Lasik eye surgery spokane wa

C A S E

Pacific Cataract

and Laser Institute:

Competing in

the LASIK Eye

Surgery Market

Dr. Mark Everett, clinic coordinator and optometric physician (OP) of the Pacifi c Cataract and Laser Institute (PCLI) offi ce in Spokane, Washington, looked at the ad that Vancouver, Canada - based Lexington Laser Vision (LLV) had been running in the Spokane papers and shook his head. This was not the fi rst ad

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This case was prepared by John J. Lawrence and Linda J. Morris, University of ldaho, for the sole purpose of providing material for class discussion. It is not intended to illustrate either effective or ineffective handling of a managerial situ- ation. The authors thank Dr. Mark Everett for his cooperation and assistance with this project. The authors also thank the anonymous Case Research Journal review- ers and the anonymous North American Case Research Association 2000 annual meeting reviewers for their valuable input and suggestions. Copyright © 2002 by the Case Research Journal and John J. Lawrence and Linda J. Morris.

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nor the only clinic advertising low - priced LASIK eye surgeries. Dr. Everett just could not believe that doctors would advertise and sell laser eye surgery based on low price as if it were a stereo or a used car. The fact that they were advertising based on price was bad enough, but the price they were promoting – $900 for both eyes – was ridiculous. PCLI and its cooperating optometric physicians would not even cover their variable cost if they performed the surgery at that price. A typical PCLI customer paid between $1,750 and $2,000 per eye for corrective laser surgery. Although Dr. Everett knew that fi rms in Canada had several inherent cost advantages, including a favorable exchange rate and regulatory environment, he could not understand how they could undercut PCLI ’ s price so much without compromising service quality.

PCLI was a privately held company that operated a total of 11 clinics through- out the northwestern United States and provided a range of medical and surgical eye treatments including laser vision correction. Responding to the challenge of the Canadian competitors was one of the points that would be discussed when Dr. Everett and the other clinic coordinators and surgeons who ran PCLI met next month to discuss policies and strategy. Dr. Everett strongly believed that the organization ’ s success was based on surgical excellence and compassioned concern for its patients and the doctors who referred them. PCLI strived to pro- vide the ultimate in patient care and consideration. Dr. Everett had joined PCLI in 1993 in large part because of how impressed he had been at how PCLI treated its patients, and he remained committed to this patient - focused value.

He was concerned, however, about his organization ’ s ability to attract laser vision correction patients. He knew that many prospective PCLI customers would be swayed by the low prices and would travel to Canada to have the procedure performed, especially because most medical insurance programs covered only a small portion of the cost of this procedure. Dr. Everett believed strongly that PCLI achieved better results and provided a higher quality service experience than the clinics in Canada offering low - priced LASIK procedures. He also felt PCLI did a much better job of helping potential customers determine which of several procedures, if any, best met the customers ’ long - term vision needs. Dr. Everett wondered what PCLI should do to win over these potential customers – both for the good of the customers and for the good of PCLI.

Pacifi c Cataract and Laser Institute

Pacifi c Cataract and Laser Institute (PCLI) was founded in 1985 by Dr. Robert Ford and specialized in medical and surgical eye treatment. The company was head- quartered in Chehalis, Washington, and operated clinics in Washington, Oregon, Idaho, and Alaska. (Exhibit 17/1 shows a map of PCLI locations.) In addition to laser vision correction, PCLI provided cataract surgery, glaucoma consultation and surgery, corneal transplants, retinal care and surgery, and eyelid surgery. Dr. Ford founded PCLI on the principle that doctors must go beyond science and technology to practice the art of healing through the Christian principles of love, kindness, and compassion. The organization had defi ned eight core values that were based on these principles. These core values, shown in Exhibit 17/2 , guided

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PCLI ’ s decision making as it attempted to fulfi ll its stated mission of providing the best possible “ co-managed ” services to the profession of optometry.

