An Industry Divided

Founded in the US in the 1950s, VSP claims, as its mission statement, the support of independent optical outlets. But much has changed in the 58 years since a group of independent optometrists met in California to form the vision care insurance company.

In the words of VSP’s Senior Vice President of Global Business Development, Mr. Ric Steere, the company has “grown quite large”. Indeed, it is now the largest optical benefits provider in the US, with a network of more than 28,000 optometrists. It has expanded into Canada, the UK and now Australia.

VSP, VSP Global and the various companies under its umbrella, including Australia’s General Optical (GenOp), now have significant stakes in virtually all aspects of optical manufacturing, distribution and retail practice.

So, we would love global dom… oh, I’m not going to say that because you’ll quote it… We would like to grow our business but we need to grow our business through independent optometry because that’s who we’re aligned with

VSP, through its various companies, owns a range of optical laboratories, produces eye care-specific practice management software, designs custom interiors and merchandising systems for the optical industry, and owns Marchon eyewear, the world’s third largest supplier of ophthalmic frames and sunglasses… Chloé, Calvin Klein, Disney, Karl Lagerfeld, Lacoste and Nike Vision are all in its stable.

Despite its multi-billion dollar annual revenue, VSP itself is classed as not-for-profit (although it recently lost the tax exemption on that not-for-profit status in the US courts), meaning that it channels 90 per cent of its profits back into growing its business. There are no owners or stockholders; instead the company is governed by a board of 13 directors, nine of whom are optometrists in private practice.

Predictably, Mr. Steere, in a lengthy interview with mivision, pointed to the company’s size as a positive, saying that “Americans have had 50 years to look at this and evaluate… if they continue to join and continue to thrive, it is a successful model”.

Critics who spoke to mivision, most requesting anonymity because of business ties with GenOp, point out the US health system is intrinsically flawed and not something that should be transposed to Australia; and that VSP is an HMO (Health Maintenance Organisation, see ‘What is an HMO?’) with a reputation for – as long-time VSP critic and US-based optical business consultant Alan Cleinman told mivision, “squeezing” US optometrists in its pursuit of “gobs and gobs and gobs of money”.

Mr. Steere says VSP’s “total package” – that is, VSP’s laboratories, VSP’s eyewear, VSP’s lenses, VSP’s IT solutions, VSP’s distribution network and VSP’s business consultants – can help independent optical outlets find a competitive edge.

“If they (independent providers) take a look at the integrated approach… there are other ways they can increase margins.

“So, we would love global dom… ah, I’m not going to say that because you’ll quote it,” Mr. Steere told mivision.

“Our purpose is not to take over the entire market. We would like to grow our business but we need to grow our business through independent optometry because that’s who we’re aligned with. So we need to make sure that independents are successful and then consequently we’ll be successful.”

Critics point out that it is VSP’s “total package” – that is, VSP’s laboratories, VSP’s eyewear, VSP’s lenses, VSP’s IT solutions, VSP’s distribution network and VSP’s business consultants – that worries them. If it looks like a duck, and quacks like a duck…

As one respected member of the Australian optical industry told mivision, under the condition of anonymity: “When any company has this much control they can control the flow of business to the practices and thus they control the price the practice charges. The practice is ultimately at the mercy of VSP. This is nothing less than a takeover of independent optometry practices by stealth and it is funded by those very same independent practices.”

So What’s the Deal?

In Australia, the VSP offer hinges on it delivering Medibank Private customers to its Eyecare Network Members.

Under the terms of the deal, network members must offer Medibank members a 20 per cent discount on frames, a 15 per cent discount on contact lenses and must purchase AUD$1,800 from GenOp each month. GenOp CEO Peter Lewis said the minimum order was “not a big deal” for even small practices and “no-one had baulked” at that condition.

The Optometry Association Australia (OAA) met with VSP in January, which OAA Chief Executive Officer Genevieve Quilty described as a “good opportunity to formally discuss the VSP model and their plans ahead and the interaction VSP will have with Medibank Private and with their optometry partners who have signed contracts with VSP”.

But Ms. Quilty said the OAA’s advice to members remained the same: carefully run the numbers.

