procedures. A Look at the History Dermatology has dipped its toe, indeed its calf, into unreimbursed, cosmetic services. Ophthalmology did the same thing 6 or so years ago with a strong push to perform laser-assisted in situ keratomileusis (LASIK) procedures. These eyecare services didn’t correct pathology per se, but promised to improve the life experience of the patient — for which the patient paid out of pocket. With refractive surgery, an interesting phenomenon occurred. The lure of big fees, unregulated by Medicare and not offered or paid by managed care companies, led non-physician, business people to a presumed gold mine. Medical practice initiatives into refractive surgery, once well received by the public, were followed quickly with private commercial companies offering the same services. Let’s look at what happened. In the very beginning. In about 1984, radial keratectomy first surfaced as a procedure imported from the USSR. A few aggressive doctors pursued the technology and modality, but it didn’t achieve broad market acceptance. The clinical results weren’t consistent, horror stories abounded, and little was known of the long-term effects of reshaping the cornea with diamond blade knives. The next big advance. Not long thereafter, in 1992, pioneering physicians who adapted advances in “cold” laser technology developed a beneficial technique for reshaping the cornea in nearsighted patients. The goal, of course, was to reduce patient dependence on glasses and contact lenses. Refractive surgery centers began appearing in other countries and reports were spread of the accuracy and predictability of “laser refractive surgery.” Advance followed advance and by 1996, the FDA permitted the first excimer laser technology on a non-experimental basis (actually one of our clients was the first to open a private practice excimer laser center following FDA approval). Of course, “vision” care has never been considered “health care,” so medical insurance has never routinely paid for these refractive eyecare procedures. Ophthalmologists by and large recognized this and thought they’d come to the Promised Land — a surgical technique for which 40 million patients would happily pay out of pocket. This occurred at the same time ophthalmologists’ reimbursement for cataract surgery was in free fall due to Medicare’s adoption of RBRVS. Ophthalmologists saw refractive surgery as the practice savior. No claim forms, primary care referral forms, utilization review, or other red tape. Even collection issues would be resolved by pre-arranged financing through commercial businesses. Bonanza! And in truth, there is a bonanza to be had in refractive surgery, but as in any new market there are ups and downs. Refractive surgery procedures are expected to grow dramatically over the next 8 to 10 years. Other forces come into play. Physicians weren’t the only people to recognize the potential attractiveness of refractive procedures. Business people quickly saw dollar signs and went into action. Several companies moved quickly to organize and establish national chains of refractive surgery centers. Capital was raised, surgeons recruited, and millions of dollars poured into advertising to achieve brand recognition. But what was there to advertise? The physicians were largely unknown, the centers had no operating history, and the value proposition (the ongoing cost of glasses versus surgery) was difficult. All the marketing was built upon the technology. Most of the lasers were unused the majority of the time. “Aha,” said the M.B.A.s, “we’ll lower the price. We’re capable of delivering 300 cases a week. Instead of selling 20 procedures at $2,500 to produce $50,000, we’ll sell 250 at $500 and generate $125,000. And so the theory went — lower the prices, advertise the low prices, improve the customers’ value calculation, grab market share, and use the “excess production” capacity — it made perfect sense . A brilliant strategy, but only when your production costs are mostly fixed, and only if your competitors can’t also lower prices. But that’s what the competitors did, which led to an all-out, price war. Within 12 months, prices in many markets fell by 75%. The discounters led the way. Physician practices, heavily invested in laser technology, had no recourse but to reluctantly follow. Adding injury to injury, the price war reached its height in the Spring of 2001. Then the economy went in the tank, and with it patients’ discretionary spending. Then the tragedy of September 11 followed in the succeeding months. About the same time, numerous news stories touted the poor outcomes that some patients experienced, and lawsuits began to mount. Each event took its toll, so that by the beginning of 2002 many refractive surgery practices saw their patient volume cut in half. The good news was that many of the discounters didn’t survive the downturn. Most physician practices scraped by because they could rely on their traditional pathology practices to carry the laser business. What’s All This Have to Do with Dermatology? Well, many are predicting that cosmetic services — everything from Botox to dermabrasion — will be your specialty’s answer to Medicare regulation and managed care company hassles. And there’s strong support for that argument. For many medical practices, demographics drive demand. The country’s demographic trend suggests a strong demand for cosmetic services during the next decade or two. Most cosmetic procedures are performed on mature adults — those older than age 50. Few dermatology practices have less than 50% Medicare patients, and the “sea” of gray heads in any dermatology practice reception area lends anecdotal evidence to the statistical. A quick look at historical birthrates in the United States foretells a huge demand waiting in the wings. The first surge in the birthrate in the United States took place from 1900 to 1920. Annual births increased from 2.5 million at the start of the period to slightly more than 3 million by 1921. The annual rate then dropped off to 2.4 million births per year in the early 1930s. The next wave of births started in the late 1930s and culminated in the Baby Boom from 1946 through 1964. By the end of the period, the rate of births was almost double the rate in the mid-1930s, topping out at 4.3 million births per year. This birthrate increase was supplemented by strong immigration from the 1970s through 1990. The average age of the immigrants during these years matched that of the Baby Boomers, adding another half a million people to the population each year. How will such trends affect the demand for cosmetic services? Add, say, 50 years to 1943 and you get 1993. Roughly the time when dermatology practices first started recognizing the potential for cosmetic services and just when the boomers were on the cusp of middle age. Looking at the number of births in the subsequent years, you can safely bet that we’ll see a huge surge in the older population in the immediate future and continuing to 2020. Those Baby Boomers are a massive generation that have distorted every market they have touched — the labor market of the 1970s, the housing market of the 1980s, and the stock market of the 1990s. They may do so, too, for cosmetic services. Lifestyle issues will push the Boomers to dermatology services. As you already know, most of that generation played too long in the sun. Result: an increased demand for skin cancer services and an increased opportunity to entice patients with cosmetic services. To boot, many Boomers are appearance conscious. This last point is demonstrated by the recent increase in the number of plastic surgery procedures. According to the American Society of Plastic Surgeons, the number of procedures performed by its members almost tripled between 1992 and 2000. Of those procedures, 68% were performed on patients born between 1936 and 1963. Cosmetic Dermatology a Bust? So the demand for cosmetic services should be a boon, but who is to say that the resulting boom will not turn to bust in short order ala refractive surgery? Several factors are not yet present in the cosmetic services mix that resulted in the collapse of the LASIK soufflé. (Remember, it was the entry of business people into the refractive surgery market that led to falling prices. And the eventual shrinkage in demand resulted from a combination of bad press, bad economy and the actions of bad people.) Consider the following: The high barrier to entry in refractive surgery. The cost of an excimer laser created a big stumbling block for many ophthalmologists, but there’s not a parallel situation that applies to most cosmetic services. That makes the need for capital, and thus the entry of capitalists, not quite so likely. Competition from optometry. Also, optometry put a lot of economic pressure on ophthalmology, and competition among providers was rampant. A number of studies reported the glut of eye doctors. Each year, another 800 ophthalmologists complete their training, adding to the oversupply. Ophthalmology caught the eye of big business. Dermatology never entranced the business crowd the way ophthalmology did in the 1990s. At that time, there were numerous physician practice management companies (PPMCs) that chased ophthalmologists. Only one PPMC, of which we were aware, was interested in consolidating dermatology. That’s because there are relatively few dermatologists, a trend that will likely continue. Plus, during the mid-’90s, the popular belief was that managed care was going to reduce the utilization of dermatologists. So to some extent, dermatology was and is lower on the radar screen and thus possibly less likely to attract attention. Similarly, until relatively recently the vast majority of dermatology practices were solo physicians or duos. There are few good acquisition targets to buy. Most capitalists know it’s harder to build a big business around very small, often idiosyncratic, practices. An Unlikely Scenario? To sum it up, without the need for capital, there’s little need for big business. Without strong competition, it’s unlikely that many dermatologists will cut prices to gain market share. Few dermatologists are empire builders, preferring instead to take care of patients. In fact, we know of only two growing businesses trying to consolidate dermatology practices at this stage: one on the West Coast and one in Florida. That’s not enough competition to drive prices down or to induce price competition. It’s also unlikely that dermatologists will attack the market in the way vision surgery was advertised — with advertising budgets in the millions. The challenge for refractive surgery providers was to educate an unknowing public about a new service that hadn’t been widely available before and then to brand themselves as the preferred providers. The cosmetic services market is different: Beauty aids, cosmetic surgery, and so on have been around for years. And while there are admittedly some new twists and techniques, it will