The year 2020 started off very strong for ophthalmology, both in terms of same-store growth and with continued M&A activity. Then, as is true for nearly everything, COVID-19 changed it all.

The American Academy of Ophthalmology on March 18 issued guidance strongly urging the discontinuation of all but the most urgent treatments – meaning only retinal injections or injuries, such as foreign objects in the eye or ruptured globes, were allowed. Some clinics started to open for less urgent procedures starting late last month, such as for cataract surgery for significantly impaired patients. More reopenings started in May based on geography. Practices doing purely elective procedures, such as refractive surgery, are still largely shut down.

Despite these setbacks, the industry will likely recover quickly as the world moves on from the pandemic. The reason is simple: With only a few exceptions, eye care is not elective. Services for cataracts and retinal disease, the biggest sources of revenue in the ophthalmic industry, are covered by Medicare. Without these procedures, patients eventually can’t see. While there are a lot of deferrals now, there won’t be much lost revenue opportunity over time.

Most revenue for ophthalmologists, who annually generate anywhere from $500,000 in revenue to as much as $3 million, comes from Medicare either directly or through Medicare Advantage programs. Most Medicare recipients are already retired, so unemployment driven by COVID-19 hasn’t affected their earnings or the availability of insurance coverage.

The areas at greatest risk are upgrades to premium intraocular lenses (IOLs) and laser cataract surgery; certain oculoplastic procedures, which are at least in part cosmetic in nature; and refractive surgery procedures. But even in these cases, there likely won’t be much of a long-term effect. For example, with premium IOLs, there’s a good case that the increased cost of the procedure is justified by eliminating the need for corrective lenses post-surgery. Practices that are good at communicating this benefit to patients are going to see little drop-off in demand.

The Impact of COVID-19

Overall, the industry has lost 70% to 80% of revenue over the past couple of months as compared with the same months last year. Revenue loss has ranged widely but overall has been intense at practices where the shutdown has been strict, such as New York. For certain subspecialty settings, such as retina, revenues declined much more modestly.

Going forward, there won’t be a big issue in terms of additional costs related to COVID-19. Ambulatory surgery centers (ASCs) already utilize personal protective equipment (PPE) as well as rigorous cleaning approaches. In other clinical settings, the cost may rise to meet COVID-19 standards, such as PPE, masks, antiseptic gels, and cleaning supplies, but the hit to the cost structure will probably be less than a half a percent of revenue.

Some loss in efficiency will occur as waiting room density is reduced to support social distancing. But practices are already adjusting to this new reality to minimize the impact, such as implementing patient portals and other technologies to enable remote patient check-in. Patients are being asked to wait in their cars until they receive a text message to enter the building, when the doctor’s ready to see them. Patients are being asked to enter the clinic by themselves.

Telehealth has also taken a huge leap forward in the past couple of months. Historically, doctors, payers, and patients were reluctant to embrace it, but it’s here to stay. People have adapted to and become comfortable with new behaviors during this time of isolation.

The Economics of Ophthalmology

While patients have adjusted their behavior, many ophthalmology practices are reckoning with a pause in cash flow, which, until the pandemic, had been both consistent and reliable. The patient financial obligation is usually paid before a procedure or service is performed. Medicare pays quite promptly, typically within 20 to 25 days, if paperwork is completed properly and submitted on time. Commercial insurance typically pays in 30 to 45 days. Medicaid is slow, but that generally represents a small percentage of these practices’ revenue. Of course, with most procedures paused, so have payments.

Given that the revenue cycle has been so predictable, practices haven’t felt the need to keep cash reserves. Most small practices don’t have much in terms of lines of credit to turn to either. Now that we’re weeks into the shutdown, practices will have to deal with their costs, such as rent, utilities, security services, and a portion of compensation for key personnel, which make up about 25% of typical revenue. But if a practice is running at less than 25% of normal collections, physicians will soon be underwater, which means they must borrow money, take money out of their own pockets, or find money somewhere else to cover fixed costs.

Over the course of 2020, I anticipate that most of the loss will be made up. For general and integrated practices, at least 80% – and, likely, 90% – of the loss will recover. For subspecialty practices, at least 90%. The one segment likely to see more lasting damage is practices that are heavily reliant on refractive procedures. They will end up between 70% and 80% for the year but may recover most of the remaining gap by the end of 2021.

Smaller practices run by a single physician on the verge of retirement are struggling the most of all. They’re typically general practices that tend not to be early adopters of technologies and don’t have a lot of cash reserves. Opportunities may exist for other practices or private equity to acquire those practices at a very low cost.

Expect Consolidation

From a pure business perspective in the ophthalmology sector, the pandemic may be beneficial in that it will bring down valuations and give practices another reason to sell. There will be a continued strong trend toward consolidation; the drivers are simply too strong to resist. Practitioners need access to liquidity, and senior doctors want to diversify assets or believe it’s useful to have a financial partner during times like these. Meanwhile, private equity is sitting on large amounts of cash. Ophthalmology is a large industry that’s still fragmented, with significant opportunities for professionalization. There are significant synergies to scale, especially in marketing and digital technology, procurement, and access to capital.

That said, a pause will likely happen over the next 6 to 12 months as people figure out the landscape. Most firms I speak with are focused on their existing portfolio companies, liquidity requirements, and operational adjustments. They’re figuring out how to ensure that people are productive and efficient at home, or how to get people back to the workplace safely where that’s necessary.

The question is, how do investors forecast activity and determine how quickly the economics will return? What about the possibility of a second wave of COVID-19? What valuation adjustments are necessary when access to leverage is limited? Another tailwind is a potentially huge wave of litigation due to practices not paying rent or vendors, as well as possible lawsuits for exposing employees to health risks. There may also be litigation against providers for failing to identify patients’ urgent health risks.

These issues may cause a delay, but over the longer term, the trend toward consolidation in the ophthalmology sector will resume.

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About Bill Hughson

Bill Hughson is currently the Chairman of the Board at Anova Fertility. Until recently, he served as CEO of Blue Sky Vision, a private equity-sponsored platform in the eye care space, where he more than doubled revenue and profit. Previously, he served as CEO and Vice Chairman of IntegraMed Fertility, the largest provider of fertility services in North America. His prior experiences include serving as President of the Healthcare Group of DeVry Education, Vice President of DaVita Healthcare Partners, President of DaVita Rx, President of AG Ferrari Foods, and President of Noah’s Bagels.

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This article is adapted from the May 14, 2020, GLG teleconference “Private Practice Outlook: Ophthalmology.” If you would like access to this teleconference or would like to speak with Bill Hughson or any of our more than 700,000 experts, contact us.

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