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The 2008 financial collapse of the US economy was the economic event of our lifetime. In the fall of 2008, $12.4 trillion of America’s net worth evaporat-ed in a few weeks’ time. Even though this event was

preceded by a dramatic 42.9 percent drop in the Consumer Confidence Index between January 2007 and November 2008, it caught many off guard, and it would continue to do so for a number of years. It is against this backdrop—the Great Recession—that Allergan Consulting decided to ana-lyze the event’s effects on the hundreds of aesthetic physi-cians that we serve.

Allergan Practice Consulting (Irving, CA), in cooperation with BSM Consulting (Phoenix, AZ), develops and maintains the largest aesthetically oriented financial benchmark-ing database in the United States. At any given time, this database reflects key financial metrics from 500+ cosmetic dermatologists, aesthetic physicians, plastic surgeons, and other professionals who participate in our annual financial benchmarking surveys. We acknowledge that the practices participating in the surveys are skewed to cosmetics and not average practices.

During our 2012 financial survey activities, where we collected 2011 financial data, many physicians sought our insights on the pace of the economic recovery. At that time, we knew various performance metrics were improv-ing off the 2009 lows. We knew Net Collected Revenue per Physician FTE median and mean values, for instance, had

grown 5.6 percent and 7.7 percent, respectively, compared to the 2010 values. We also knew cosmetic dermatologists enjoyed somewhat higher corresponding growth rates, followed by board-certified plastic surgeons and other aes-thetic physicians in our medical aesthetical database. We even saw operating margins (operating income to physician owners) up nearly 3 percent for 2011 versus the 2010 values.

Still, we continued to have many physician discussions that revolved around the question of when aesthetic prac-tices might return to pre-Great Recession business levels. At that point in time, we had not gone back and examined the larger Great Recession time frame, but as we completed our annual cycle of financial survey work in the fall of 2012,

The Effects of the Great Recession on Medical Aesthetics

An analysis of how aesthetic physicians have been affected

and insight on the pace of economic recovery.

BY LEE H. BOWSER

“We see more physician owners undertaking structured efforts as a way of thinking and planning

ahead. They are attempting to build consensus across practice staff and

taking steps to establish levels of accountability within the business.”

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we decided to compile a snapshot of relevant 2007-to-2011 information/data (the Great Recession time frame) to try to answer such questions. We were surprised by what we learned.

Initially, we focused on physician revenue production (i.e., Net Collected Revenue per Physician FTE) and found that the 2011 median value of $1.274M was actually below the corresponding 2007 median value of $1.278M for physi-cians in our medical aesthetics database. This calculated to a negative (-0.08) percent compounded average growth rate (CAGR) from 2007 to 2011—a flat trend line in practical terms, which we did not expect to see. Board-certified plas-tic surgeons exhibited slight growth at a 0.13 percent CAGR; both cosmetic dermatologists and other aesthetic physi-cians in our database experienced negative growth rates (see Exhibit 1).

Corresponding Net Collected Revenue per Physician FTE mean values were to some extent better (positive), but not by much. The overall mean value in our medical aesthetics database from 2007 to 2011 on this measure improved by a mere 0.28 percent CAGR (from $1.433M in 2007 to $1.449M in 2011). Over the five-year period, cosmetic dermatologists experienced a 1.73 percent CAGR, board-certified plastic surgeons saw a 0.84 percent CAGR, and other aesthetic physicians (this category includes specialties such as facial plastics, ocular plastics, and others) came in with a negative (-1.81) percent CAGR (see Exhibit 2). Five years proved to

be a long time-frame to experi-ence essentially flat physician revenue production, so we came to better understand the questions we were continuing to hear from the physicians we serve nationwide.

We subsequently expanded the review and analysis of our medical aesthetics database to examine all facets of the aesthetic practice as a business. After all, our financial bench-marking survey work focuses on the aesthetics practice as a business—it is what we unique-ly do for physician owners across the United States. While our initial 2007-to-2011 analysis showed physician-revenue pro-duction was negative to flat, we were heartened to learn from our larger database analysis that physicians demonstrated

resilience in many ways. We often advise physicians that at the end of the day, the aesthetic practice is just a business, and, like all businesses, continually understanding its finan-cial performance (and the customer, employee, and business process performance) is essential to an owner’s business suc-cess. So, we were surprised by what we learned here, too.