“It is generally accepted that the net profit on the sale of spectacles is approximately 20 per cent of the sale price, therefore, without other changes to the way in which your practice functions, a discount of 20 per cent would result in no net income from the sale of goods at all,” Ms Quilty said.

“If the margin on goods is even smaller, then each pair of spectacles sold to a member of a Health Fund (in this case, specifically Medibank) would represent a loss to the practice. It does not matter how many more patients are attracted to the practice, the loss could not be recovered unless other actions were taken.”

Mr. Lewis told mivision that too much has been made of the rebate, which was just “one little facet” of the total package being offered by VSP.

“It’s a whole business solution and I think one has to look at the whole story. VSP Global has four divisions: eye care health insurance; frame manufacturing; lens processing and super labs; and the biggest practice solution business in America. What we have put together here is a complete business solution, encompassing all of these facets in one delivery vehicle.”

Mr. Lewis said independent optical retailing was “basically a cottage industry” in Australia, without the integrated systems needed to take on Luxottica and Specsavers.

“All we are doing is saying to them, if you have got to give this discount, and you use the integration process, you are going to be in the same position, if not a better position, than you were in prior to that,” Mr. Lewis said.

The VSP contract with optical retailers in Australia promises that VSP will maintain a searchable web-based directory of VSP Approved Suppliers, provide in-office promotional materials and to use “reasonable efforts” to expand the network.

Although not mentioned in any of the VSP documents seen by mivision,¹ Mr. Lewis said the total business package offered by VSP would also include training, visits to the practice by business consultants and IT solutions.

In addition, Mr. Lewis said, a grassroots marketing campaign would help direct patients to independent optical stores in the VSP network.

“There are a lot of other drivers but, for commercial reasons, I’m not going to be able to divulge any of those…there is going to be a lot of communication. The communication is more direct to the patients, it is not overt, cluster bomb marketing… it is direct marketing; personalised marketing; communication from doctor to patient,” Mr. Lewis said.

Mr. Steere said VSP would not match the multi-million dollar advertising budgets of Luxottica and Specsavers to build brand recognition in Australia, primarily relying on commitments from Medibank to drive customers to the VSP network, through its website and newsletters.

It did, however, sponsor a series of print advertisements, which appeared in capital city newspapers in mid-January. Medibank Private was expected to begin promoting the network to fund members last month (February), Mr. Steere said.

While the network has been in action only since 1 January this year, Mr. Lewis said some network members were already reporting an increase in Medibank Private patients.

A VSP case study

Nick Hansen, from the central western New South Wales city of Orange, said he decided to join the VSP Neighbourhood Eyecare Network after seeing a “steady leak” of Medibank Private patients over the past few years.

“As an independent optometry business we needed to rethink our approach in an increasingly competitive marketplace.

“Joining the VSP Neighbourhood Eyecare Network hasn’t dramatically changed anything we do. We are still Hansen Optometry, Eyecare Plus. We have always offered ‘No Gap options to all health fund members and we were already utilising the GenOp integrated supply chain. The contract with VSP is quite comfortable in that you can exit … with 90 days’ notice. If it doesn’t appear to be working for our business we can opt out quite easily.”

He said the network was in its early days, but “anecdotally, our impression … is that Medibank Private patients are tending to spend more with us when they know they’re receiving a discount”.

Call to Arms

On the flip side, the immediate past President of the International Opticians Association, Paul Clarke, urged independent retailers to be “brave” and resist the VSP deal, saying it was not necessary to lure customers.

Paul Clarke, who has a thriving Perth practice and one of the few industry leaders willing to publicly put his name to criticism of VSP, has cancelled his account with GenOp in protest against the arrival of VSP and what he described as its “fear campaign” to recruit independent optical outlets.

For an independent outlet to compete against the corporate optical giants, it was necessary to “stand out and be different”, he said.

“Don’t put yourself into the ‘same old, same old’ … you don’t have to corporatise yourself to compete,” Mr. Clarke said.

Mr. Clarke urged eye care professionals to inform themselves about US HMOs and VSP, in particular, as well as the benefits offered by various health funds – and then be vocal about it to patients.

“Our patients listen to us. People believe us more than they believe the big corporates. Health care people need to stand up. Rather than telling patients that ‘all health funds are the same’, we should be telling Medibank Private members to look at the alternatives, by consulting consumer websites such as Choice,”
Mr. Clarke said.

