Some Thoughts For VSP and our Industry to Consider

Where are we and where are we headed?

OK…so carefully and, to a large degree surreptitiously, VSP has evolved to become the world’s largest integrated retailer with 25,000 provider locations.   They “own” their Providers; just as Wal-Mart “owns” so many of its vendors.   Yes, Wal-Mart has to rely upon day-to-day competition to get its customers.  But they can only dream of having the power over their customers that VSP has secured.  And, granted, VSP has to compete, too…with the likes of EyeMed, Davis and Spectera and a host of other “Managed Care Provider Organizations.”   What’s their competitive weapon?  Its Provider Panels and Provider’s fees.   And based on my observations, it’s apparent that Providers feel powerless while they’re getting kicked in the proverbial profit margin.  

VSP says that they’re organized as a non-profit (the IRS and VSP are in a Supreme Court debate over this issue) and they position themselves as “the friend of private optometry.”  That’s certainly their roots.  And, yes, they’ve managed to secure 55 million Americans and tie them to 25,000 Providers.   And they certainly provide some support to the profession by reallocating Provider reimbursements to programs of their choice…sort of a tax (without representation?).  They even have a fund that helps first time buyers acquire practices.  And now, with the purchase of Marchon and Officemate, this positioning will likely escalate.  It has to, because VSP has to now sell its frames, lenses, technologies and office design services to reap a return on the investment of their Provider’s money.     

With the Marchon acquisition in mind think for a moment about the brilliance of what VSP has done. From the bottom up they have secured a customer base and from the top down they have secured the product deliverables. This is actually better than the Wal-Mart model in three key ways. First, VSP does not have to build stores and manage locations; the Provider does this for VSP at their own risk. Second they have secured a market of one sixth of the entire U.S. population who take little responsibility for paying for a service, which, except for selling the plan and processing money, VSP doesn’t provide anyway.  This burden is shifted to employers. Thirdly, VSP uses the purchasing power derived to secure the ability to purchase and manufacture products in huge volume.   Pure genius! 

And what Luxottica is attempting to build from the manufacturer level down to the provider (via EyeMed), VSP has built from the ground up.  The end result is likely the same.  

 Is VSP really contributing to the upward mobility of private practice optometry?  Or is the very system that they’ve developed actually going to create a downward spiral for this segment of the industry that results in a further focus on price rather than excellence in patient care?   

VSP makes enough of a margin from being the insurance middleman to make billion dollar investments!  Is that not the provider’s money?  Should providers have more of a say in the deployment of those resources?   VSP has clearly stated that they will use the largess of its current Provider network to take its “product” to the world.  What benefit does this have for its current Providers who are, effectively, funding this expansion through their discounts on eyecare and eyewear and now, through their purchases of Marchon and other products?  

VSP commands upwards of a 50% discount for primary benefits and eyewear. They then resell its Provider’s services to employers on a capitation basis.  That means the VSP’s economic motivation is to actually reduce utilization; benefits unused or underused means profit for VSP.  And now, VSP is selling plans to individual consumers directly!  It is doubtful that these consumers are the Wal-Mart crowd; but more likely small business owners and professionals, many of whom are already the patients of Providers.  What is the benefit to Providers of having patients who yesterday paid Usual and Customary to now come to that same provider at a 50% discount?  Is this not the proverbial “I lose money on every customer but make it up on volume” analogy?

Even more debilitating then 50% discounts on primary care, in my opinion, is that VSP requires that providers discount at least 20% off everything else the patient acquires.   Does not this method eliminate the ability, and to a large degree, the incentive, for Providers to recover losses on the initial benefit through the delivery of exceptional care and quality products?     

We review hundreds of optometrist’s income statements per year and tens of thousands of data points of operating information.  It’s clear.  Providers are getting squeezed from multiple directions.  Providers have no choice but to attempt to increase dollar and unit productivity, often at the expense of their families.    But there’s a natural limit to productivity in the delivery of optometric care.  That limit appears to be about 5000 patients per year per optometrist and there are likely less than 100 O.D.s in the entire nation that have developed and can sustain that level of personal production while maintaining their sanity and any semblance of quality.   For the other 24,900 Providers, they’re struggling with margins.  Providers are working harder to stand still.  Indeed, according to our studies, adjusted for inflation, the average Provider is no better off today then they were 10 years ago…no gain…no improvement in economic performance.  And to survive economically, patients are being rushed through the system and investments in technology, staff and facilities are suffering.  When patients are rushed…they don’t invest in eyewear. 