TOP-LINE REVENUE GROWTHTop-line revenue for the physician practices in our medi-

cal aesthetics database grew by a 2.6 percent CAGR from 2007 to 2011 (i.e., on average, 2.6 percent of new revenue each and every year over the five-year period). The finding stood in sharp contrast to our initial finding of flat physician revenue production. The top-line revenue median value grew from $1.973M (2007) to $2.189M (2011). It actually fell about 7 percent for the two years (2008 and 2009) imme-diately following the economic downturn, but the point is that physician owners in our database with whom we work throughout the year figured it out and took corrective mea-sures.

Of particular note in our analysis is that the share of top-line revenue from other than physician-professional service revenue lines (i.e., non-physician professional service revenues and other business lines such as retail sales rev-enues) grew 18.75 percent from 2007 to 2011. Conversely, the share of top-line revenue produced by the physician’s hands fell by 10.2 percent, presumably as a result of the

Exhibit 1. Physician revenue production as indicated by Net Collected Revenue per Physician FTE

2007-2011.

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Great Recession’s effects on reduced consumer demand for certain physician procedures and services. Physicians directly accounted for nearly 65 percent of the practice revenue pro-duced in 2007, but saw this share fall to about 58 percent in 2011 (see Exhibit 3).

PRACTICES DIVERSIFIED Revenue from non-physician providers, which our

national database defines as either nurse practitioners (NPs) or physician assistants (PAs), alone, grew at a 3.14 percebt CAGR from 2007 to 2011. The Revenue per FTE Non-physician Provider median value grew from $409K per FTE (2007) to $462K per FTE (2011). In fact, non-physician provider revenue growth was evident early in the five-year period growing by 7.4 percent in the first year of the eco-nomic downturn (2007 to 2008), falling somewhat in 2009, rebounding to a 12.7 percent growth rate for 2010, and then falling 1.5 percent during 2011. However, the overall five-year growth trend and benefit to the aesthetic practice as a business is undeniable.

Diversification also is evident when examining medical procedures over the 2007 to 2011 time frame. Surgical (inva-sive) procedures declined over the period, experiencing a negative (-1.09) percent CAGR from 2007 to 2011. Surgical procedures fell a cumulative (-19.6) percent during 2008 and 2009 before beginning a modest recovery trend for the

remainder of the period, but a dramatic shift in the volume of surgical procedures that we track took root, which was still not recovered by the end of 2011 (in our analysis, 2011 remained 7.3 percent below the 2008 levels). Non-invasive procedures (e.g., neurotoxins, dermal fillers, and similar pro-cedures that we track as part of our financial benchmarking sur-veys for the aesthetic practice) grew dramatically over the five-year period—a 13.7 percent CAGR over the period (i.e., on average, each and every year). Non-invasive procedures were up 31.3 percent during 2008 alone, and up another 20.4 per-cent during 2011. Patients as consumers of aesthetic services opted for lower-priced, non-invasive procedures.

OPERATING MARGINS DECLINEDOperating income margins (defined as what physician

owners take out of the business from which they pay them-selves and other licensed providers who diagnose—the MGMA model) did experience a decline over the period, and by 2011 had not returned to 2007 levels. Aesthetic prac-tice operating margins in our analysis saw a (-1.55) percent CAGR decline from 2007 (median value of 37.9 percent) to 2011 (median value of 35.6 percent).

Operating margins, however, are calculated as a percent of total top-line revenue. Because top-line revenue in our analysis grew at a 2.64 percent CAGR between 2007 and 2011, physi-cian owners in our analysis were taking more out of the busi-ness in absolute dollar terms in 2011 when compared to 2007. Physician owners did experience lost income in the intervening years, notably in 2008 and 2009, as they coped with changing business situations and then initiated various business changes. This is what business owners are driven to do.

OPERATING EXPENSES (OVERHEAD)The inverse of operating income margins, of course, is

operating expense ratios (overhead rates). However, raw operating overhead rates (i.e., total operating expenses as a percent of total top-line revenue) can be misleading. For instance, our analysis for the 2007 to 2011 timeframe shows that operating overhead rates went up in 2007 (62.1

Exhibit 2. Compounded average growth rate (CAGR) from 2007 to 2011.