Co-management involved PCLI working closely with a patient ’ s optometrists, or OD (for doctor of optometry). In co-managed eye care, family ODs were the primary care eye doctors who diagnosed, treated, and managed certain diseases of the eye that did not require surgery. When surgery was needed, the family OD referred patients to ophthalmologists (e.g., PCLI ’ s eye surgeons) for spe- cialized treatment and surgery. Successful co-management, according to PCLI, depended upon a relationship of mutual trust and respect built through shared learning, constant communication and commitment to providing quality patient care. PCLI ’ s co-management arrangements did not restrict ODs to work with just PCLI, although PCLI sought out ODs who would use PCLI as their primary surgery partner and who shared PCLI ’ s values. Many ODs did work exclusively with PCLI unless a specifi c patient requested otherwise. PCLI – Spokane had developed a network of 150 family ODs in its region.

PA C I F I C C AT A R A C T A N D L A S E R I N S T I T U T E

Exhibit 17/1: Map Showing PCLI Clinic Locations (Clinics designated by a♦; Anchorage, Alaska, clinic not shown)

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PCLI operated its 11 clinics in a very coordinated manner. It had seven sur- geons that specialized in the various forms of eye surgery. These surgeons, each accompanied by several surgical assistants, traveled from center to center to perform specifi c surgeries. The company owned two aircraft that were used to fl y the surgical teams between the centers. Each clinic had a resident optometric physician who served as that clinic ’ s coordinator and essentially managed the day - to - day operations of the clinic. Each clinic also employed its own offi ce sup- port staff. PCLI ’ s main offi ce in Chehalis, Washington, also employed patient counselors who worked with the referring family ODs for scheduling the patient ’ s surgery and a fi nance team to help patients with medical insurance claims and any fi nancing arrangements (which were made through third - party sources). Dr. Everett was the Spokane clinic ’ s resident optometric physician and man- aged the day - to - day activities of that clinic. Actual surgeries were performed in the Spokane clinic only one or two days a week, depending upon demand and the surgeons ’ availability.

Laser Eye Surgery and LASIK

Laser eye surgery was performed on the eye to create better focus and lessen the patient ’ s dependence on glasses and contact lenses. Excimer lasers were the main means of performing this type of surgery. Although research on the excimer laser began in 1973, it was not until 1985 that excimer lasers were introduced to the ophthalmology community in the United States. The FDA approved the use of excimer lasers for photorefractive keratectomy (PRK) in October 1995 for the purpose of correcting nearsightedness. PRK entailed using computer - controlled beams of laser light to permanently resculpt the curvature of the eye by selectively removing a small portion on the outer top surface of the cornea (called epithelium).

Exhibit 17/2: Pacific Cataract and Laser Institute ’ s Core Values

We believe patients ’ families and friends provide important support, and we encourage them to be as involved as possible in our care of their loved ones. We believe patients and their families have a right to honest and forthright medical information presented in a manner they can understand. We believe that a calm, caring, and cheerful environment minimizes patient stress and the need for artifi cial sedation. We believe that all our actions should be guided by integrity, honesty, and courage. We believe that true success comes from doing the right things for the right reasons. We believe that effi cient, quality eye care is provided best by professionals practicing at the highest level of their expertise. We believe that communicating openly and sharing knowledge with our opto metric colleagues is crucial to providing outstanding patient care. We believe that the ultimate measure of our success is the complete satisfaction of the doctors who entrust us with the care of their patients.

•

•

•

• • •

•

•

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The epithelium naturally regenerated itself, although eye medication was required for 3 to 4 months after the procedure.

In the late 1990s, laser in - situ keratomileusis, or LASIK, replaced PRK as the preferred method to correct or reduce moderate to high levels of nearsightedness (i.e., myopia). The procedure required the surgeon to create a fl ap in the cornea using a surgical instrument called a microkeratome. This instrument used vacuum suction to hold and position the cornea and a motorized cutting blade to make the necessary incision. The surgeon then used an excimer laser to remove a microthin layer of tissue from the exposed, interior corneal surface (as opposed to remov- ing a thin layer of tissue on the outer surface of the cornea as was the case with PRK). The excimer laser released a precisely focused beam of low temperature, invisible light. Each laser pulse removed less than one hundred - thousandth of an inch. After the cornea had been reshaped, the fl ap was replaced. The actual surgical procedure took only about 5 minutes per eye. LASIK surgery allowed a patient to eliminate the regular use of glasses or contact lenses although many patients still required reading glasses.

