LASIK Surgery. An analysis of how LASIK surgery became the dominant from of vision correction surgery in the United States

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1 An analysis of how LASIK surgery became the dominant from of vision correction surgery in the United States LASIK Surgery by Pete Gauthier, Sandy Levine, Dave Sibley, Sarah Stern & Joya Zuber

2 Introduction to LASIK Laser in Situ Keratomiliusis (LASIK) is a type of refractive surgery that corrects common vision problems such as myopia, hyperopia, and astigmatism. LASIK surgery can permanently reduce or eliminate patient dependence on corrective eyewear such as glasses and contact lenses. In 1989, the first LASIK procedure on a human eye was performed by Dr. Ioannis Pallikaris. In 1999, the FDA approved LASIK for use in the United States and the technique quickly gained popularity with patients. By 2010, LASIK was the single most common elective operation in the world with over 35 million procedures performed. 1 The phenomenal success of LASIK surgery can be attributed to innovations in surgical techniques and laser technology that reduced procedure and recovery time and improved results for patients. Advertising by ophthalmologists and word of mouth endorsements from satisfied patients also contributed to the success of LASIK - more than 95% of LASIK patients in the United States are satisfied with the outcome of their procedure and would recommend the surgery to a friend. 2 The Vision Correction Ecosystem in the United States The number of individuals in the United States who suffer from some form of refractive error requiring vision correction is enormous and options for vision correction available to patients include corrective eyewear and surgery. The vision correction ecosystem is defined by 1 Dan Z. Reinstein, MD, MA. "The History of LASIK." Journal of Refractive Surgery (2012): Solomon, K.D. et al. Ophthalmology 2009; 116(4):

3 many players including ophthalmologists, optometrists, opticians, payers, patients, eyewear and lens manufacturers, and laser manufacturers. Market Data The vision correction market encompasses any product, device, or surgery that helps improve sight for patients with less than 20/20 vision. More than 50% of Americans, over 150 million people total, suffer from refractive errors or eye problems that result in less than 20/20 vision. 80% of these problems are driven by refractive errors, which occur when the eye cannot adequately focus light 3. These refractive errors manifest themselves as nearsightedness, farsightedness, or astigmatism, which is an irregular curve of the eye s cornea. As of 2008, Americans spent more than $15 billion on corrective eyewear to treat refractive errors 4. Statistics on glasses and contact lenses vary depending on the source. Roughly 38 million Americans wear contact lenses and this generates $2.1 billion in revenue annually 5. It is also estimated that 64% of Americans wear glasses, although it is undetermined how many of these include prescription lenses that address vision imperfections. The average price for prescription eyeglasses is $263 6, including frames and lenses. Price for contact lenses vary greatly based on whether the contact lens is soft or hard and how long the contact lens can be worn for. Since LASIK was approved by the FDA in 1999, over 35 million LASIK procedures have been performed worldwide. In the United States, roughly 700,000 LASIK procedures are 3 Susan Vitale, PhD, MHS; Leon Ellwein, PhD; Mary Frances Cotch, PhD; Frederick L. Ferris III, MD; Robert Sperduto, MD. Prevalence of Refractive Error in the United States, Archives of Ophthalmology, 2008; 126 (8): 1111 DOI: /archopht Vision Problems in the U.S., by the National Eye Institute and Prevent Blindness America,

4 performed annually 7. The number of LASIK procedures performed moves in line with macroeconomic factors like the Consumer Confidence Index. LASIK surgery has experienced major declines during periods of economic slowdown, specifically after the September 11th attacks in 2001 and the financial and housing crisis of 2007/2008. During the economic boom of 2004 to 2008, LASIK surgeries grew to roughly 1.2 million surgeries per year 8. Because insurance companies rarely cover LASIK surgery, consumers must pay for LASIK out-of-pocket and this comes from their discretionary spending. Non-Surgical Vision Correction If a patient is suffering from vision problems and is interested in receiving a prescription for corrective lenses, they must decide whether to see an optometrist or ophthalmologist. Most patients who are looking for a simple eye exam will set up an appointment with an optometrist. The optometrist can determine the appropriate prescription and work with the patient to understand what care path works best with their lifestyle. If a patient is not interested in or ineligible for surgery, the optometrist can prescribe them prescription glasses or contact lenses. This task can also be performed by an ophthalmologist if a patient chooses to see them instead. The patient must then fill the prescription through their optometrist, ophthalmologist, dispensing optician, eyewear store, general store, or local pharmacy. Most employers provide some type of vision plan either through their general health insurance or through a separate entity such as VSP. Annual eye exams are usually covered by insurance but coverage for vision correction can vary. In general, a significant portion of vision correction costs are paid for by insurers but patients also take on an out-of-pocket fee. 7 Eye Surgery Education Council, established by the American Society for Cataract and Refractive Surgery. Lasik. 8 F6BC-438C-B49A FA8%7D/Continued-economic-downturn-affecting-LASIK-PRK-volumes 3

