Pacific Cataract and Laser Institute Case Study

Pacific Cataract and Laser Institute (PCLI) in Spokane, Washington, has been facing tough competition in the LASIK eye surgery market. Dr. Mark Everett, the clinic coordinator and optometric physician (OP), expressed his disbelief at the low-priced LASIK eye surgery advertisements run by Vancouver-based Lexington Laser Vision (LLV) in the Spokane papers. This was not a new occurrence, as other clinics had also been advertising similar low prices. Dr. Everett found it absurd that doctors would advertise and sell laser eye surgery solely based on price, treating it like a consumer product such as a stereo or a used car. The advertised price of $900 for both eyes was considered ridiculously low by PCLI, as it would not even cover their variable cost for performing the surgery. Unlike LLV, PCLI charged customers between $1,750 and $2,000 per eye for corrective laser surgery. Although Dr. Everett acknowledged that Canadian firms enjoyed cost advantages due to factors like a favorable exchange rate and regulatory environment, he couldn’t comprehend how LLV could significantly undercut PCLI’s prices without compromising the quality of their services.

PCLI, a privately held company, operated 11 clinics in the northwestern United States. They offered various medical and surgical eye treatments, including laser vision correction.
Next month, Dr. Everett and the other clinic coordinators and surgeons of PCLI were planning to discuss policies and strategies, including how to respond to Canadian competitors. Dr. Everett firmly believed that the organization’s success was based on excellent surgical skills and compassionate care for patients and referring doctors. PCLI aimed to provide top-notch patient care and consideration.
Dr. Everett joined PCLI in 1993 because he was impressed with how the organization treated its patients. He remained dedicated to this patient-focused value. However, he was worried about PCLI’s ability to attract laser vision correction patients. He knew that many potential customers would be enticed by lower prices and might travel to Canada for the procedure, especially since most medical insurance programs only covered a small portion of the cost.
Dr. Everett strongly believed that PCLI delivered better results and offered a superior service experience compared to Canadian clinics that provided low-priced LASIK procedures.The writer acknowledged that PCLI provided superior assistance in guiding customers to choose the most suitable procedure that aligned with their long-term vision needs.

Dr. Everett pondered the steps that PCLI should take to attract these potential customers, with the goal of benefiting both the customers and PCLI. Pacific Cataract and Laser Institute (PCLI) was established in 1985 by Dr. Robert Ford and specialized in medical and surgical eye treatment. The company’s headquarters were in Chehalis, Washington, and it had clinics in Washington, Oregon, Idaho, and Alaska. (Exhibit 17/1 displays a map of PCLI locations.) Apart from laser vision correction, PCLI offered cataract surgery, glaucoma consultation and surgery, corneal transplants, retinal care and surgery, and eyelid surgery. Dr. Ford founded PCLI on the belief that doctors should go beyond science and technology to practice the art of healing based on Christian principles such as love, kindness, and compassion. The organization had defined eight core values that were rooted in these principles.

Exhibit 17/2 showcases the core values that guided PCLI’s decision making in fulfilling its mission of providing superior “co-managed” services to the optometry profession. The concept of co-management involved close collaboration between PCLI and a patient’s optometrists, also known as OD (doctor of optometry). Within this co-managed eyecare approach, family ODs acted as the primary care eye doctors, diagnosing, treating, and managing non-surgical eye diseases. PCLI’s role came into play when surgical intervention was necessary, as patients were then referred to their eye surgeons who were part of PCLI, known as ophthalmologists. In order to ensure successful co-management, PCLI emphasized the importance of a relationship based on mutual trust, respect, shared learning, constant communication, and a commitment to exceptional patient care. It is essential to note that PCLI’s co-management arrangements did not limit ODs to exclusively working with PCLI, but rather sought out ODs who aligned with PCLI’s values and preferred them as primary surgery partners. Nonetheless, many ODs exclusively collaborated with PCLI unless specifically requested otherwise by a patient. PCLI-Spokane had also established a network comprising 150 family ODs in its region. Please refer to Exhibit 17/2 for a comprehensive overview of 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 artificial 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 efficient, 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 optometric 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.

PCLI ran 11 clinics in a highly organized manner. It had seven specialized eye surgeons and their accompanying surgical assistants who traveled to different centers to perform specific surgeries. The company used two aircraft to transport the surgical teams between the centers. Each clinic had a coordinating optometric physician who oversaw the clinic’s operations, and there was also a dedicated office support staff for each clinic.