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percent), in 2008 (65.5 percent), and peaked in 2009 (66.8 percent) before declining somewhat in 2010 (65.4 percent) and, again, in 2011 (64.4 percent). But what really happened in terms of business expenses?

Exhibit 4 summarizes median value operating expenses from the 2007 to 2011 analysis. What is common across all of the major expense categories are reduced expenditures dur-ing the 2009 “trough” of the Great Recession. The exception is a slight increase for rent expenses that year; we suspect prac-tices engaged in seeking longer-term relief in rents or financ-ing costs and/or even making physical changes/improvements

to the practice site. Aside from the staffing,

rent, and marketing expens-es lines, it is noteworthy that “other expenses,” as report-ed from the financial state-ments of the practices, were managed to near-flat growth as a percent of top-line reve-nue (at 39.4 percent in 2007 to 40.3 percent in 2011—a change (increase) of less than 1 percent). Considering our finding of diversification (growth) in provider types producing revenue in the aesthetic practices over the same period, it represents a positive business feat.

Marketing expenses over the period are also notable. We track market-ing expenses in our financial benchmarking survey work because practices often do not track and/or understand (i.e., learn) “the return” to

the practice as a business from such expenditures. Clearly, aesthetic practices in our analysis managed marketing spend-down over the five-year period as a percent of top-line rev-enue as it was essentially flat in absolute dollar terms.

KEY SUCCESS FACTORS: WHAT WE SEESeeing beyond the numbers is what we try to do with the

aesthetic practices with whom we work across the nation. This first-ever review of the effects of the Great Recession on our medical aesthetics database supports many of the same insights and findings we are seeing.

Adopting Financial Discipline. We see more physician owners measuring and reporting (i.e., learning) as a way of managing change forward. Things don’t just happen and the numbers in our analysis bear out that physician owners and practice administrators are managing for improved performance.

Undertaking Business Planning. We see more physician owners undertaking structured efforts as a way of thinking and planning ahead. They are attempting to build consensus across practice staff and taking steps to establish levels of accountability within the business. From simple to sophisti-cated, depending on the practice setting, increased effort in this area is quite evident.

Business-wide Practice Assessment. We see more physi-

Exhibit 3. Physicians directly accounted for nearly 65 percent of the practice revenue produced in

2007. This share fall to about 58 percent in 2011.

The aesthetic business is straightforward—it’s about great outcomes and great customer service. The challenge lies in executing on these two distinctly different planes—the clinical side as well as the business side. You cannot have suc-cess in one without being successful in the other—patients as customers eventually vote with their feet if both great outcomes and great customer service are not evident when discretionary spends are involved. Measuring to learn, com-municating and building consensus, and establishing incen-tives and accountabilities are hallmarks of executing change.

PRACTICAL POINTER

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cian owners using and embracing our practice assessment tools as a basis for pursuing changes and improvements. Alex Horniman, PhD, from The Darden School of Business Administration, University of Virginia, suggests organiza-tions tend to operate from positions of “knowing” (i.e., habits and simply reacting) as compared to undertaking “learning” (i.e., making choices based on what is learned). He argues the tensions between habits verses choices can be great, and that moving from a “knowing” to a “learn-ing” culture can be huge for an organization. Core to the variety of benchmarking surveys and analytical work undertaken by Allergan Practice Consulting is the notion of learning—of assessing the business situation—as a basis for subsequent choices for the physician-owner to make. We strongly believe in the approach.

Execution. We see more physician-owners providing leader-ship in the aesthetic practice. We advise physician-owners that the aesthetic business is straightforward—it’s about great outcomes and great customer service, but the challenge is executing on these two distinctly different planes—one clini-

cal; the other business (we argue you cannot have one without the other, i.e., patients as customers eventually vote with their feet if both are not evident when discretionary spends are involved). Measuring to learn, communicating and build-ing consensus, and establishing incentives and accountabilities are hallmarks of executing change. Again, things don’t just happen in organizations—not even in aesthetic practices as businesses.