5 Surgical Vision Correction Refractive surgery is currently the only permanent vision correction option available to patients. LASIK is the most common refractive surgery technique available in the United States. Vision problems that can be treated by LASIK include myopia (more than 32 million Americans over age 40), hyperopia (more than 12 million Americans over age 40), and astigmatism (one third of people). 9 In the United States, surgical vision correction is an elective procedure that legally must be performed by an ophthalmologist. Patients typically find a surgeon through word of mouth, advertisements, or a referral from an optometrist. Health insurance does not typically cover LASIK procedures and patients must find a way to pay for the surgery themselves. Innovation and LASIK The emergence of LASIK surgery as a method for permanent vision correction in patients required the development of both new ocular surgical techniques (keratomileusis) and new medical devices (excimer laser). Before LASIK surgery could be successfully performed, both of these innovations had to be in place. As a result of these innovations, LASIK surgery is now performed in 10 minutes and corrects 96% of all refractive errors with minimal discomfort, a recovery time of a few hours, and typical vision restoration up to 20/ Keratomileusis In 1948, Colombian ophthalmologist Jose Ignacio Barraquer Moner developed a surgical technique for correcting refractive errors in the eye called keratomileusis. Keratomileusis Dan Z. Reinstein, MD, MA. "The History of LASIK." Journal of Refractive Surgery (2012):

6 literally means sculpting of the cornea. The technique has four steps: (1) removing the corneal disk from the patient s eye (2) freezing the cornea (3) sculpting the frozen corneal tissue using a cryolathe and (4) replacing the thawed cornea in the patient s eye. Barraquer s development of keratomileusis laid the groundwork for modern day LASIK surgery. One of Barraquer s students, Luis Ruiz, further developed the technique to allow keratomileusis to be performed in situ, which simply means the cornea no longer had to be removed from the eye before sculpting. 11 Excimer Laser An innovation that dramatically reduced the recovery time from refractive surgery and encouraged adoption was the excimer laser. In 1981, IBM researchers discovered that an argonflouride excimer laser could make an incision in tissue without damaging the surrounding tissue. 12 The excimer laser is the foundation of the lasers used to perform LASIK today. Wavefront technology creates a three-dimensional image of the cornea. Wavefront technology was approved by the FDA in Wavefront technology is used to program the excimer laser and guide the correction process during surgery. 13 LASIK On June 20, 1989, Gholam A. Peyman, MD, was granted a United States patent for using an excimer laser to perform in situ keratomileusis, the technique that is now known as LASIK. LASIK was approved by the FDA in Dan Z. Reinstein, MD, MA. "The History of LASIK." Journal of Refractive Surgery (2012): Dan Z. Reinstein, MD, MA. "The History of LASIK." Journal of Refractive Surgery (2012): Refractive Surgery: an in depth look at LASIK, American Academy of Opthalmology. 5

7 LASIK Ecosystem Players in the LASIK Ecosystem Patients Over half of Americans need some type of visual correction. Of these ~160 million Americans, a small portion is interested in undergoing LASIK surgery, either because of risk or financial issues. Of those patients that are interested in LASIK, roughly 95% are approved. Some common reasons patients are not approved is because their prescription is still changing or they are taking medications that could prevent wound healing and recovery. Ophthalmologist The ophthalmologist is a medical doctor that has attended four years of medical school and conducted four years of residency training. Ophthalmologists specialize in both medical and surgical eye problems and are certified to perform eye surgery. There are roughly 15,000 ophthalmologists in the US today and this number is expected to grow at only a 0.67% rate going forward 15. The median salary for an ophthalmologist is $254, Optometrist An optometrist typically completes four year of undergraduate work and then completes four additional years of study to achieve a doctoral degree. Optometrists focus on the eye, vision and associated systemic diseases. They are also required to study general health and the patient s overall medical condition as it relates to eyes. They are not certified to perform surgery so will 14 Annie Stuart. A Look at LASIK: Past, Present and Future. Eyenet (2009): Demand for Opthalmic Services and Opthamologists A Resource Assessment by Market Scope, LLC,

