Introduction
Refractive surgery over the past decade has been the fastest-growing segment of the ophthalmic market. Clinicians continue to gain greater experience with the current technology and procedures even as new innovations move from investigational studies to widespread use. Ophthalmic surgeons interested in the economics of starting and maintaining a refractive practice must first consider the potential size of the market, the speed of its development and the necessary financial investment. To that end, this discussion reviews patient demographics, the process of market development, and an analysis of various practice economics.
Development of Refractive Surgery
The U.S. Food and Drug Administration (FDA) approved photorefractive keratectomy (PRK) for mild myopia for laser manufacturers Summit Technology in 1995 and Visx in 1996. PRK quickly supplanted radial keratotomy (RK) as the most widely-practiced refractive procedure. Since then, laser in situ keratomileusis (LASIK) with the combined use of the microkeratome and the excimer laser has become the predominant refractive procedure.
It is often difficult to obtain reliable data on the volume of elective procedures such as LASIK, because these procedures usually are not covered by insurance. The industry does provide estimates of the number of procedures performed. The number of RK procedures in the United States increased from 20,000 a year in 1990 to approximately 250,000 procedures in 1994, and then declined following the introduction of PRK in 1995. In 1996, doctors performed approximately 100,000 PRK procedures. In 2000, approximately 1.5 million refractive procedures were performed, mostly LASIK. This procedure now comprises the major growth segment of refractive surgery due to its rapid visual recovery, minimal pain, and the ability to treat higher degrees of myopia. Other treatment modalities that have been developed include intracorneal arcuate segment implants (KeraVision) and phakic intraocular lenses placed within the anterior or posterior chambers for refractive correction.
Patient Demographics
The prevalence of myopia in adults worldwide is estimated at 25% to 30%. Of the remaining individuals with refractive error, most are in the low hyperopic range. An estimated 15% of the population has astigmatic correction greater than 1 D and 2% have greater than 3 D of astigmatism. The prevalence of presbyopia in the United States is 31%. Most likely owing to emmetropization, most spherical correction errors lie in the range of myopia (less than 1 D), too low to justify surgical correction in most instances. Assessment of the potential market for refractive surgery must focus on patients with enough refractive error to compromise their visual performance and quality of life, and who, therefore, currently require corrective lenses.
Research from 1996 showed that an estimated 163 million persons in the United States required corrective lenses. Approximately one third of the U.S. population are in their presbyopic years. The low myopes in this category remove their spectacles for reading.
Various other issues help determine the potential refractive market, including age, gender, ethnicity, and discretionary income. Age is important because the very young and very old may not be appropriate candidates. Refractive surgery is particularly well suited for the pre-presbyopic adult population. The age at which patients seek surgery generally falls between 25 and 55 years old, with the mean in the mid-to-late thirties. Data for RK and PRK show that a smaller percentage of minority populations have had either procedure compared to the percentage of whites. Men are more likely than women to seek refractive surgery, by a ratio of 3:2.
Because refractive surgery is an elective procedure, discretionary income plays a significant role in determining the market. In some markets, LASIK costs $2,000 or more per eye. With the advent of publicly traded laser center companies and increased price competition, the cost of refractive surgery has fallen to as low as $500 per eye for patients in certain locales. It is safe to assume that a combined household income of $35,000 or greater is a realistic threshold requirement. Nationwide, that means about 38% of households can be considered part of the potential refractive market. Of course, this percentage may vary tremendously from one locale to the next.
Refractive Market Estimation
Once the total population is filtered by these various factors, we can establish the target pool of potential refractive candidates. The next step is to determine the actual number of patients who will opt for this elective procedure, what is called the conversion rate. Annual conversion rates depend on factors such as consumer knowledge and interest, marketing, and the visual outcomes of patients who have undergone the procedure.