Although LASIK used the same excimer laser that had been approved for other eye surgeries in the United States by the Ophthalmic Devices Panel of the FDA, it was not an approved procedure in the United States, but was under study. LASIK was offered by clinics in the United States, but was considered an “ off - label ” use of the laser. “ Off label ” was a phrase given to medical services and supplies that had not been thoroughly tested by the FDA, but which the FDA permitted to be performed and provided by a licensed medical professional. Prescribing aspirin as a blood thinner to reduce the risk of stroke was another example of an off - label use of a medical product – the prescribing of aspirin for this purpose did not have formal FDA approval but was permitted by the FDA.

The LASIK procedure was not without some risks. Complications arose in about 5 percent of all cases, although experienced surgeons had complication rates of less than 2 percent. According to the American Academy of Ophthalmology, complications and side effects included irregular astigmatism, resulting in a decrease in best corrected vision; glare; corneal haze; overcorrection; undercor- rection; inability to wear contact lenses; loss of the corneal cap, requiring a corneal graft; corneal scarring and infection; and in an extremely rare number of cases, loss of vision. If lasering were not perfect, a patient might develop haze in the cornea. This could make it impossible to achieve 20/20 vision, even with glasses. The fl ap could also heal improperly, causing fuzzy vision. Infections were also occasionally an issue.

Although PRK and LASIK were the main types of eye surgery currently per- formed to reduce a patient ’ s dependence on glasses or contact lenses, there were new surgical procedures and technologies that were in the test stage that could receive approval in the United States within the next 3 to 10 years. These included intraocular lenses that were implanted behind a patient ’ s cornea, laser thermok- eratoplasty (LTK) and conductive keratoplasty (CK) that used heat to reshape the cornea, and “ custom ” LASIK technologies that could better measure and correct the total optics of the eye. These newer methods had the potential to improve vision even more than LASIK, and some of these new processes also might allow

L A S E R E Y E S U R G E R Y A N D L A S I K

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additional corrections to be made to the eye as the patient aged. Intraocular lenses were already widely available in Europe.

LASIK Market Potential

The market potential for LASIK procedures was very signifi cant, and the market was just beginning to take off. According to offi cials of the American Academy of Ophthalmology, over 150 million people wore glasses or contact lenses in the United States. About 12 million of these people were candidates for current forms of refractive surgery. As procedures were refi ned to cover a wider range of vision conditions, and as the FDA approved new procedures, the number of people who could have their vision improved surgically was expected to grow to over 60 million. As many as 1.7 million people in the United States were expected to have some form of laser eye surgery during 2000, compared to 500,000 in 1999 and 250,000 in 1998. Laser eye repair was the most frequently performed surgery in all of medicine.

Referrals were increasingly playing a key role in the industry ’ s growth. Surgeons estimated that the typical patient referred fi ve friends and that as many as 75 percent of new patients had been referred by a friend. A few employers were also beginning to offer laser eye surgery benefi ts through managed care vision plans. These plans offered discounts from list prices of participating surgeons and clinics to employees. Vision Service Plan ’ s (VSP) partners, for example, gave such discounts and guaranteed a maximum price of $1,800 per eye for VSP members. The number of people eligible for such benefi ts was expected to grow signifi cantly in the coming years. PCLI did not participate in these plans and did not offer such discounts.

LASIK at PCLI

The process of providing LASIK surgery to patients at PCLI began with the partnering OD. The OD provided the patient with information about LASIK and PCLI, reviewed the treatment options available, and answered any questions the patient might have concerning LASIK or PCLI. If a patient was interested in having the surgery performed, the OD performed a pre - exam to make sure the patient was a suitable candidate for the surgery. Assuming the patient was able to have the surgery, the OD made an appointment for the patient with PCLI and forwarded the results of the pre - exam to Dr. Everett. PCLI had a standard surgi- cal fee of $1,400 per eye for LASIK. Each family OD added on additional fees for pre - and postoperative exams depending on the number of visits per patient and the OD ’ s costs. Most of the ODs charged $700 to $1,200, making the total price of laser surgery to the patient between $3,500 and $4,000. This total price rather than two separate service fees was presented to the patient.