8 refer their patients to an ophthalmologist for surgery procedures. There are 34,200 optometrists, roughly twice the number of ophthalmologists. The median salary for an optometrist is $94, Opticians Dispensing opticians help fit patient s eyeglasses and contact lenses once they have received a patent. Opticians most often work at an optometrist s or ophthalmologist s office, but they also work at stand-alone eyewear stores, pharmacies, and general merchandise stores. The median salary for an optician is $32, Regulators The United States Food and Drug Administration is the government agency that is responsible for regulating and supervising the use of food products, over the counter drugs, and medical devices. This authority covers the approval and use of LASIK lasers. First, a device manufacturer files for approval from the FDA; before this approval, the device cannot be legally sold in the country. The device manufacturer must provide proof that the device is safe and effective. Once the device is approved, doctors are able to use the devices in whatever ways they think are appropriate. However, the FDA continues to monitor the safety and effectiveness of the devices through two programs: MedWatch and SightNet. MedWatch is a program that allows people to report problems that arise from use of the devices. SightNet allows health care

9 professionals to share their concerns with one another and report problems to the FDA 19. Other nations have similar governing bodies through which device manufacturers must get approval. Governing bodies that approve and monitor devices are critical for consumer adoption of new drugs or medical devices and should not be taken for granted. Without this approval process, consumers would not be confident in the safety or efficacy of medical devices and would be resistant to adopt new technologies. The adoption timing would be significantly longer as people would have to see positive results and limited risk through other avenues word of mouth, consumer reports, etc. Due to the apparent risk of having laser surgery on eyes, this approval process is particularly important for LASIK manufacturers. While the approval process may be a headache initially, it is to the benefit of LASIK manufacturers in the long run. Additionally, the American Medical Association impacts the vision ecosystem by granting ophthalmologists medical licenses to perform certain procedures and preventing others, including optometrists, from performing them. There are two ways the AMA is impacting the ecosystem. First, they are vetting the quality of the professional who can perform the service to ensure quality. Second, they are limiting the supply of medical professionals who can perform an operation, thereby keeping prices high. 19 htm 8

10 Referral LASIK Surgery Ecosystem Map Non-Surgical Vision Correction AMA Ophthas Prescription Ophthas Patient Contacts Patient Lens Optician Patient Frames Optoms Optoms Patient 2012 Vision Correction FDA Device Manufacturers 3 rd Party Financing AMA LASIK Procedure Patient Ophthas Prescription Ophthas Patient Contacts Patient Kick-Back Lens Optician Patient Frames Optoms Optoms Patient 9

11 How LASIK Reconfigured the Vision Correction Ecosystem Partner Relative Benefit Total Cost Surplus Ophthalmologists Device Manufacturers Optometrists/Opticians Patients Third Party Financers As a result of the value deficit of LASIK to optometrists, ophthalmologists redistribute some of their surplus to optometrists in the form of a kickback in order to encourage LASIK adoption amongst optometrists. Ophthalmologists rely on optometrists to screen patients and send them good candidates for LASIK. Patients As with any new surgery, adoption risk can be a concern, both for the physician and the patient. In this instance, the patient is even more important because they undergo this surgery to improve their personal lifestyle and not because of immediate health risks. There are three important criteria areas for patients: costs, quality/outcomes, and risks. Costs are an important area since most health insurance and vision plans do not cover this procedure. On average, patients will pay roughly $1,630 per eye for non-customized LASIK using a microkeratome and excimer lasers that are not guided by wavefront analysis, and $2,151 10

12 per eye for wavefront-guided LASIK using a laser-created flap 20. Long-term though, this cost is much less than the lifetime cost of wearing glasses or contact lenses. Many ophthalmologist offices will work with third-party financers to offer financing plans that allow patients the flexibility to pay for the surgery in small segments over a larger period of time. The second area patients consider before adopting LASIK is quality and outcomes. LASIK initially was something that customers were skeptical of because outcomes were not well-known or established. Once LASIK received FDA approval in 1999, it became more widely known and more data was published on the long-term effects of LASIK. Studies performed by LASIK practitioners show that 95.4% of patients are satisfied with their surgery. In studies of patients who suffer from nearsightedness, a median of 94 percent of eyes achieved 20/40 or better vision after LASIK surgery and did not require correction with glasses or contact lenses 21. These statistics and word-of-mouth awareness have convinced most patients that LASIK is a high quality procedure that leads to beneficial outcomes. The last element patients consider when electing to undergo LASIK is the risks associated with the surgery. These are broken out into short-term and long-term risks; however it is very rare that any permanent problems result. Less than 1 percent of LASIK patients experience serious, vision-threatening problems. Short-term problems include halos, haze, and glare, while more serious long-term problems include eye infection, chronic dry eye, or LASIK flap problems. When LASIK was still new to the market, there were many widely publicized news stories about the scary effects of LASIK. However, these cases represent a very small