Doesn’t VSP (and others) recognize that their benefit design actually reduces the ability for Providers to invest in what it takes (people, training, technology, facilities, etc.) to provide the exceptional patient experience that truly sets a Provider apart to begin with?  

What’s the result of these declining provider margins?  My opinion is that the quality of the patient experience from the majority of Providers will spiral lower.  Indeed, based on my “in the trenches” observations, there appears virtually no quality control by VSP beyond that of limited record audits.  I’ve personally seen VSP providers working out of facilities that would be described as “pits;” with staff that can’t walk and chew gum at the same time; with yesterday’s technology; while offering product that would be classified as “crap” and service that is appalling.  It’s sad to say, but there are many VSP Providers that can’t hold a candle to the likes of Wal-Mart…independent or not.  There’s much more then what appears on a patient record that determines quality.

My prediction is that the majority of VSP Providers and discounters like Wal-Mart will ultimately equalize; meeting each other on the price and quality plain.  After all, the optometrists at Wal-mart were trained at the same schools as those who practice in a private setting.  That will force many private Providers out of business; the result of their inability or unwillingness to invest in the expanded medical and fashion experience which the consumer desires.  Without change resulting from investment in the experience, eyecare and eyewear will increasingly become commodities and we all know what happens to commodities. 

How sad this is for consumers.  It’s certainly my belief and first-hand experience that educated consumers are seeking a quality eyecare experience and products that enhance their psyches; just as those same consumers seek quality restaurant experiences.  The two industries are not dissimilar.  How unfortunate it is that, in spite of (or because of?) BOGO and multiple pair discounting, our industry can barely scratch into double digits on multiple pair sales; when every consumer has multiple eyewear needs just as they have multiple footwear needs.  And how ludicrous is it that our industry gleans only $94 per capita when consumers spend $144 per capita on shoes?   Are feet more important than eyes?  Or have we discounted ourselves to death (see my June 22 entry on discounting)?    

So what might VSP do?

VSP might make some changes that would make a HUGE difference in the lives of its providers; and in my opinion, these changes would result in the improvement in quality of VSP’s “product”; limit the trend towards commoditization; and, as a result, help to ensure the survival of its independent provider base. 

 While I don’t profess to have all the answers and I’m sure there are barriers to some of these ideas, perhaps they’ll open a debate?  Perhaps VSP’s leadership will address these issues head-on with its Provider Network?  Or, perhaps VSP will do nothing and continue their path of total domination of its Providers; and ultimately implode through Provider attrition or revolt?      

Why not change your benefit design?:

·         Eliminate all discounts beyond that offered with the initial purchase of eyewear. 

o   The law of the marketplace will ensure that patients receive value, since they still enjoy a choice of 25,000 Providers who are, in turn, competing in a demanding market.

o   20% on a $200 pair of eyewear is not much of an incentive to buy a second pair; that desire must already be in place.  And 20% on a $1000 pair of eyewear is grossly unnecessary; and helps send the message that our industry’s products and services are overpriced.  Why not allow the provider to decide how they’ll incent multiple pair purchases?  Why not allow some creativity…some retailing…into the system?  The entire industry will improve when we get rid of our propensity to offer daily discounts as the only incentive.

·         Raise exam reimbursement to 80% of independent’s U&C nationwide (as determined by an outside auditor).  Then adjust that reimbursement based upon the regional CPI.  Future exam reimbursements should then be adjusted every year or two based upon changes in the CPI.

o   This establishes a more equitable means of determining exam reimbursement vs. the arbitrary means used today.

o   This would also help Providers decide whether to continue acceptance of other plans; if VSP raises their reimbursements, Providers will surely abandon lower end plans.  Without the best Providers those plans will ultimately implode.     

o   While I’ve performed no actuarial studies, my gut says that the resulting small increase in capitation rates can readily be absorbed and explained to VSP’s customers or passed to consumers in the form of higher co-pays.

·         Eliminate the sale of benefit plans to individuals.

o   It makes no sense to sell a discount plan to a Provider’s existing patients; especially when it means that Providers are replacing U&C with 40%+ discounts.  Quality Providers have little concern about competition from the likes of Wal-Mart and Lenscrafters.  Let them compete.