UPDATEAs press time neared and we were finalizing this

article, we were in the process of updating our medical aesthetic database based on 2012 survey findings (during 2013, we survey and collected 2012 information and data, nationally). Here is what we learned comparing the 2012 survey results to the aforementioned findings and trends covered in this article:

Physician Revenue Production. The 2012 financial survey update shows physician revenue produc-tion continued to decline. Net Collected Revenue per FTE Physician median value in our 2012 survey fell to $1.246M, (-2.2) percent below the corre-sponding median value of $1.274M for 2011; the overall mean value declined to $1.428M, which is a (-1.4) percent decline vs. the corresponding 2011 mean value. Effectively, 2012 survey findings further exacerbated the long-term trends at play on this metric and effects of the Great Recession on overall physician revenue production (i.e., pro-duced by physician’s hands). Median values for

board-certified plastic surgeons and cosmetic dermatologists, however, did register improvements of 1.8 percent (to $1.33M) and 7.2 percent (to $1.454M) for 2012 compared to 2011, respectively. Our other aesthetic physicians category showed a (-9.1) percent decline in Net Collected Revenue per FTE Physician (to $1.023M) in our 2012 survey.

Top-Line Revenue Growth. Our 2012 survey update found top-line revenue for the practices overall grew to a median value of $2.121M. This growth, however, was below the corresponding growth rate in the previous year and, thus, negatively affected the longer-term recovery trend. While the 2007-to-2012 five-year trend showed a 2.6 percent CAGR, the effect of the 2012 survey findings saw it fall to a 1.46 percent CAGR for the one-year longer, 2007 to 2012 period, trend.

Practice Diversification. Revenue produced by non-physician providers (NPs and PAs in our surveys) in our 2012 financial survey saw median values increase to $480K per Non-physician FTE Provider versus the 2011 median value of $462K—a nearly 4 percent increase. Similar increases were evident for our “other

Exhibit 4. Median value operating expenses from the 2007 to 2011 analysis.

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cosmetic providers” category (e.g., RNs, licensed aestheticians, etc.). Surgical (invasive) procedures remained essentially flat in our 2012 survey findings when compared to 2011, continuing to reflect material declines in these service categories compared to the highs last seen in our 2008 survey findings—a definitive, downward trend. Non-invasive procedures stand in sharp con-trast, continuing to show growth in the procedures we track in our annual financial surveys—up nearly 3 percent overall (2012 versus 2011) and maintaining a double-digit CAGR at 11.3 percent for the one-year expanded (2007 to 2012) period—the five-year 2007-to-2011 period saw a CAGR of 13.7 percent for non-invasive procedures in our surveys.

Operating Performance. Operating incomes (operating mar-gins) fell modestly in our 2012 financial survey with median values falling (-0.2) percent compared to our 2011 findings. Of note, overall operating margins remain below 2007 perfor-mance levels. Thus, operating overhead expenses (overhead rates), moved up modestly. In our 2012 financial survey, key components of operating overhead expense saw support staff payrolls up modestly, rents down modestly, and marketing spend flat when compared to 2011 survey findings reviewed earlier in this article.

2013 COLLECTION UNDERWAYAs a final point, we are now collecting 2013 financial

information/data. In the coming months, we should have a preliminary sense of what the 2013 financial survey update is suggesting in terms of key metrics and trends experienced by the aesthetic physicians we work with. By the end of this year, we should have concrete aesthetic database results that will provide us with an additional full year (2013) of medical aesthetics database results—two years beyond what is generally viewed as the Great Recession period (2007 to 2011). We are confident this information/data will be of great interest to the aesthetic physician community. n

Lee Bowser is a management consultant with the Allergan Practice Consulting Group, a specialty pharmaceutical company based in Irvine, CA. Mr. Bowser consults with dermatology and plastic sur-gery practices in the following areas: financial anal-ysis; strategic initiatives, business planning, and performance processes; human resources; marketing; and other general practice management matters.

Mr. Bowser has more than 20 years of diversified manage-ment and consulting experience in the healthcare financing and delivery industry. Specifically, his experience covers physi-cian practice operating/startup/turnaround situations, and health insurance marketing/sales/regulatory affairs for medi-cal, dental, and vision business lines.