Launching a second office: Is it time to branch out?

Opening a new practice location can be a great opportunity -- or a great drain. Here's how to ensure that you make the right decision.

By — Posted May 28, 2007

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About 10 years ago, Carolina Ear Nose and Throat Associates found itself in what it believed to be a dangerous strategic position, one getting more perilous by the month.

The six-doctor group is based in Gastonia, N.C., a suburb of Charlotte. While most of its patients were from the Charlotte area, a growing number -- at least 200 a month -- were coming from neighboring Cleveland County. The county, which has grown to about 100,000 people, at the time had only one otolaryngologist: a solo doctor getting close to retirement.

Indirectly, this doctor's situation created a serious threat to Carolina Ear Nose and Throat, said Frederic Levy, MD, one of the physicians in the group. "We knew as soon as that doctor retired, and possibly before he retired, another ENT group was going to move in and fill the vacuum." Not only could another group take most of the patients who travel eastward from Cleveland County to Gastonia, but it also could make some inroads with the Carolina group's in-county patients who live near the county line.

So the group decided to protect its flank: It opened a second office in Shelby, a city in Cleveland County. Initially, group members were planning a small satellite office staffed a few days a week. But they quickly discovered that referrers there did not take kindly to people they considered interlopers.

So the group hired a new doctor who would live in Cleveland County and made its two offices co-equals instead of primary and satellite. "We had to give the [Cleveland County] hospital and referrers a comfort level with us by demonstrating that we were really committed to practicing there," Dr. Levy says.

A few years later, the county's once sole ENT specialist retired, and Carolina Ear Nose and Throat Associates got virtually all of his patients.

"That one decision [to open a second office] blocked other groups from taking our patients and eventually brought us an entire practice worth of new patients. It was obviously the right decision for the time," Dr. Levy says.

Charles Thomason III, president of Atlanta-based consulting company Medical Management Associates Inc., says this experience exemplifies one of the most important reasons for considering a second office: defending your group against the possible encroachment of competitors.

If a ZIP code analysis of a group's patient base determines that a large block of patients are traveling in from a geographic area that normally would be considered outside the group's market territory, chances are that area is underserved in the specialty, he says.

"Any underserved area is ripe for another group to set up shop there. You have to decide if you can tolerate that," Thomason says.

Carolina ENT Associates' strategy was defensive. Practices also may take the offense and open a second office as a way to expand to another market, Thomason says.

There could be many reasons. For example, the group has the opportunity to hire another doctor and wants to take advantage of it. Population changes have turned a backwater into a gentrified upscale community. Someone has offered the group office space (possibly shared) at a good price.

"Aggressive groups should be on the lookout for areas that are adjacent to their home territories for these kinds of opportunities," Thomason says.

One such group, seven-doctor Orthopaedicof Central New York, decided to open a second office about 10 miles north and seven miles east of its primary location in downtown Syracuse. That decision was motivated by the opening of an office park with a large primary care group.

"This was a great opportunity for us to expand our base of referrals," says Jim Barrett, the group's administrator. The new office also would allow the group to attract patients from the rural northern part of the state who were reluctant to drive into Syracuse.

Barrett said the strategy was successful. Referrals from the primary care group began pouring in. A few years after that project, the group opened a third office in East Syracuse so it could locate near two of its major referrers in the city.

While external factors such as competition and demographics could determine if a second office is feasible, Nick Fabrizio, a consultant with the MGMA Consulting Group, points out that groups should consider internal factors before deciding to take the plunge.

"Office dynamics are very important in determining if a second or third office will succeed or fail," he says. For example, he looks at factors such as number, stability and turnover of staff and doctors, the general morale of the office and the ages of doctors.

"If the group expects to have to replace a retiring doctor soon, or if it is having problems with a doctor, it's essential to solve that issue before striking out on a risky venture like a second office," Fabrizio said.

For example, in a cardiology group that Fabrizio worked with, a doctor left shortly after the second office launch. The group had been depending on his income to pay off the debt for the new location.

While it was able to bring in a new doctor in a few months, the lost income left the group behind financially. Fabrizio doesn't know if that group could have predicted the doctor's leaving but says groups have to try to get honest information from current doctors about their personal plans before opening a second office.

Being nimble and flexible

When groups pursue an aggressive multioffice strategy, they have to be willing to make changes when the situation warrants.

For example, heady with the success of its second office, Carolina ENT Associates decided to open a third in another county. While Cleveland County referrers and patients virtually required the group to have a full-time office to be accepted, this third county never had its own medical community. The population was used to having specialists covering the area one or two days a week.

So Carolina's ENT Associates' fulltime office didn't give the group enough of an advantage to justify the cost of maintaining it. The group closed the office after three years.

"You have to know when patient volume isn't there and a venture isn't working out and be willing to abandon it," Dr. Levy says.

In fact, sometimes groups find that consolidating offices is the best tactic. "When you go from two offices to three, sometimes you lose some of the economies of scale and the collegiality," says Darrell Martin, MD, an ob-gyn with Southern Crescent Women's Healthcare in Fayette, N.C.

The group, which has six doctors (and is about to hire a seventh), two nurse practitioners and four nurse midwives, found that when it expanded from two to three offices, doctors were shuttling around so much, they barely had time for hallway consultations.

And while the group didn't need additional staff members to support one satellite office, it did have to increase headcount when adding a third office. So the group has decided to close the two satellite offices, which were about 10 miles apart, and instead open one located just about midway between them. Because the new office is in a just-opened office park right off the interstate, even patients who have to drive a little farther may find it more convenient.

While the most important factors in determining the success of an expansion lie in good planning, groups also have to implement an aggressive marketing strategy just before or just after the launch.

"You have to try to hit the ground running," Fabrizio said. "Every day the new office isn't working at full capacity will impinge on your ability to pay back the loan." While many groups consider newspaper ads and radio spots minimally effective, Fabrizio says these media shouldn't be entirely ignored. But in addition, the group should hold open houses and give seminars and lectures at local clubs.

"You want to let everyone know that you've arrived and you plan to stay," Fabrizio says.

He cautions that groups should pay at least a bit of attention to reassuring current patients, who may be concerned that the group is planning to abandon the area. He suggests at least handing out letters at the clinic or even mailing a letter to each patient explaining that the group has expanded but is not leaving its current location.

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When to stay put

Consultants say there are times when groups should consider not expanding:

  • The economic or demographic analyses don't justify the risk.
  • Increased on-call requirements might require privileges at another hospital, which may be difficult to obtain if you only plan a satellite office.
  • There is a lack of available affordable space in the new area.
  • The group has no strong consensus and/or commitment to the new location.
  • Instability exists in the group (for example, there is high staff or physician turnover.)
  • The group is searching for a new administrator, or its current administrator has weak administrative skills.
  • The group is not currently productive or profitable.
  • The group has a high debt load.

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