take much more for a cosmetic practice’s message to be heard among all the other “look-and-feel-good” advertising that goes on. None of this, of course, says that cosmetic services won’t experience the same boom and bust characteristics that the laser refractive surgery business experienced. Cosmetic services are likely to be in high demand in good times and to fall off in poor times. And certainly, when the nation goes into shock over a national disaster, a lot fewer people will worry about their crow’s feet — for several months at least. But all of this simply means that a solely cosmetic business is riskier than combining cosmetic offerings with traditional dermatology as the core business. That’s basic risk management. For many, many years, plastic surgery practices have survived on that basis very nicely. So why not your practice, as well?
Will Price Cutting Erode Cosmetic Dermatology Fees
W hile it might surprise you (and then again, maybe not) dermatology and ophthalmology have a lot in common. Since 1984, my firm, The Health Care Group, has classed these two specialties along with obstetrics-gynecology practices as “primary care, surgical practices.” The reason for this unique classification is that these practices share common, underlying economic characteristics. In each specialty, many patients visit the practice and regularly return, forming a relationship similar to that of a primary care physician. Patients often present with pathology that the physician will treat with (relatively) high-priced surgery. This shared economic characteristic results in a number of common traits between dermatology and ophthalmology. Which brings me to discuss a trend that had devastating consequences in ophthalmology — laser vision correction discounting. You might recall the “price wars” for refractive surgery fees that resulted in a good number of ophthalmologists — those who drastically lowered their prices to try and compete — actually losing money by performing the procedures. In some markets, ophthalmology refractive surgery pricing fell from $2,400 per eye to $490 per eye. How did this happen, and could dermatology also experience this trend with regard to elective cosmetic dermatology procedures? As a practice management consultant, and as an attorney, I’m often asked this question by dermatologists who offer cosmetic procedures. A Look at the History Dermatology has dipped its toe, indeed its calf, into unreimbursed, cosmetic services. Ophthalmology did the same thing 6 or so years ago with a strong push to perform laser-assisted in situ keratomileusis (LASIK) procedures. These eyecare services didn’t correct pathology per se, but promised to improve the life experience of the patient — for which the patient paid out of pocket. With refractive surgery, an interesting phenomenon occurred. The lure of big fees, unregulated by Medicare and not offered or paid by managed care companies, led non-physician, business people to a presumed gold mine. Medical practice initiatives into refractive surgery, once well received by the public, were followed quickly with private commercial companies offering the same services. Let’s look at what happened. In the very beginning. In about 1984, radial keratectomy first surfaced as a procedure imported from the USSR. A few aggressive doctors pursued the technology and modality, but it didn’t achieve broad market acceptance. The clinical results weren’t consistent, horror stories abounded, and little was known of the long-term effects of reshaping the cornea with diamond blade knives. The next big advance. Not long thereafter, in 1992, pioneering physicians who adapted advances in “cold” laser technology developed a beneficial technique for reshaping the cornea in nearsighted patients. The goal, of course, was to reduce patient dependence on glasses and contact lenses. Refractive surgery centers began appearing in other countries and reports were spread of the accuracy and predictability of “laser refractive surgery.” Advance followed advance and by 1996, the FDA permitted the first excimer laser technology on a non-experimental basis (actually one of our clients was the first to open a private practice excimer laser center following FDA approval). Of course, “vision” care has never been considered “health care,” so medical insurance has never routinely paid for these refractive eyecare procedures. Ophthalmologists by and large recognized this and thought they’d come to the Promised Land — a surgical technique for which 40 million patients would happily pay out of pocket. This occurred at the same time ophthalmologists’ reimbursement for cataract surgery was in free fall due to Medicare’s adoption of RBRVS. Ophthalmologists saw refractive surgery as the practice savior. No claim forms, primary care referral forms, utilization review, or other red tape. Even collection issues would be resolved by pre-arranged financing through commercial businesses. Bonanza! And in truth, there is a bonanza to be had in refractive surgery, but as in any new market there are ups and downs. Refractive surgery procedures are expected to grow dramatically over the next 8 to 10 years. Other forces come into play. Physicians weren’t the only people to recognize the potential attractiveness of refractive procedures. Business people quickly saw dollar signs and went into action. Several companies moved quickly to organize and establish national chains of refractive surgery centers. Capital was raised, surgeons