Just Say No

Another urging local optical retailers to look to VSP’s operations in the US is Mr. Alan Cleinman, President of Cleinman

Performance Partners, a New York based firm that describes itself as the largest business development company for optometry in the world, and a long time, vocal critic of VSP’s American operations.

Mr. Cleinman, who toured Australia last month for a series of business seminars sponsored by Hoya and aimed at independent optical retail outlets, said it was his opinion that VSP was interested in nothing more than making “gobs and gobs and gobs of money” and was “no different than LensCrafters” (a wholly owned subsidiary of Luxottica).

Mr. Cleinman said in the US, private optometry providers were now dependent on VSP delivered patients.

“Just 10 years ago, the typical provider was paying about 11 per cent of sales to (VSP) to feed their patient volume ‘habit’…and an 11 per cent cost of sales was a reasonable investment to put ‘butts in seats’,” he said.

But Mr. Cleinman said private providers in the US were now paying “hundreds of thousands of dollars” to have these patients delivered to them by VSP, and claimed the mandated rebates had now risen to about 50 per cent, and now almost completely controlled the practices in its US network.

Mr. Cleinman said with an already established delivery system and online presence, VSP was now developing relationships directly with customers through the network providers.

“In simple terms, this picture begs the question…what do they need you for?”

The reality is that (ultimately) they (will) not need your involvement in the delivery of eyewear… ”

Mr. Cleinman said while VSP was entrenched in America, it was not as well known in Australian, and he urged optometrists here to “just say no”.

Mr. Steere shrugged off online criticism as “that’s one blog”, pointing again to the growing number of optometry providers continuing to join the VSP in the US.

Australian business consultant and regular mivision contributor, Mark Overton, said he did not believe that ‘packaged solutions’ as offered by VSP were the answer for independent optical retailers.

“There’s no doubt that their aim with a total package is to foster dependence and make it difficult for practices to extract.

“I think practices need to focus less on competing with Specsavers and others and start competing with themselves… It’s about personal care and ideally meeting needs and wants for your customers. The business that does this ideally will ultimately succeed. This can mean many different things in many different markets.

“A business with one primary supplier with IT, frames, lenses, business services and logistics can be a huge risk. We need diversity in suppliers, not uniformity,” Mr. Overton warned.

Looking to the Future” On launch day – 1 January this year – VSP and GenOp had signed more than 350 independent practices, including some savvy business operators with multiple practices, to its new network.

The EyeQ group of optometry practices was one of the first to jump at the VSP deal, announcing by media release that it was “excited” by the prospect of partnering with VSP.

Mr. Steere said while the VSP deal with Medibank Private was exclusive for the first year, the company’s plan is to “grow as big as we could possibly grow” and it was hoped that other independent optical outlets – and health funds – would be added to the network over time.

Mr. Steere, during his interview with mivision, repeatedly emphasised that the network in Australia was in its infancy and that time would reveal the benefits of the VSP model – both to independent optometrists and their patients.

“It’s not the silver bullet but it helps them (independent optical retailers) maintain those (Medibank) patients,
it can help them get new patients and because of the rebate, because of the marketing through Medibank, it can give them the opportunities to sell more (product) that has margins available that will allow them to make money, even with discounts,” he said.

The OAA’s Ms. Quilty agrees that it is too early to judge VSP’s impact on the Australian market: “The impact of VSP is unknown at this time given it is very early days. Independent optometry, however defined, has always been a strong contributor and source of innovation in the Australian optometry sector.

“Involvement with VSP will not diminish this as the arrangement is primarily related to optical appliances rather than the clinical service provided by the optometrist,” Ms Quilty said.

References

1. mivision reviewed the VSP Vision Care Australia Provider Agreement, dated 15 October 2012; the Medicare Addendum to the same document; an introductory letter to optometrists from Mr. Steere; a flyer announcing a series of information evenings; a VSP Neighbourhood Eyecare FAQs sheet; and an online FAQ page for Eyecare Professionals and general FAQs on the VSP Australia website (https://vsp-australia.com.au/static/faq/eyecare_professionals.html and https://vsp-australia.com.au/static/faq/general.html).