·         Allow on-site lens finishing by Providers.

o   On-Site finishing ensures that investments in lens edging technology and inventory can be reasonably amortized over the provider’s entire patient base.  When 50%+ of a Provider’s patients are ineligible for the service, Providers cannot support finishing on site and the result is a decline in competitiveness.  

Why not change your provider participation requirements?

·         Establish objective criteria for not only what goes on in the exam room, but also the entire patient experience (staffing, training, facilities, products). 

·         Invest in Mystery Shoppers and Satisfaction Surveys to ensure compliance and assist Providers with improving service.

·         The result is an ability to sell against your competitors (EyeMed, Davis, Spectara as well as Walmart, Pearle, etc.) using objective measurements.   Being “independent” is not a label that ensures quality or value.

Why not change your structure?:

• Consider a change to Provider ownership (there are likely legal barriers, but Ken Starr can probably figure this one out).
• Have Providers/Shareholders directly elect the Board of Directors (like most companies).
• Bring your executive and employee benefits more in line with industry; assist your Providers in providing improved employee benefits to their employees (as a recruitment and retention tool).

·         Deliver a reasonable level of excess profits back to the shareholders in the form of a dividend.

There’s little doubt that VSP provides its consumer beneficiaries; indeed the entire health system; with exceptional value.  There’s also no doubt that VSP Providers are facing a groundswell of eroding margins.  As a result, this “value” is coming at the direct expense of the very Providers who deliver it.   And now that VSP totally dominates many Providers’ patient base, VSP appears to be at odds with the very Providers who they say they represent.  Because of Provider’s eroding margins, VSP is effectively forcing many of its Providers to commoditize the patient experience.  Providers are reducing their investments in the very areas that allow them to effectively compete with organized retailers.  This deterioration will ultimately eliminate VSP’s and its Provider’s competitive edge.

VSP controls the lives of 25,000 private practice optometrists.   In my opinion, they have a solemn duty to do what’s right by their Providers.  Will they?   

Comments

[eye4golf]

I appreciate Al's insight and that of those not necessarily in agreement, too. For alot of us 50-60 year old 'boomer' O.D.'s, we were in infancy practices when VSP started (when the Board was made up of optometrists!) back in the early-mid 80's (right?). The biggest issue/problem now lies in the fact that after this many years of having so many loyal patients under VSP, how can you 'get out' without having thousands of disappointed patients wondering why??

I'm concerned that patients will get one of two impressions (these were provided by some of our patients after finding out that we did not sign up for one of the newer plans out there):
#1) Previous patients (that knew that we provided good quality care/services) impressions were that 'those Docs must be a little greedy as they wouldn't accept the discount in what the plan pays'!....or,
#2) New patients that had gotten referred by others (but didn't find our name in 'THE BOOK') thought 'well, they must not have met the "requirements" or "couldn't qualify" to get on the panel!

Sooooo,...either way, the practice,...the docs...end up being demeaned,...meanwhile, everyone is confused and unhappy!
What a way to carry on trying to serve patients and still run a viable healthy business!!?

I long for the days when a large local company created an indemnity plan where they paid $'X' on the exam, $'X' on lenses & frames or contact lenses. Then, everyone was on a level playing field,...patients just paid for the difference, they're happy; docs got paid by company within 2-3 weeks and they were happy. Every patient paid the SAME FEE that was fair (now the non-covered cash-paying patient really does pay a premium for our services, as we've had to raise fees in order to combat the cut that VSP/3rd party reimburses!). Those fees were fairly well defined by the competition/economy of their own locale.
Sooo, how in the H--- did this 'other model' become the monster that controls so much today?? Was it just too many of us that couldn't see the 'big picture' back when and are now too 'milk-toast' or uncomfortable with walking away from it??

P.S. Can anyone dig up a copy of the Optometric Management article from probably 3-5 years ago entitled "How I gave up VSP and Survived" (or some title wording like that)??