recruited, and millions of dollars poured into advertising to achieve brand recognition. But what was there to advertise? The physicians were largely unknown, the centers had no operating history, and the value proposition (the ongoing cost of glasses versus surgery) was difficult. All the marketing was built upon the technology. Most of the lasers were unused the majority of the time. “Aha,” said the M.B.A.s, “we’ll lower the price. We’re capable of delivering 300 cases a week. Instead of selling 20 procedures at $2,500 to produce $50,000, we’ll sell 250 at $500 and generate $125,000. And so the theory went — lower the prices, advertise the low prices, improve the customers’ value calculation, grab market share, and use the “excess production” capacity — it made perfect sense . A brilliant strategy, but only when your production costs are mostly fixed, and only if your competitors can’t also lower prices. But that’s what the competitors did, which led to an all-out, price war. Within 12 months, prices in many markets fell by 75%. The discounters led the way. Physician practices, heavily invested in laser technology, had no recourse but to reluctantly follow. Adding injury to injury, the price war reached its height in the Spring of 2001. Then the economy went in the tank, and with it patients’ discretionary spending. Then the tragedy of September 11 followed in the succeeding months. About the same time, numerous news stories touted the poor outcomes that some patients experienced, and lawsuits began to mount. Each event took its toll, so that by the beginning of 2002 many refractive surgery practices saw their patient volume cut in half. The good news was that many of the discounters didn’t survive the downturn. Most physician practices scraped by because they could rely on their traditional pathology practices to carry the laser business. What’s All This Have to Do with Dermatology? Well, many are predicting that cosmetic services — everything from Botox to dermabrasion — will be your specialty’s answer to Medicare regulation and managed care company hassles. And there’s strong support for that argument. For many medical practices, demographics drive demand. The country’s demographic trend suggests a strong demand for cosmetic services during the next decade or two. Most cosmetic procedures are performed on mature adults — those older than age 50. Few dermatology practices have less than 50% Medicare patients, and the “sea” of gray heads in any dermatology practice reception area lends anecdotal evidence to the statistical. A quick look at historical birthrates in the United States foretells a huge demand waiting in the wings. The first surge in the birthrate in the United States took place from 1900 to 1920. Annual births increased from 2.5 million at the start of the period to slightly more than 3 million by 1921. The annual rate then dropped off to 2.4 million births per year in the early 1930s. The next wave of births started in the late 1930s and culminated in the Baby Boom from 1946 through 1964. By the end of the period, the rate of births was almost double the rate in the mid-1930s, topping out at 4.3 million births per year. This birthrate increase was supplemented by strong immigration from the 1970s through 1990. The average age of the immigrants during these years matched that of the Baby Boomers, adding another half a million people to the population each year. How will such trends affect the demand for cosmetic services? Add, say, 50 years to 1943 and you get 1993. Roughly the time when dermatology practices first started recognizing the potential for cosmetic services and just when the boomers were on the cusp of middle age. Looking at the number of births in the subsequent years, you can safely bet that we’ll see a huge surge in the older population in the immediate future and continuing to 2020. Those Baby Boomers are a massive generation that have distorted every market they have touched — the labor market of the 1970s, the housing market of the 1980s, and the stock market of the 1990s. They may do so, too, for cosmetic services. Lifestyle issues will push the Boomers to dermatology services. As you already know, most of that generation played too long in the sun. Result: an increased demand for skin cancer services and an increased opportunity to entice patients with cosmetic services. To boot, many Boomers are appearance conscious. This last point is demonstrated by the recent increase in the number of plastic surgery procedures. According to the American Society of Plastic Surgeons, the number of procedures performed by its members almost tripled between 1992 and 2000. Of those procedures, 68% were performed on patients born between 1936 and 1963. Cosmetic Dermatology a Bust? So the demand for cosmetic services should be a boon, but who is to say that the resulting boom will not turn to bust in short order ala refractive surgery? Several factors are not yet present in the cosmetic services mix that resulted in the collapse of the LASIK soufflé. (Remember, it was the entry of business people into the refractive surgery market that led to falling prices. And the eventual shrinkage in demand resulted from a combination of bad press, bad economy and the actions of bad people.) Consider the following: The high barrier to entry in refractive surgery. The cost of an excimer laser created a big stumbling block for many ophthalmologists, but there’s not a parallel situation that applies to most cosmetic services. That