Once a patient arrived at PCLI, an ophthalmic assistant measured the patient ’ s range of vision and took a topographical reading of the eyes. Dr. Everett would then explain the entire process to the patient, discuss the possible risks, and have

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the patient read and sign an informed consent form. The patient would then meet the surgeon and have any fi nal questions answered. The meeting with the surgeon was also intended to reduce any anxiety that the patient might have regarding the procedure. The surgical procedure itself took less than 15 minutes to perform. After the surgery was completed, the patient was told to rest his/her eyes for a few hours and was given dark glasses and eyedrops. The patient was required to either return to PCLI or to his or her family OD 24 hours after their surgery for a follow - up exam. Additional follow - up exams were required at 1 week, 1 month, 3 months, 6 months, and 1 year to make sure the eyes healed properly and to insure that any problems were caught quickly. The patient ’ s family OD performed all of these follow - up exams.

Three of PCLI ’ s seven surgeons specialized in LASIK and related procedures. The company ’ s founder, Dr. Robert Ford, had performed over 16,000 LASIK procedures during his career, more than any other surgeon in the Northwest. His early training was as a physicist, and he was very interested in and knowledge- able about the laser technology used to perform LASIK procedures. Because of this interest and understanding, Dr. Ford was an industry innovator and had developed a number of procedural enhancements that were unique to PCLI. Dr. Ford had developed an enhanced software calibration system for PCLI ’ s lasers that was better than the system provided by the laser manufacturers.

More signifi cantly, Dr. Ford had also developed a system to track eye move- ments. Using superimposed live and saved computer images of the eye, PCLI surgeons could achieve improved eye alignment to provide more accurate laser resculpting of the eye. Dr. Ford was working with Laser Sight, a laser equip- ment manufacturer developing what PCLI and many others viewed as the next big technological step in corrective eye surgery – custom LASIK. Custom LASIK involved developing more detailed corneal maps and then using special software to convert these maps into a program that would run a spot laser to achieve theoretically perfect corrections of the cornea. This technology was currently in clinical trials in an effort to gain FDA approval of the technology, and Dr. Ford and PCLI were participating in these trials. Although Dr. Ford was on the leading edge of technology and had vast LASIK surgical experience, very few of PCLI ’ s patients were aware of his achievements.

Competition

PCLI in Spokane faced stiff competition from clinics in both the United States and Canada. There were basically three types of competitors. There were general ophthalmology practices that also provided LASIK surgeries, surgery centers like PCLI that provided a range of eye surgeries, and specialized LASIK clinics that focused solely on LASIK surgeries.

General ophthalmology practices provided a range of services covering a patient ’ s basic eye care needs. They performed general eye exams, monitored the health of patients ’ eyes, and wrote prescriptions for glasses and contact lenses. Most general ophthalmology practices did not perform LASIK surgeries (or any other types

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of surgeries) because of the high cost of the equipment and the special training needed to perform the surgery, but a few did. These clinics were able to offer patients a continuity of care that surgery centers and centers specializing solely in LASIK surgeries could not. Customers could have all pre - and postoperative exams performed at the same location by the same doctor. In the Spokane market, a clinic called Eye Consultants was the most aggressive competitor of this type. This organization advertised heavily in the local newspaper, promoting an $1,195 per eye price (Exhibit 17/3 ). The current newspaper promotion invited poten- tial customers to a free LASIK seminar put on by the clinic ’ s staff, and seminar attendees who chose to have the procedure qualifi ed for the $1,195 per eye price, which was a $300 per eye discount from the clinic ’ s regular price.

Exhibit 17/3: Eye Consultant ’ s Advertisement

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Surgery centers did not provide for patients ’ basic eye care needs, but rather specialized in performing eye surgeries. These centers provided a variety of eye surgeries, including such procedures as cataract surgeries and LASIK surgeries in addition to other specialty eye surgeries. PCLI was this type of clinic. The other surgery center of this type in the Spokane area was Empire Eye. PCLI viewed Empire Eye as its most formidable competitor in the immediate geographic area. Empire Eye operated in a similar way as PCLI. It relied heavily on referrals from independent optometric physicians, did not advertise aggressively, and did not attempt to win customers with low prices. It did employ a locally based surgeon who performed its LASIK procedures, although this surgeon was not nearly as experienced as Dr. Ford at PCLI.