[Alec Smart]

MLB, I don't know of any VSP providers that are netting much at all. Get a clue! You may gross $800 an hour seeing 4 patients but you may only net $100 on materials on those four. A token overage on frames sometimes, maybe a small amount from AR sometimes but that's it. So you are saying the "proper business model" for optometry is 7-4, out the door, I'll collect my $100 per VSP patient total and make $70,000/yr if you are lucky? No sir, we are worth more than that. Maybe if you don't care your image is of the chain store, eyeglass peddler, with a shoddy old blue pharmacist smock. Maybe Grandpa Jones OD is okay with old school refractometry and making that but as the primary eyecare provider in America, we need to be reimbursed what we are worth. $62 per exam is a slap in the face. I would say you are the one that doesn't have a clue of what the "proper business model" is. But I guess some are just that desperate they are happy with what ever they are told they will be reimbursed. Thanks for advancing our profession.

[Dr. Ackerson]

I cold opened a practice 7 years ago with no patient base. I really needed VSP to help drive in new patients. They refused because of my past employment with Wal-Mart. It did not make any sense why nor could they really explain why except that I needed to wait 6 months and then re-apply and pay $500 and they would reconsider my worthiness. Fast forward 7 years and my now very busy non-VSP, non-eyemed, non-spectera practice. I have a full optical lab that allows me to build all the glasses for my patients. My profit margins are much higher than average and I see less patients than some of my competition. VSP asked me if I wanted to be a provider at the last convention. Why would I want to take a 50% pay cut I asked them? Once again VSP did not have a good answer except that I could see more patients and make less. Remember, VSP patients displace CASH and Medicare patients who have double the profit margin. How full is your schedule and how full does it need to be?

[Mike]

Thank you Al for looking at this issue and helping create a visible picture of VSP. I have to decide whether to close a practice in the next few years, not due to not being busy but due to profitability because it is a VSP practice in an area with a high cost of living. The reimbursements aren’t keeping up with the cost of maintaining the practice. This is an established practice of over 50 years and in the last 5 to 6 years has gone all VSP (90to 95%)

[Aaron]

This is the 3 headed Gorilla and I do not see that this bodes well for Optometry. They dangle the provider reimbursement carrot and then take it back on the material side. It becomes imperitive to provide an amazing experience each and every time and look at each patient as a total margin at each visit. Multiple pairs of eyewear, multiple types of service(Medical, CL, Comprehensive).

[mlb]

john, i'm not a shill for anyone. Lets see, a paulty $62 per refraction (times four) plus lets say $140 product gross (times four)equals $808 per hour. whats wrong with that?
perhaps you do 2 patients per hour at $400 per patient. I don't have a problem with either business model, why do you?

[john]

Just what is the "proper" business model there MLB? To see 4 patients an hour at a paltry $62/refraction? Working you and your staff to death, by trying to make up in volume. Cleinman clients make well above the norm nationally, myself being one of them, because Al gets it. He knows business. Are you an adminstrator for VSP or just a happy refractionist, doing the job any tech can do, just selling eyewear?

[mlb]

i have an efficent and friendly staff, sell decent quality products, charge reasonable rates, see mostly VSP patients in an efficent manner, and make way above the norms. this is without esoteric equipment (i can refer out for these tests) or even a sign on my property. Cleinman does not speak for me but i'm sure he appeals to the vast number of OD's who are clueless at understanding the proper business model of optometry and will remain that way. VSP does not do everything correctly, but at least they provide a critical mass of patients. It is up to me to make sure they return and refer others in the process.

I do not really care if VSP is tax exempt or not or if they purchased Marchon, for those items are beyond my control and ultimate understanding of the intended or unintended consequences. As long as VSP continues to provide my office patients in reasonable numbers, at reasonable reimbursements, i will not bite the hand that feeds me.

As long as there is an oversupply of OD's, the insidious removal of prime patients due to LASIK, new optometry schools pouring out more of us, the success of plans inferior (for the OD's) to VSP, the situation will worsen and our fees will be pressured downward. I hope the VSP can hang in there for all of us, even those of us who look for magic bullets to make up for there own genuine shortcomings.

From my perspective, there are may villians comfronting optometry, i consider VSP my main true supporter and tire of the mindless attacks i come across.

[Lee]

We have let 3 workers go, did not renew the DEA license, put the wife to work, sell crap frames. VSP and others have destroyed this profession.

[Tory Moore]

To answer your question - NO! VSP's Corporate greed has taken over at the expense of our profession. The CEO and directors will milk the profits and get theirs while the getting is good and then the market will eventually equalize VSP with the others as you said. By then they will be dead or retired. They don't care.