makes the need for capital, and thus the entry of capitalists, not quite so likely. Competition from optometry. Also, optometry put a lot of economic pressure on ophthalmology, and competition among providers was rampant. A number of studies reported the glut of eye doctors. Each year, another 800 ophthalmologists complete their training, adding to the oversupply. Ophthalmology caught the eye of big business. Dermatology never entranced the business crowd the way ophthalmology did in the 1990s. At that time, there were numerous physician practice management companies (PPMCs) that chased ophthalmologists. Only one PPMC, of which we were aware, was interested in consolidating dermatology. That’s because there are relatively few dermatologists, a trend that will likely continue. Plus, during the mid-’90s, the popular belief was that managed care was going to reduce the utilization of dermatologists. So to some extent, dermatology was and is lower on the radar screen and thus possibly less likely to attract attention. Similarly, until relatively recently the vast majority of dermatology practices were solo physicians or duos. There are few good acquisition targets to buy. Most capitalists know it’s harder to build a big business around very small, often idiosyncratic, practices. An Unlikely Scenario? To sum it up, without the need for capital, there’s little need for big business. Without strong competition, it’s unlikely that many dermatologists will cut prices to gain market share. Few dermatologists are empire builders, preferring instead to take care of patients. In fact, we know of only two growing businesses trying to consolidate dermatology practices at this stage: one on the West Coast and one in Florida. That’s not enough competition to drive prices down or to induce price competition. It’s also unlikely that dermatologists will attack the market in the way vision surgery was advertised — with advertising budgets in the millions. The challenge for refractive surgery providers was to educate an unknowing public about a new service that hadn’t been widely available before and then to brand themselves as the preferred providers. The cosmetic services market is different: Beauty aids, cosmetic surgery, and so on have been around for years. And while there are admittedly some new twists and techniques, it will take much more for a cosmetic practice’s message to be heard among all the other “look-and-feel-good” advertising that goes on. None of this, of course, says that cosmetic services won’t experience the same boom and bust characteristics that the laser refractive surgery business experienced. Cosmetic services are likely to be in high demand in good times and to fall off in poor times. And certainly, when the nation goes into shock over a national disaster, a lot fewer people will worry about their crow’s feet — for several months at least. But all of this simply means that a solely cosmetic business is riskier than combining cosmetic offerings with traditional dermatology as the core business. That’s basic risk management. For many, many years, plastic surgery practices have survived on that basis very nicely. So why not your practice, as well?
W hile it might surprise you (and then again, maybe not) dermatology and ophthalmology have a lot in common. Since 1984, my firm, The Health Care Group, has classed these two specialties along with obstetrics-gynecology practices as “primary care, surgical practices.” The reason for this unique classification is that these practices share common, underlying economic characteristics. In each specialty, many patients visit the practice and regularly return, forming a relationship similar to that of a primary care physician. Patients often present with pathology that the physician will treat with (relatively) high-priced surgery. This shared economic characteristic results in a number of common traits between dermatology and ophthalmology. Which brings me to discuss a trend that had devastating consequences in ophthalmology — laser vision correction discounting. You might recall the “price wars” for refractive surgery fees that resulted in a good number of ophthalmologists — those who drastically lowered their prices to try and compete — actually losing money by performing the procedures. In some markets, ophthalmology refractive surgery pricing fell from $2,400 per eye to $490 per eye. How did this happen, and could dermatology also experience this trend with regard to elective cosmetic dermatology procedures? As a practice management consultant, and as an attorney, I’m often asked this question by dermatologists who offer cosmetic procedures. A Look at the History Dermatology has dipped its toe, indeed its calf, into unreimbursed, cosmetic services. Ophthalmology did the same thing 6 or so years ago with a strong push to perform laser-assisted in situ keratomileusis (LASIK) procedures. These eyecare services didn’t correct pathology per se, but promised to improve the life experience of the patient — for which the patient paid out of pocket. With refractive surgery, an interesting phenomenon occurred. The lure of big fees, unregulated by Medicare and not offered or paid by managed care companies, led non-physician, business people to a presumed gold mine. Medical practice initiatives into refractive surgery, once well received by the public, were followed quickly with private commercial companies offering the same services. Let’s look at what happened. In the very