Past experience with the introduction of new technology may help in understanding the conversion factor for PRK or LASIK. The target population for new technology generally falls into a binomial distribution, ranging from innovators to late adopters. The progression through this population from the early adopters to the majority of the population generally takes 5 to 10 years. New technology introductions may show a biphasic curve, with a small initial peak of early adopters. Acceptance of new technology by the general population comes only after seeing positive results of the initial adopters. That was the case with soft contact lenses in the 1970s. It took more than a decade for soft contact lens wear to penetrate the majority of the potential candidate pool. The conversion rate for soft contact lenses and RK did not exceed 2% of the targeted pool. It is likely that the adoption of PRK and LASIK may follow a similar trend.
Based on these assumptions and a U.S. pool of 163 million corrective lens wearers, of which 77 million are myopes, a conservative prediction of the targeted pool is approximately 12 million, matched by refractive error, age, and income. With a conversion rate of 2%, that means 240,000 patients electing refractive surgery each year. If 75% were to undergo a second-eye procedure, this amounts to 420,000 procedures annually. Of course, within various regional markets, there may be significant variations.
When hyperopes, astigmatics, and presbyopes are added as potential candidates, and the trend toward increasing comfort and acceptance of refractive surgery among the general public is considered, it is clear that there is tremendous possible upside growth. Conversely, media-driven concerns about "hidden dangers" can dramatically reduce demand. Witness the recent 50% reduction in demand for laser vision correction in Canada in response to largely anecdotal reports of glare and night-driving symptoms.
Consumer Marketing
Driven in part by extensive marketing by commercial refractive centers and to a lesser extent by private practitioners, Americans have become much more aware of refractive surgery within the past few years. Acceptance of refractive surgery is influenced by factors such as visual results, word-of-mouth referrals, price, and marketing strategy. Internal marketing plays an important part in this effort. Refractive surgery patients are often willing to spend personal income for a higher level of service. As such, practices interested in generating higher refractive volume will be required to tailor to their needs by offering weekend and evening appointments. In addition, refractive surgery patients may require more time to educate and convert to surgery. This may entail training staff to become "refractive counselors" who are able to help patients educate themselves about the surgical options.
External marketing relies on mass media advertising campaigns and a telemarketing infrastructure. One method of determining the efficacy of a marketing program is to analyze the cost per lead (CPL) and the cost per surgery (CPS). For example, the Canadian marketing program's CPL is approximately $50 (Canadian) with a CPS of $200 or less. As the market expands and word-of-mouth referrals increase, the CPL and CPS should become lower. Given the higher media costs in the United States, a CPL of $100 or less is considered an effective marketing campaign.
However, even after reaching a target CPL or CPS, practices can still lose money per procedure. The costs can be higher in the early phases of building a practice when advertising costs are higher relative to surgical volume. All the target indicators must be in balance to achieve profitability. This issue is illustrated dramatically by the private and publicly held laser centers that have been willing to absorb tremendous financial losses as they seek to obtain market share and establish brand identity through aggressive advertising and positioning as the "low-cost provider." The recent bankruptcy of some of these commercial laser center chains reflects the difficulty in achieving profitability via a high volume/low price business module.
Economics of Refractive Surgery
Refractive surgery offers lower margins than traditional ophthalmic surgical procedures. It involves both high fixed costs and novel business risks. Financial models that estimate the cost of owning and operating a refractive surgery center with an excimer laser reveal that break-even points are several hundred procedures per year. One approach is to share the risk of ownership with other providers or to gain access to a corporate laser center.
The costs of running a refractive laser center include the potential cost of royalty fees as well as the cost of maintaining the laser optics and the cost of avoiding technological obsolescence. The cost of facility management includes personnel, both front-desk staff as well as technical assistants.
Originally, a royalty fee of $250 per procedure was imposed by Summit Technology and Visx, Inc., the manufacturers of the first two commercial excimer lasers approved by the FDA. There were arguments for and against royalty fees. Among the supporting arguments was the notion that this revenue stream was required to reward investors for helping develop new medical technology. Manufacturers maintained that sufficient revenue could not be obtained simply through the purchase price of the lasers. Among the arguments against a per-procedure royalty fee was that patenting of medical procedures stifles innovation and limits the access of patients to potentially superior technology. In any event, with the competition brought on by the introduction of other commercial excimer lasers, royalty fees have since dropped substantially, to about one half of the previous $250 level. Currently, one laser manufacturer charges no per procedure fee.