PCLI’s main office in Chehalis, Washington also had patient counselors, who coordinated with referring family ODs to schedule the patient’s surgery. There was also a finance team to assist patients with medical insurance claims and any financing arrangements made through third-party sources. In the Spokane clinic, Dr. Everett served as the resident optometric physician and oversaw the daily operations. Surgeries were conducted at the Spokane clinic on a weekly basis, either one or two days depending on demand and surgeon availability.

This case was written by John J. Lawrence and Linda J. Morris from the University of Idaho for the purpose of facilitating class discussion. It is not meant to demonstrate either effective or ineffective management handling. The authors acknowledge the support and assistance provided by Dr. Mark Everett, as well as the input and suggestions given by the anonymous reviewers from the Case Research Journal and the North American Case Research Association 2000 annual meeting.

Laser eye surgery involves using excimer lasers to improve focus and reduce dependence on glasses and contact lenses. Excimer lasers were introduced in 1985 and approved by the FDA in 1995 for photorefractive keratectomy (PRK) to correct nearsightedness. PRK used laser light beams to reshape the cornea’s outer top surface, called the epithelium, which naturally regenerated itself. LASIK, introduced in the late 1990s, became the preferred method for correcting moderate to high levels of nearsightedness. This procedure involved creating a corneal flap using a microkeratome instrument.

The surgeon used an excimer laser in LASIK surgery, which employed a precise beam of low temperature, invisible light to remove a microthin layer of tissue from the inner corneal surface. This was different from PRK, where tissue removal occurred on the outer corneal surface. Each laser pulse removed less than one hundred-thousandth of an inch. After reshaping the cornea, the flap was repositioned. The entire surgical process took about 5 minutes per eye. LASIK surgery allowed patients to avoid regular use of glasses or contact lenses, although some still needed reading glasses.

Although the excimer laser had FDA approval for other eye surgeries in the United States, LASIK itself was still being studied and not yet approved at that time. In the US, clinics offered LASIK as an “off-label” use of this laser. “Off-label” referred to medical services and supplies that were not thoroughly tested by FDA but could be administered by licensed medical professionals.

An analogous example of off-label usage was prescribing aspirin as a blood thinner for stroke prevention without formal FDA approval but with permission. It is important to note that there were certain risks associated with LASIK procedure. Complications occurred in around 5% of cases; however, skilled surgeons had a lower complication rate of under 2%.

Complications and side effects of eye surgery, such as LASIK and PRK, may include various issues like irregular astigmatism, glare, corneal haze, overcorrection, undercorrection, inability to wear contacts, loss of corneal cap requiring grafting procedure, corneal scarring and infection. In rare cases, there might be a risk of vision loss. If the surgery is not completely successful, patients may still experience corneal haze that can result in less-than-perfect vision even when using glasses. Improper healing of the flap during the recovery process can lead to blurry vision while occasional infections are also possible.

The United States may approve new surgical procedures and technologies within the next 3 to 10 years. These innovations include intraocular lenses that are implanted behind the cornea; laser thermokeratoplasty (LTK); conductive keratoplasty (CK); and “custom” LASIK technologies which have improved capabilities for measuring and correcting the eye’s overall optics. These advancements hold great potential for significantly enhancing visual outcomes and some may even offer additional corrections as patients age. It should be noted that intraocular lenses are already widely available in Europe.

According to officials of the American Academy of Ophthalmology, the market potential for LASIK procedures was significant and growing. They stated that there were over 150 million people in the United States who wore glasses or contact lenses, with about 12 million of them being suitable candidates for refractive surgery. As FDA-approved procedures improved and new ones were introduced, it was expected that the number of individuals eligible for vision improvement through surgery would rise to over 60 million.

In terms of numbers, an estimated 1.7 million people in the United States were projected to undergo laser eye surgery in 2000, compared to 500,000 in 1999 and 250,000 in 1998. This made laser eye repair the most prevalent surgical procedure across all medical fields.

The growth of the industry was driven by referrals as well. Surgeons believed that each patient referred an average of five friends, contributing up to 75 percent of new patients referred by acquaintances.

Some employers started including laser eye surgery benefits in their managed care vision plans. These plans offered employees discounts on participating surgeons and clinics. Vision Service Plan (VSP) partners like VSP provided such savings along with a maximum price per eye set at $1,800 for VSP members.

It was predicted that the number of individuals eligible for these benefits would substantially increase in the future. However,PCLI did not participate in these plans nor provide any discounts.