LASIK clinics provided only LASIK or LASIK and PRK procedures. They did not provide for general eye care needs nor did they provide a range of eye sur- geries like surgery centers. These clinics generally had much higher volumes of LASIK patients than general ophthalmology or surgery centers, allowing them to achieve much higher utilization of the expensive capital equipment required to perform the surgeries. The capital cost of the equipment to perform the LASIK procedure was about US$500,000.

The largest of these fi rms specializing in LASIK surgeries was TLC Laser Eye Centers, Inc. TLC was based in Mississauga, Ontario, and had 56 clinics in the United States and 7 in Canada. During the fi rst quarter of 2000, TLC generated revenues of US$49.3 million by performing 33,000 surgeries. This compared with fi rst quarter of 1999 when the company had revenues of US$41.4 million on 25,600 procedures. TLC was the largest LASIK eye surgery company in North America and performed more LASIK surgeries in the United States than any other company. The closest TLC centers to Spokane were in Seattle, Washington, and Vancouver, British Columbia. The second largest provider of LASIK surgeries in the United States was Laser Vision Centers (LVC), based in St. Louis, Missouri. Its closest center to Spokane was also in Seattle.

Almost all of the Canadian competitors that had been successful at attracting US customers were clinics that specialized solely in LASIK surgeries. The largest Canadian competitor was Lasik Vision Corporation (LVC), based in Vancouver, British Columbia. LVC operated 15 clinics in Canada and 14 in the United States, and was growing rapidly. LVC had plans to add another 21 clinics by the end of 2000. During the fi rst quarter of 2000, LVC generated revenues of US$20.1 million by performing 26,673 procedures. This compared to fi rst quarter of 1999, when the company had revenues of only US$4.3 million on 6,300 procedures.

In total, there were 13 companies specializing in providing LASIK surgeries in British Columbia, mostly in the Vancouver area. One of the British Columbia fi rms that advertised most aggressively in the Spokane area was Lexington Laser Vision (LLV). LLV operated a single clinic staffed by nine surgeons and equipped with four lasers. The clinic scheduled surgeries 6 days a week and typically had a 2 - month wait for an appointment.

The service design process at LLV was structured to accommodate many patients and differed signifi cantly from PCLI ’ s service process. To begin the process, a patient simply called a toll - free number for LLV to schedule a time to have the

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surgery performed. Once the patient arrived at the LLV clinic, he or she received a preoperative examination to assess the patient ’ s current vision and to scan the topography of the patient ’ s eyes. The next day, the patient returned to the clinic for the scheduled surgery. The typical sequence was to fi rst meet with a patient counselor who reviewed with the patient all pages of a LASIK information book- let that had been sent to the patient following the scheduled surgery date. The patient counselor answered any questions the patient had regarding the informa- tion in the booklet and ensured that the patient had signed all necessary surgical consent forms. Following this step, a medical assistant surgically prepped the patient and explained the postcare treatment of the eyes. After this preparation, the surgeon greeted the patient, reviewed the topographical eye charts with the patient, explained the recommended eye adjustments for the patient, and reiter- ated the surgical procedure once again. The patient would then be transferred to the surgery room, where two surgical assistants were available to help the doctor with the 5 - to 10 - minute operation. Once the surgery was completed, a surgical assistant led the patient to a dark, unlit room so that the patient ’ s eyes could adjust. After a 15 - minute waiting period, the surgical assistant checked the patient for any discomfort and repeated the instructions for postcare treatment. Barring no problems or discomfort, the surgical assistant would hand the patient a pair of dark, wraparound sunglasses with instructions to avoid bright lights for the next 24 hours. At the scheduled postoperative exam the next day, a medical technician measured the patient ’ s corrected vision and scheduled any additional postoperative exams. If desired, the patient could return to the clinic for the 1 - week, 1 - month, and 3 - month postoperative exams at either the LLV clinic or one of the US – based partner clinics of LLV. In some cases, the patient might opt to have these postoperative exams performed by his or her family OD.