Arthur D. Little has developed a refractive surgery financial model that includes three proformas, representing a range of practice types. The small proforma relates to a private practice with 40 refractive surgical days per year, the medium model represents a group practice with 60 surgical days per year, and the large model is for a designated refractive surgery center. The model assumes that the lease of the laser will be for 5 years with typical lease terms. Marketing costs include direct mail and some broadcast advertising matched to the size of the practice. This model utilizes a royalty fee of $250, a procedure fee of $1500 per eye and a 20% comanaged population at a fee of $300.
As a result of negative cash flow for the small model and a near break-even point for the medium model, the analysis predicts that few practices would logically invest directly in an excimer laser unless practitioners pool their resources. Practitioners interested in leasing the laser have the option of a fixed payment or per-procedure lease. Fixed payment leases are usually amortized over 5 years with fixed monthly payments. Per-procedure leases are based on the actual number of procedures performed. The program involves payment of a fee based on procedure volume, for example, $250 for the first 500 procedures and $75 for subsequent procedures.
Cost Effectiveness of Refractive Surgery
With the advent of new technology, consumers invariably compare the cost of the new technology with what is already in place. In the case of refractive surgery, this means comparing the cost effectiveness of spectacle and contact lens wear versus that of refractive surgery.
Javitt and Chang1 compared the cost effectiveness of the procedure from societal and individual perspectives. The direct and indirect costs of spectacle and contact lens wear were based on the cost of professional services and materials and the time lost from work to obtain care. Similar parameters were used to determine refractive surgery costs. The cost was determined assuming a surgical fee of $2000 per eye.
The analysis showed that the surgical option was as cost effective as wearing soft contact lenses over a 10-year period and less expensive over 20 years. With decreasing surgical fees, the cost of refractive surgery is at least comparable, if not favorable, to that of wearing corrective lenses.
Conclusion
Refractive surgery is still in a stage of market development and is likely to experience continued growth over the next several years. Current excimer laser technology, augmented for expanded treatment ranges, will enable a larger percentage of the target pool to undergo refractive surgery. New technology, including lasers with eye-tracking capability, intracorneal rings, and intraocular lenses, potentially can expand the current treatment range or the patients willing to seek out surgical correction.
However, refractive surgery remains an extremely challenging practice from a business perspective due to its high costs and strong competition. Surgical fees are under constant downward pressure due to consumer retail pricing forces. Competition is a major issue because of the large perceived market for refractive surgery. Many business ventures are developing businesses in refractive surgery through commercial laser centers. At the same time, costs for refractive surgery are high, primarily due to the high costs of marketing and operating the excimer laser. This creates a highly competitive environment that favors the survival of those with large reserves of capital, strong management and the ability to minimize costs.
Because of retail pricing pressures, high operating costs of the excimer laser, small initial patient pools and an intensely competitive marketplace, refractive surgery providers must run efficient practices that deliver the highest quality of care at the lowest cost to penetrate the mass market. The combination of these factors creates low margins for covering costs and means that ophthalmologists who provide refractive surgery must employ good business skills to develop and sustain a refractive practice.
A decade from now, refractive surgery is likely to be a routine alternative to glasses and contact lenses. Refractive surgery has evolved from a procedure performed by a small group of practitioners to a mainstream consumer commodity. The economic forces driving the refractive market will select for business models that deliver the highest-quality vision correction at the lowest cost. Practitioners who can deliver this level of care within certain financial boundaries will ultimately succeed in the evolving world of refractive surgery.
Reference
1. Javitt J, Chiang Y. The socioeconomic aspects of laser refractive surgery. Arch Ophthalmol. 1994;112:1526-1530.
Bibliography
Kliman GH, Taylor KP. The economics of refractive surgery. In: Wu HK, et al, eds. Refractive Surgery. New York, NY: Thieme Incorporated; 1999.