The process of starting LASIK surgery at PCLI involves the partnering OD providing the patient with information and answering any questions. They also evaluate the patient’s suitability for the surgery. If the patient is eligible, the OD schedules an appointment with PCLI and shares the pre-examination results with Dr. Everett. PCLI charges a standard surgical fee of $1,400 per eye, while each family OD adds fees for pre- and postoperative exams based on their costs and number of visits. Typically, these additional fees range from $700 to $1,200, resulting in a total price of $3,500 to $4,000 for the laser surgery. Instead of presenting separate service fees, the patient receives a comprehensive price. When arriving at PCLI, an ophthalmic assistant performs vision measurements and eye topography readings. Dr. Everett then discusses the entire process, potential risks, and obtains informed consent from the patient. The patient also has an opportunity to meet with the surgeon and address any remaining concerns in order to alleviate anxiety before undergoing the procedure.After having completed the surgical procedure, patients are instructed to rest their eyes for several hours and provided with dark glasses and eyedrops. The surgery itself takes less than 15 minutes.

The patient had to return to PCLI or their family OD 24 hours after surgery for a follow-up examination. Additional follow-up examinations were required at 1 week, 1 month, 3 months, 6 months, and 1 year to ensure proper healing and early detection of any issues. All of these follow-up examinations were conducted by the patient’s family OD. Among PCLI’s seven surgeons, three specialized in LASIK procedures. Dr. Robert Ford, the company’s founder, had performed over 16,000 LASIK procedures in his career, surpassing all other Northwest surgeons. With an early background in physics, Dr. Ford possessed a strong interest and understanding of the laser technology employed for LASIK procedures. This led him to become an industry innovator, introducing unique procedural enhancements exclusively available at PCLI. Dr. Ford devised an improved software calibration system for PCLI’s lasers that outperformed the manufacturers’ system. Additionally, he devised a eye movement tracking system.

Using live and saved computer images of the eye, PCLI surgeons were able to improve eye alignment for more precise laser resculpting. Dr. Ford collaborated with Laser Sight, a laser equipment manufacturer, to develop custom LASIK, which was considered a significant advancement in corrective eye surgery. Custom LASIK involved creating detailed corneal maps and converting them into a program for precise corneal corrections using a spot laser. This technology was currently undergoing clinical trials for FDA approval, with Dr. Ford and PCLI participating in these trials. Despite his pioneering work and extensive LASIK surgical experience, Dr. Ford’s achievements were not well-known among PCLI’s patients. Competition.

PCLI in Spokane faced tough competition from clinics in the United States and Canada. The competitors could be categorized into three types: general ophthalmology practices offering LASIK surgeries, surgery centers like PCLI that provided various eye surgeries, and specialized LASIK clinics solely focusing on LASIK surgeries. General ophthalmology practices offered a wide range of services including general eye exams, monitoring eye health, and prescribing glasses and contact lenses. Although most did not perform LASIK surgeries due to the high cost of equipment and specific training requirements, a few did. These ophthalmology clinics provided a seamless continuity of care, enabling patients to have all pre- and postoperative exams conducted by the same doctor in one location. Eye Consultants in Spokane emerged as the most fierce competitor in this category.

This organization heavily advertised in the local newspaper, promoting a price of $1,195 per eye (Exhibit 17/3). The current newspaper promotion invited potential customers to a free LASIK seminar hosted by the clinic’s staff. Seminar attendees who chose to have the procedure qualified for the discounted price of $1,195 per eye, which was $300 less than the clinic’s regular price. (Exhibit 17/3: Eye Consultant’s Advertisement Surgery) These surgery centers focused on performing eye surgeries and did not provide basic eye care services. They offered a range of eye surgeries including cataract surgeries, LASIK surgeries, and other specialty eye surgeries. PCLI was a clinic of this nature.

PCLI considered Empire Eye, the other surgery center in Spokane, to be its biggest rival in the local area. Like PCLI, Empire Eye operated similarly by relying on referrals from independent optometric physicians and not engaging in aggressive advertising or using low prices to attract customers. However, Empire Eye had a less experienced surgeon than Dr. Ford at PCLI. LASIK clinics solely offered LASIK procedures or LASIK and PRK procedures, while they did not provide general eye care or a range of eye surgeries like surgery centers do. Despite this, LASIK clinics had higher volumes of LASIK patients than general ophthalmology or surgery centers, which allowed them to make more efficient use of the expensive capital equipment needed for the surgeries.