US patients traveling to LLV or the other clinics in British Columbia to have the surgery performed needed to allow for 3 days and 2 nights for the surgery. A pre - exam to insure the patient was a suitable candidate for the surgery was performed the fi rst day, the surgery itself was performed the second day, and the 24 - hour postexam was performed on the third day. Two nights in a hotel near LLV cost approximately US$100, and airfare to Vancouver, British Columbia, Canada cost approximately US$150 from Spokane, Washington. Lexington Laser Vision had a sister clinic in the Seattle area where patients could go for postoperative exams. LLV requested patients to undergo follow - up exams at 1 week, 1 month, and 3 months. These exams were included in the price as long as the patient came to either the Seattle or Vancouver clinics. Some patients outside of the Seattle/ Vancouver area arranged with their family ODs to perform these follow - ups at their own expense to avoid the time and cost of traveling to Seattle or Vancouver, British Columbia.

A breakdown of the estimated cost structure for each of these different competi- tors is shown in Exhibit 17/4 . Dr. Everett believed that both Eye Consultants and LLV were probably incurring losses. Both were believed to be offering below - cost pricing in response to the signifi cant price competition going on in the industry. Eye Consultants was also believed to be offering below - cost pricing in order to build volume and gain surgeon experience. PCLI ’ s own cost structure

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was fairly similar to Empire Eye ’ s cost structure, as both operated in a similar fashion.

The Canadian Advantage

LASIK clinics operating in Canada had a number of advantages that allowed them to charge signifi cantly less than competitors in the United States. First, the Canadian dollar had been relatively weak compared to the US dollar for some time, fl uctuating between C$1.45 per US dollar and C$1.50 per US dollar. This exchange rate compared to rates in the early 1990s that fl uctuated between C$1.15 per US dollar and C$1.20 per US dollar. On top of this, the infl ation rate in Canada averaged only 1.5 percent during the 1990s compared to 2.5 percent in the United States. This dual effect of a weakened Canadian dollar combined with somewhat

Exhibit 17/4: LASIK - Related Revenue and Cost Estimates for PCLI ’ s, Competitors (All Figures Are in US$) a

Competitor Eye Consultants Empire Eye TLC Clinic Lexington Laser

Vision b

Type of Operation General Ophthalmology

Practice

Eye Surgery Center

Specialized LASIK Clinic

Specialized LASIK Clinic

Location of Operation Spokane, WA Spokane, WA Seattle, WA Vancouver, BC

Number of Procedures/Year 600 1,000 4,000 10,000 Price to Customer, per Eye $1,195 $1,900 $1,600 $500

Estimated Revenues 717,000 $1,900,000 $6,400,000 $5,000,000

Estimated Expenses Payments for Pre - and

Postoperative Care c 120,000 450,000 1,400,000 1,500,000 Royalties 150,000 250,000 1,000,000 0 Surgeon ’ s Fees/Salary 120,000 300,000 1,200,000 1,500,000 Medical Supplies 30,000 50,000 200,000 500,000 Laser Service 100,000 100,000 200,000 400,000 Depreciation 125,000 125,000 250,000 500,000 Marketing 75,000 75,000 400,000 500,000 Overhead 200,000 350,000 500,000 600,000

Total Annual Expenses $925,000 $1,700,000 $5,150,000 $5,500,000

aThis table was developed based on a variety of public sources on both the LASIK industry in general and on individual competitors. In a number of cases, the figures represent aggregated “estimates” of data from several sources. Estimated expenses are based largely, but not entirely, on discussion of the LASIK industry cost structure provided in “Eyeing the Bottom Line: Just Who Profits from Your Laser Eye Surgery May Surprise You,” by James Pethokoukis, U.S. News & World Report, March 30, 1998, pp. 80–82. bThis cost structure was thought to be typical of all of the specialized LASIK clinics located in British Columbia, Canada, that competed with PCLI. cln some cases, these costs are paid directly by the patient to the postoperative care provider; they have been included here because they represent a part of the total price paid by the customer.