Where Have All the Profits Gone?

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Curtis PickelleWhile I have used this space to discuss the impact of consolidation on the business of medical imaging, another indicator that the marketplace is maturing is the methodical erosion of profit margins in virtually every segment of the distribution of goods and services. I take that back: The insurance-company payors do not seem to be sharing as much pain as the providers, suppliers, and service organizations that support imaging, but that is a column for another day. Fact: It is a basic tenet of our economy that profits are the lifeblood sustaining viability and growth (while providing for continuing investment in innovation). Although the concept of profit has been vilified by those who really do not understand its necessity as a critical element in this most basic law of economics, anyone who has tried to build a practice or hospital without profits has discovered—the hard way—that one cannot provide high-quality services unless there are the margins available to fund them. The best business transactions and the most beneficial negotiations consider the fact that each side in an exchange needs to have its reasonable profitability protected so that it can fulfill its obligations to the other party. Most of the current difficulties experienced by practices renewing payor contracts spring from the fact that they are facing ratcheting down their profitability while ensuring volume protection. The old maxim that we can afford to lose a little money on each procedure because we will make it up in volume is no longer an abstract and absurd concept; it is expected, by some payors, that providers will do just that. Diminishing profit margins are an unfortunate result of a maturing marketplace, which is also characterized by consolidation and commoditization. It is in the commoditization of products and services that such erosion of margins is experienced, and this economic and business reality needs to be accepted as an element of the imaging profession that is here to stay. The issue for practices is what to do about it—how to function and thrive under this new dynamic. Make no mistake: One can develop strategies designed to take advantage of diminishing profitability, but they need to be smart, innovative, and conscious. First and foremost, it is critically important for the entire organization to understand that the existence of good profits is a healthy part of the enterprise, and that profitability is the manna that allows the practice to support its brand and core values, including the delivery of top-quality medical care. Each person in the organization needs to understand that one should not apologize for making a profit and needs to sustain the pride of the practice in all of its dealings with those who control referrals and contracts. Effectively communicating why and how the practice’s success ensures this high-quality delivery of care can make (and has made) the difference in difficult negotiations. One should feel confident about defending the necessity of protecting margins. What will not work is for practice leaders to assume that everyone understands their need for reasonable profit margins—or for them to whine about how the payors nickel and dime their way through contract renewals—when virtually no member of the practice’s team could recite how profits feed the practice’s value proposition to its customers. The bottom line is that as a result of a market experiencing meteoric growth, these profits have been taken for granted for too long. In some cases, they have even been seen as entitlements. Most health-care executives and radiologists I know understand that those days are long gone, but there remains some confusion about how to deal with this new reality. My point is that there should be no mystery in this. I (and others) have been discussing this maturing marketplace for some time now. We have also discussed an array of solutions designed to help executives understand the business fundamentals that govern a mature marketplace. Chief among these is the rise of a platinum level of customer service as the star of building customer loyalty, thereby earning sustainable profit margins for a practice. Where have all the profits gone? They are now cleverly disguised within the organization’s brain trust—the innovators and champions within the practice who live, each day, the branding proposition and who find ways to make something positive happen. Executives need to spend more time looking for their margins within this most valuable asset. Curtis Kauffman-Pickelle is publisher of ImagingBiz.com and Radiology Business Journal, and is a 30-year veteran of the medical-imaging industry. He welcomes your comments at ckp@imagingbiz.com.