The equipment required for performing the LASIK procedure had a capital cost of approximately US$500,000. TLC Laser Eye Centers, Inc., based in Mississauga, Ontario, was the leading company specializing in LASIK surgeries. With a total of 56 clinics in the United States and 7 in Canada, TLC generated revenues of US$49.3 million during the first quarter of 2000 by performing 33,000 surgeries. In comparison, their first quarter revenues for 1999 were US$41.4 million on 25,600 procedures. TLC held the dominant position in North America as the largest LASIK eye surgery provider and performed the highest number of LASIK surgeries in the United States. The nearest TLC centers to Spokane were located in Seattle, Washington, and Vancouver, British Columbia. Another prominent LASIK surgery provider in the United States was Laser Vision Centers (LVC), headquartered in St. Louis, Missouri. LVC’s closest center to Spokane was also based in Seattle. Almost all successful Canadian competitors that attracted US customers were specialized clinics focused solely on LASIK surgeries. The leading Canadian competitor was Lasik Vision Corporation (LVC) from Vancouver, British Columbia. LVC operated 15 clinics in Canada and 14 in the United States with plans for significant expansion by adding another 21 clinics by the end of 2000.

During the first quarter of 2000, Lexington Laser Vision (LLV), one of the 13 companies specializing in LASIK surgeries in British Columbia, generated revenues of US$20.1 million by performing 26,673 procedures. This was a significant increase compared to the first quarter of 1999, when LLV had revenues of only US$4.3 million on 6,300 procedures. LLV operated a single clinic in British Columbia’s Vancouver area, staffed by nine surgeons and equipped with four lasers. The clinic had a high demand and typically scheduled surgeries 6 days a week, with a 2-month wait for an appointment. The service design process at LLV differed significantly from other LASIK surgery providers, such as PCLI. To schedule a surgery at LLV, patients simply called a toll-free number. Upon arriving at the clinic, patients received a preoperative examination to assess their current vision and scan the topography of their eyes. The actual surgery took place the next day.

The traditional procedure involved an initial meeting with a patient counselor. The counselor reviewed all pages of a LASIK information booklet previously sent to the patient after the scheduled surgery date. Questions from the patient regarding the booklet were addressed by the counselor, who also ensured that the necessary surgical consent forms were signed. After this stage, a medical assistant prepped the patient for surgery and provided instructions for postcare treatment of the eyes. The surgeon then met with the patient, reviewed topographical eye charts, discussed recommended eye adjustments, and went over the surgical procedure once more.

The patient would be moved to the surgery room, where two surgical assistants were available to assist the doctor during the 5- to 10-minute operation. After completion of the surgery, a surgical assistant would guide the patient to a dark, unlit room to allow their eyes to adjust. Following a 15-minute wait, the surgical assistant would assess the patient for any discomfort and reiterate the instructions for postcare treatment. Unless there were any issues or discomfort, the surgical assistant would provide the patient with dark, wraparound sunglasses and advise them to avoid bright lights for 24 hours. The next day, at the scheduled postoperative exam, a medical technician would measure the patient’s corrected vision and coordinate further postoperative exams. The patient had the option to return to either the LLV clinic or one of LLV’s US-based partner clinics for the 1-week, 1-month, and 3-month follow-up exams. Alternatively, some patients chose to have these exams conducted by their family OD. For US patients traveling to LLV or other British Columbia clinics for surgery, a 3-day and 2-night stay was necessary.

The first day consisted of a pre-exam to assess the patient’s suitability for surgery, followed by the surgery itself on the second day. A 24-hour postexam was then conducted on the third day. The cost of two nights in a hotel near LLV was around US$100, and airfare from Spokane, Washington to Vancouver, British Columbia, Canada was approximately US$150. LLV had a sister clinic in Seattle where patients could undergo postoperative exams. Patients were required by LLV to have follow-up exams at 1 week, 1 month, and 3 months, which were included in the price if they visited either the Seattle or Vancouver clinics. Some patients outside of these areas arranged for their local family optic doctors to perform these follow-ups at their own expense to save time and money on travel. Exhibit 17/4 provides a breakdown of the estimated cost structure for each competitor. Dr. Everett believed that both Eye Consultants and LLV were likely experiencing losses due to the price competition in the industry. Eye Consultants was also offering below-cost pricing to increase volume and gain surgeon experience. PCLI’s cost structure was similar to Empire Eye’s as both operated in a similar manner.Exhibit 17/4 presents revenue and cost estimates related to LASIK for PCLI’s competitors. Note that all figures are displayed in US dollars.

