Archive | December 2010

Doctor Drift and Medical Devices: SmartLipo

I previously discussed the concept of “doctor drift”, where some physicians enter areas of practice well outside their areas of specialty training.  Much of this is due to financial constraints and the gradual buckling of the unsustainable payment system.  Understandably, doctors tend to drift into areas of discretionary medicine, such as skin care, cosmetic procedures and cosmetic surgery.

What is not obvious is the role that some device companies play in encouraging this drift.   Consider liposuction, one of the most common surgical procedures.  Liposuction has gotten a boost from the introduction of laser devices which purportedly tighten skin and enhance the removal of fat.  A pioneer corporation is Cynosure, creator of the SmartLipo family of products.  (Disclosure:  I do not own any interest in Cynosure, nor do I own a SmartLipo machine.  But I have done hundreds of SmartLipo procedures).

Here are some excerpts from Cynosure’s 10-K SEC filing:

“…there are approximately 18,000 dermatologists and plastic surgeons in the United States. A broader group of physicians in the United States, including primary care physicians, obstetricians and gynecologists, have incorporated aesthetic treatment procedures into their practices. These non-traditional physician customers are largely motivated to offer aesthetic procedures by the potential for a reliable revenue stream that is unaffected by managed care and government payor reimbursement economics.”

“We sell our aesthetic treatment systems to the traditional physician customer base of dermatologists and plastic surgeons as well as to the increasing number of non-traditional physician customers who are providing aesthetic services using laser and light-based technology. Non-traditional physician customers can include primary care physicians, obstetricians and gynecologists.”

(Authors’s note:  The above two paragraphs come from the 2010 10-K.  In prior years, the phrase; ‘ophthalmologists and ear, nose and throat specialists’ followed “gynecologists”)

“To remain competitive, we must … sell our products to non-traditional customers, including primary care physicians, gynecologists and other specialists;”

Cynosure understands the motivation for doctor drift, as well as the internal drift within the traditional specialties of plastic surgery and dermatology.  The need for the company to sell its devices to as many physicians as possible is not in doubt.  The customer base expands from 18,000 to over 200,000 in the U.S. alone when the non-core specialties are included.  If I were on Cynosure’s board, I would have to accept this strategy.  However, I would question the wisdom of selling all the company’s devices to all types of physicians.

My specific concern is having non-surgeons perform liposuction.  One of the unspoken reasons behind office-based surgery is this:  in most states, performing office surgical procedures under local anesthesia avoids the regulatory constraints needed to do the same procedures in a hospital or ambulatory surgical center (ASC).  This allows a “non-traditional” physician to legally perform surgery in an office, when that same physician would not qualify to do the same procedure in a hospital or ASC.

Cynosure doesn’t set the rules for office-based surgery, and they are not the only company seeking to recruit non-core physicians to the field of cosmetic medicine and surgery.  In fact, failing to do so would almost certainly lead the company to ruin.  But specialty societies and state legislatures have failed to keep up with changes in medical economics that have led to office based surgery by non-core physicians.  As clearly noted, device companies also play a role in promoting this potentially hazardous trend.

Medicare “Snowball” Continues to Grow

The latest patch on the Medicare payment system has been applied through the end of the year.  The latest measure halted a 23% reduction in physician payments, based on the Sustainable Growth Rate formula.  Unless patched again, the cut will be implemented on Jan. 1, 2011, and will be 25%.  The increase, or “snowball” occurs because as spending exceeds certain index parameters, the law adds the shortfall to the next cut.  Plenty of authors have discussed the cuts, the flaws that go into the formula, and the distorting effects on utilization that this type of scheme can cause.

Here is a highly simplified income statement for a fictitious, single physician medical practice.  It illustrates the effect of the 25% cut in revenue.  The example assumes 100% of revenues from Medicare, with 55% overhead.  All overhead (staff/rent/supplies/etc) is considered as a single item.

Fictitious Medical Practice, Income Statement

Revenues:   $250,000
Overhead:  $137,500
Pretax net to owner:  $112,500

Now, here’s the same thing after the 25% cut.

Revenues:  $187,500
Overhead:  $137,500
Pretax net to owner:  $50,000

This results in more than a 55% drop in the pretax profit.  Although the overhead is based on a revenue percentage in the first example, that same dollar amount still must be spent in the second case.   Patient volume remains the same; only the government payment rate has changed.  And when that filters down through the practice, the effect is more than double the amount of the cut.  Its a snowball on both ends.

Given the major problems that need to be solved (see the Simpson-Bowles report later this week), this recurring Medicare issue isn’t getting top billing.  There are arguments against continuing to patch a payment scheme for physicians, when there are many other serious problems still facing the U.S. economy.  But this problem cannot be ignored forever, and there is no solution in sight.