beginning. In about 1984, radial keratectomy first surfaced as a procedure imported from the USSR. A few aggressive doctors pursued the technology and modality, but it didn’t achieve broad market acceptance. The clinical results weren’t consistent, horror stories abounded, and little was known of the long-term effects of reshaping the cornea with diamond blade knives. The next big advance. Not long thereafter, in 1992, pioneering physicians who adapted advances in “cold” laser technology developed a beneficial technique for reshaping the cornea in nearsighted patients. The goal, of course, was to reduce patient dependence on glasses and contact lenses. Refractive surgery centers began appearing in other countries and reports were spread of the accuracy and predictability of “laser refractive surgery.” Advance followed advance and by 1996, the FDA permitted the first excimer laser technology on a non-experimental basis (actually one of our clients was the first to open a private practice excimer laser center following FDA approval). Of course, “vision” care has never been considered “health care,” so medical insurance has never routinely paid for these refractive eyecare procedures. Ophthalmologists by and large recognized this and thought they’d come to the Promised Land — a surgical technique for which 40 million patients would happily pay out of pocket. This occurred at the same time ophthalmologists’ reimbursement for cataract surgery was in free fall due to Medicare’s adoption of RBRVS. Ophthalmologists saw refractive surgery as the practice savior. No claim forms, primary care referral forms, utilization review, or other red tape. Even collection issues would be resolved by pre-arranged financing through commercial businesses. Bonanza! And in truth, there is a bonanza to be had in refractive surgery, but as in any new market there are ups and downs. Refractive surgery procedures are expected to grow dramatically over the next 8 to 10 years. Other forces come into play. Physicians weren’t the only people to recognize the potential attractiveness of refractive procedures. Business people quickly saw dollar signs and went into action. Several companies moved quickly to organize and establish national chains of refractive surgery centers. Capital was raised, surgeons recruited, and millions of dollars poured into advertising to achieve brand recognition. But what was there to advertise? The physicians were largely unknown, the centers had no operating history, and the value proposition (the ongoing cost of glasses versus surgery) was difficult. All the marketing was built upon the technology. Most of the lasers were unused the majority of the time. “Aha,” said the M.B.A.s, “we’ll lower the price. We’re capable of delivering 300 cases a week. Instead of selling 20 procedures at $2,500 to produce $50,000, we’ll sell 250 at $500 and generate $125,000. And so the theory went — lower the prices, advertise the low prices, improve the customers’ value calculation, grab market share, and use the “excess production” capacity — it made perfect sense . A brilliant strategy, but only when your production costs are mostly fixed, and only if your competitors can’t also lower prices. But that’s what the competitors did, which led to an all-out, price war. Within 12 months, prices in many markets fell by 75%. The discounters led the way. Physician practices, heavily invested in laser technology, had no recourse but to reluctantly follow. Adding injury to injury, the price war reached its height in the Spring of 2001. Then the economy went in the tank, and with it patients’ discretionary spending. Then the tragedy of September 11 followed in the succeeding months. About the same time, numerous news stories touted the poor outcomes that some patients experienced, and lawsuits began to mount. Each event took its toll, so that by the beginning of 2002 many refractive surgery practices saw their patient volume cut in half. The good news was that many of the discounters didn’t survive the downturn. Most physician practices scraped by because they could rely on their traditional pathology practices to carry the laser business. What’s All This Have to Do with Dermatology? Well, many are predicting that cosmetic services — everything from Botox to dermabrasion — will be your specialty’s answer to Medicare regulation and managed care company hassles. And there’s strong support for that argument. For many medical practices, demographics drive demand. The country’s demographic trend suggests a strong demand for cosmetic services during the next decade or two. Most cosmetic procedures are performed on mature adults — those older than age 50. Few dermatology practices have less than 50% Medicare patients, and the “sea” of gray heads in any dermatology practice reception area lends anecdotal evidence to the statistical. A quick look at historical birthrates in the United States foretells a huge demand waiting in the wings. The first surge in the birthrate in the United States took place from 1900 to 1920. Annual births increased from 2.5 million at the start of the period to slightly more than 3 million by 1921. The annual rate then dropped off to 2.4 million births per year in the early 1930s. The next wave of births started in the late 1930s and culminated in the Baby Boom from 1946 through 1964. By the end of the period, the rate of births was almost double the rate in the mid-1930s, topping out at 4.3 million births per year. This birthrate increase was