13 portion of surgeries. Many studies have also shown that as surgeons perform more LASIK surgeries, outcomes improve and complication decline 22. Laser Manufacturers Summit Technology was the first company to receive FDA approval to use a laser for keratectomy surgery. The company received FDA approval for commercial LASIK machines in There have been nearly a dozen companies that manufacture FDA-approved corrective eye surgery lasers 23. The different machines have different patents that protect their unique technologies. The global market for these lasers is roughly $600M, and is projected to grow to over $800M by , largely driven by the aging population. The most common of the LASIK machines are Abbott Medical Optics (AMO), Nidek and Alkon with AMO having the largest market share 25. LASIK machine manufacturers have three different revenue streams. First, they sell doctors the machines for an up-front price, which is typically $350K for each machine 26. Second, doctors typically pay a click fee for each eye on which they perform LASIK. These fees are typically $150. Third, manufacturers can sell replacement parts and maintain and service the machines tm Interview with Dr. Gus Stern, November 6 th Interview with Dr. Gus Stern, November 6 th

14 Ophthalmologists The ophthalmologists are the primary champions of LASIK surgery and were immediately a green light adopter. They are the only player who can perform LASIK surgery in the ecosystem. LASIK is a highly profitable business line for ophthalmologists if they can perform it in volume. Buying the laser equipment is very expensive; therefore high volumes of LASIK surgery are needed to spread out the fixed cost. Many ophthalmologists have formed group practices to spread the costs and increase volume. Direct marketing campaigns have also been critical to LASIK s success. Many ophthalmologist practices market through television, radio, and online to attract new patients. LASIK also benefits ophthalmologists in that it often brings in new customers, as opposed to cannibalizing current business lines. Previously, their primary focus had been on medical and surgical treatments for eye disease. LASIK provided a growth mechanism for them to enter the corrective market and steal share from optometrists. Optometrists Optometrists are the primary detractor of LASIK surgery. They have very little to gain from this innovation. They are not licensed to perform surgery themselves and the LASIK surgery, if performed correctly, reduces demand for their services. Optometrists lose market share because of LASIK surgery and lose customers who would have generated high lifetime value. Because of this loss, some optometrists are incentivized to discourage patients from pursuing LASIK and rarely refer their patients to ophthalmologists. In some cases, they will tell patients they are too high risk for LASIK when this is not the case. Ophthalmologists have 13

15 responded to this by providing financial incentives for referrals; optometrists often receive a kick-back of roughly $800. However, because $800 is much less than the average amount an optometrist will generate on a per customer basis over several years, optometrists still prefer to keep the patient instead of referring for LASIK. Providing the referral kick-back moved optometrists to a yellow light in the ecosystem. The full unlock for creating green lights in the LASIK ecosystem was to exclude the optometrists completely. Ophthalmologists were able to achieve this through direct marketing campaigns. This has been the key driver of volume since many optometrists are unwilling to recommended LASIK to their patients. Opticians Similar to ophthalmologists, opticians are removed from the ecosystem because they have no value to gain from LASIK. American Medical Association The AMA requires an individual be trained as a medical doctor to perform LASIK. This has two impacts on the adoption of LASIK. First, it reduces concern that consumers may have with the procedure. Had others (optometrists, nurses, etc.) been able to perform LASIK, the results may have been reduced or the number of errors may have increased. This would have increased the risk of getting the surgery done and therefore may have slowed adoption. Second, the fact that a medical license is required to perform LASIK reduces the number of people who can perform the surgery. In effect, this enables ophthalmologists to maintain prices that are high enough to justify purchasing the expensive machines and perform the surgery after years of training. 14

16 Paying For LASIK LASIK is not a cheap procedure. Even though the average 25 year-old can expect to save over $40,000 during his lifetime if undergoes LASIK, with the cost averaging over $3,000 for both eyes, not everyone can have pay for the surgery. In the ecosystem, Insurance Companies, Ophthalmologists, Financial Institutions, and the US Government, have each contributed to making the procedure more accessible to patients. These players have helped fuel the growth of this innovation. Insurance Companies According to the Mann Eye Care Center in Houston, one of the country s leading performers of LASIK surgeries, There are few to no insurance companies that will pay for the complete LASIK procedure. To them, LASIK is an elective procedure. For an insurance company to pay for any surgery, they require the patient to have a disease or limiting condition, one example would be a cataract. The fact that insurance companies do not pay for the surgery is frustrating to many consumers. Not only is this a life-changing procedure, but in the long run it saves the insurance company money by not having to pay for new glasses every year. However, Insurance companies know that once a patient has the surgery, they may not enroll in vision insurance anymore and will stop paying the premiums they once paid. Insurance companies do work with certain practices and some do offer a 5-15% discount for having the surgery completed at certain ophthalmologists. The discounts are becoming more prevalent and have helped more people afford LASIK. 15