1. Eye Consultants
2. Empire Eye
3. TLC Clinic
4. Lexington Laser Visionb
5. Type of Operation
6. General Ophthalmology Practice
7. Eye Surgery Center
8. Specialized LASIK Clinic
9. Specialized LASIK Clinic
10. Location of Operation
11. Spokane, WA
12. Spokane, WA
13. Seattle, WA
14. Vancouver, BC

Number of Procedures Per Year

• 600
• 1,000
• 4,000
• 10,000

The cost to the customer for each eye is indicated.

• $1,195
• $1,900
• $1,600
• $500

Projected Income

• 717,000
• $1,900,000
• $6,400,000
• $5,000,000

Estimated Costs

Payments for Pre- and Postoperative Carec

• 120,000
• 450,000
• 1,400,000
• 1,500,000

Royalties

• 150,000
• 250,000
• 1,000,000

Surgeon’s Compensation

• 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 is the process of promoting and selling products or services. It involves various activities such as advertising, market research, and public relations. Marketing plays a crucial role in attracting and retaining customers, increasing brand awareness, and driving sales. It relies on effective communication and strategic planning to reach target audiences and achieve business objectives.

• 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

This table was created using information from various public sources on the LASIK industry as a whole and on specific competitors. In some instances, the numbers are estimates based on data from multiple sources. The estimated expenses are primarily derived from a discussion of the cost structure of the LASIK industry in the article “Eyeing the Bottom Line: Just Who Profits from Your Laser Eye Surgery May Surprise You” by James Pethokoukis, published in U.S. News & World Report on March 30, 1998, pages 80–82.

The cost structure of specialized LASIK clinics in British Columbia, Canada, that competed with PCLI was believed to be standard.

In certain instances, patients directly pay these costs to the postoperative care provider. These costs are included here as they are a portion of the total price paid by the customer. The Canadian Advantage

LASIK clinics in Canada had significant advantages over their competitors in the United States. Firstly, the Canadian dollar had been weaker compared to the US dollar for a while, fluctuating between C$1.45 and C$1.50 per US dollar, which was lower than the exchange rates in the early 1990s that fluctuated between C$1.15 and C$1.20 per US dollar. Additionally, Canada had a lower average inflation rate of 1.5% during the 1990s, while the United States had an average inflation rate of 2.5%. This combination of a weakened Canadian dollar and higher inflation in the US gave Canadian providers a significant exchange rate cost advantage.

Secondly, laser surgery equipment manufacturers in the United States charged a $250 patent royalty fee for each surgery performed, while the legal system in Canada prevented such charges. As a result, Canadian clinics saved $500 per patient compared to their counterparts in the US. Competitive pressure among equipment manufacturers had caused this fee to decrease to as low as $100 for certain procedures performed on older equipment in recent months, giving US clinics hope that this cost disadvantage might diminish over time.

The higher salaries and fees for surgeons and support staff in the United States compared to Canada affected LASIK clinics. Although Canadian LASIK clinics were not a part of the national health system, they could pay their surgeons more than what they could earn in the nationalized system. However, this was still considerably less than what a comparable surgeon would earn in the United States. Additionally, the cost difference extended to the optometrists who conducted pre- and postoperative exams and whose fees were usually included in the overall price for customers.

Many Canadian clinics relied heavily on advertising and customer referrals via word-of-mouth instead of optometrist referrals. They also de-emphasized pre- and postoperative exams. Additionally, there were speculations among US clinics that certain low-priced Canadian clinics were compromising the quality of care. They were believed to not follow recommended equipment calibration and maintenance frequency, as well as reusing microkeratome blades for corneal incisions. However, Canadian clinics denied any compromise in the quality of care provided to patients. Furthermore, Dr. Everett observed that Canadian providers were engaged in a price war, and some clinics were not generating profits at the current prices. Despite this, Canadian providers had notable noncost advantages.

Due to variations in the approval process of medical equipment and procedures, laser eye surgery technologies were frequently accessible in Canada prior to becoming readily available in the United States. In Canada, the approval of new medical technologies typically relied on evidence from other countries indicating their safety. Conversely, in the United States, manufacturers had to conduct a series of studies as part of the approval process. Consequently, Canadian clinics gained more experience with laser eye surgery than their American counterparts, especially considering the increased demand generated by their lower prices.