supplemented by strong immigration from the 1970s through 1990. The average age of the immigrants during these years matched that of the Baby Boomers, adding another half a million people to the population each year. How will such trends affect the demand for cosmetic services? Add, say, 50 years to 1943 and you get 1993. Roughly the time when dermatology practices first started recognizing the potential for cosmetic services and just when the boomers were on the cusp of middle age. Looking at the number of births in the subsequent years, you can safely bet that we’ll see a huge surge in the older population in the immediate future and continuing to 2020. Those Baby Boomers are a massive generation that have distorted every market they have touched — the labor market of the 1970s, the housing market of the 1980s, and the stock market of the 1990s. They may do so, too, for cosmetic services. Lifestyle issues will push the Boomers to dermatology services. As you already know, most of that generation played too long in the sun. Result: an increased demand for skin cancer services and an increased opportunity to entice patients with cosmetic services. To boot, many Boomers are appearance conscious. This last point is demonstrated by the recent increase in the number of plastic surgery procedures. According to the American Society of Plastic Surgeons, the number of procedures performed by its members almost tripled between 1992 and 2000. Of those procedures, 68% were performed on patients born between 1936 and 1963. Cosmetic Dermatology a Bust? So the demand for cosmetic services should be a boon, but who is to say that the resulting boom will not turn to bust in short order ala refractive surgery? Several factors are not yet present in the cosmetic services mix that resulted in the collapse of the LASIK soufflé. (Remember, it was the entry of business people into the refractive surgery market that led to falling prices. And the eventual shrinkage in demand resulted from a combination of bad press, bad economy and the actions of bad people.) Consider the following: The high barrier to entry in refractive surgery. The cost of an excimer laser created a big stumbling block for many ophthalmologists, but there’s not a parallel situation that applies to most cosmetic services. That makes the need for capital, and thus the entry of capitalists, not quite so likely. Competition from optometry. Also, optometry put a lot of economic pressure on ophthalmology, and competition among providers was rampant. A number of studies reported the glut of eye doctors. Each year, another 800 ophthalmologists complete their training, adding to the oversupply. Ophthalmology caught the eye of big business. Dermatology never entranced the business crowd the way ophthalmology did in the 1990s. At that time, there were numerous physician practice management companies (PPMCs) that chased ophthalmologists. Only one PPMC, of which we were aware, was interested in consolidating dermatology. That’s because there are relatively few dermatologists, a trend that will likely continue. Plus, during the mid-’90s, the popular belief was that managed care was going to reduce the utilization of dermatologists. So to some extent, dermatology was and is lower on the radar screen and thus possibly less likely to attract attention. Similarly, until relatively recently the vast majority of dermatology practices were solo physicians or duos. There are few good acquisition targets to buy. Most capitalists know it’s harder to build a big business around very small, often idiosyncratic, practices. An Unlikely Scenario? To sum it up, without the need for capital, there’s little need for big business. Without strong competition, it’s unlikely that many dermatologists will cut prices to gain market share. Few dermatologists are empire builders, preferring instead to take care of patients. In fact, we know of only two growing businesses trying to consolidate dermatology practices at this stage: one on the West Coast and one in Florida. That’s not enough competition to drive prices down or to induce price competition. It’s also unlikely that dermatologists will attack the market in the way vision surgery was advertised — with advertising budgets in the millions. The challenge for refractive surgery providers was to educate an unknowing public about a new service that hadn’t been widely available before and then to brand themselves as the preferred providers. The cosmetic services market is different: Beauty aids, cosmetic surgery, and so on have been around for years. And while there are admittedly some new twists and techniques, it will take much more for a cosmetic practice’s message to be heard among all the other “look-and-feel-good” advertising that goes on. None of this, of course, says that cosmetic services won’t experience the same boom and bust characteristics that the laser refractive surgery business experienced. Cosmetic services are likely to be in high demand in good times and to fall off in poor times. And certainly, when the nation goes into shock over a national disaster, a lot fewer people will worry about their crow’s feet — for several months at least. But all of this simply means that a solely cosmetic business is riskier than combining cosmetic offerings with traditional dermatology as the core business. That’s basic risk management. For many, many years, plastic surgery practices have survived on that basis very nicely. So why not your practice, as well?