17 Ophthalmologists Due to the fact that most insurance companies do not cover the LASIK procedure, many eye care offices around the country now offer direct financing to patients. This has become very important to the LASIK industry. Direct financing has afforded many patients the ability to have the surgery without having to pay a large amount up front. In fact, many eye centers have used their financing options as a marketing tool to attract more patients. For example, The Mann Eye Center offers qualified patients a two-year zero-interest loan program. This can reduce monthly payments to below $150 a month for a 24 month period. The terms of the financing vary based on the patient s personal and financial situation. Many practices are willing to finance at low rates to attract more customers. Financial Institutions As with many elective surgeries, there are many financial institutions willing to finance expensive procedures such as LASIK. The issue with finance companies is they often charge a very high interest rate and the rates fluctuate significant based upon the patient s credit score and personal situation. Although this is not common, some people use financial institutions to finance their surgery. The Government Another reason for the success of LASIK in the United States is the help from the US Government. The government has allowed LASIK as an eligible expense of Flexible Spending Accounts (FSAs). FSAs allow the patient to use pre-tax dollars to pay for the surgery. This is significant savings for customers. Instead of using the after-tax dollars from their paycheck, they 16

18 are able to avoid income taxes on the money they spend on the surgery. For example, the savings on a $3000 LASIK procedure for a patient in the 25%, 28%, 33% and 35% tax brackets are $1,000, $1,167, $1,478, $1,615, respectively. The FSA creates, an interest-free LASIK financing program for yourself by taking a portion of your salary each month and depositing into a tax-free FSA account. 27 Not everyone has access to an FSA because they are only offered through employer-sponsored plans. The catch is that if you don't use up all the money in your account during a calendar year, you generally forfeit the balance, so you have to plan ahead if you intend to use the money for laser vision surgery. 28 Dr. Gus Stern, an ophthalmologist and LASIK surgeon, noted that he often will see a spike in the number of LASIK patients towards the end of the year. People will realize they have a balance in their account and do not want to see it go to waste, said Stern during an interview. Although some people will wait until the end of the year, one attractive feature is that the entire amount of your annual contribution may be available as an advance, so you don't have to wait for your payroll deductions to build up before scheduling your procedure. 29 A second option is to use a Health Care Spending Account. These accounts are similar to FSAs and allow the patient to use pre-tax dollars to pay for their surgery. The difference with an HCSA is that HCSA do not have to be set up through an employer sponsored plan. These plans are often used by individuals who elect a high-deductible plan or who are self-employed. The individual does not forfeit the unused amount at the end of the year, but these plans can be more difficult to keep track of for tax purposes than an FSA. 27 LASIK Financing: How to Afford LASIK Surgery. Hilt, Jessica. July LASIK Eye Surgery. ConsumerReports.org. August LASIK Eye Surgery. ConsumerReports.org. August

19 Other Ways To Pay Some employers will actually pay for employees to have the LASIK procedure performed. These are often for employees who are working in roles that require good eyesight and maybe under unique conditions. For example, an oil company may pay for LASIK surgery for an employee they are sending to do detailed engineering work in the Middle East for six months. These are one-off situations and not common in the US. Another recent way LASIK has become more affordable is by some eye care centers offering Groupon-like promotions. This is not perceived well by many people and may hurt the centers brand, but for some patients it is the only way they can afford the surgery. Conclusion Execution Risk Co-innovation Risk Laser Incision Device Lasik Procedure Patient Training AMA Ophtho 3 rd Party Financing Optom referrals DTC Advertising Value Chain Risk 18

20 LASIK has been a successful innovation in eye correction and is forecasted to continue growing. The ultimate success of LASIK depended on cutting the optometrists out of the ecosystem and focusing on direct LASIK marketing campaigns. Ophthalmologists, customers, and device manufacturers all benefit greatly from LASIK and have been able to create an ecosystem that supports LASIK s growth. Patient ability to pay for LASIK will limit the growth of LASIK in the future. Ophthalmologists have been able to use third party financial institutions to create payment plans for patients so that they can afford it, but it is still a very expensive procedure. Incentivizing insurance companies to offer LASIK could significantly grow the size of the LASIK market. Having the surgery can be cheaper than a lifetime of optometrist appointments and purchasing eye glasses or contact lenses. 19

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