Whether you are an administrator, owner, or someone who is involved in some way with the running of a medical practice, you are likely going to already know about both asset-light and asset-heavy medical practice designs.
If you are, however, unfamiliar with these terms, then knowing the difference between them can be extremely helpful in weighing up how to design a medical practice and where capital should be allocated.
An asset-heavy medical practice is one with a large amount of capital invested in equipment, the property and building where the practice is located, employees (with a large number of full-time employees), and essentially owns a wide range of assets that allow it to perform as many functions as possible.
An asset-light medical practice on the other hand is one that owns fewer fixed assets, with a minimized quantity of full-time employees that focuses more on using outsourcing vendors to provide patients with a full range of medical and diagnostic treatments.
If we were to look at this in terms of urology practices, an asset-heavy medical practice would likely own its building, own all specialty urology and imaging equipment, and employ many nurses and technicians, while an asset-light medical practice would not own its building, would own very little specialized equipment, would employ a trained urologist, but would outsource many other specialized rolls (such as medical imaging and urodynamics).
Both of these options give patients of a practice access to the right professionals, however there are pros and cons for both types of practice structure that can make one work better in certain environments, and vice versa. Knowing how each works may allow you to apply this information to your own position within a medical practice to focus on either vertical integration or growth and flexibility.
So, even though one is not better than the other and should be used depending on the specific environment of the practice, what are the pros and cons of each?
Asset-Light Private Medical Practices
Businesses in many different industries are opting for the asset-light option with a view that capital assets may actually weigh down a company and slow down growth along with a company’s financial results. There are essentially two ways that a business, including a medical practice, can go asset-light: outsourcing, and asset sharing.
Outsourcing – Outsourcing is likely the most flexible option for any medical practice, where asset requirements such as equipment and expertise can be outsourced to specialized providers instead of tying up capital by outright purchasing specialized equipment and training staff/employing a specialist. This option gives practices access to specialized services and expertise while also allowing them to remain flexible and update to a different vendor with the advent of updated technology or procedure.
Asset sharing – This form allows medical practices to use an asset that is shared among multiple practices on a semi-regular basis. Because the maintenance of some types of equipment is expensive, asset sharing allows practices to only pay for the use of equipment when needed, saving money on maintenance costs, and providing additional flexibility for fluctuations in demand.
Being free of non-performing assets that take up capital and storage space allows practices to allocate capital towards areas of growth instead and focus on their core strengths while also providing flexibility to stay up-to-date with the latest trends instead of being held back by assets that would likely devalue over time. Therefore, asset-light approaches are also more sustainable, and allow medical practices with limited capital to still provide patients with a range of services. According to a study conducted by the Boston Consulting Group, on average, asset-light businesses also generate better returns than their asset-heavy peers.
There are some downsides however, since asset-light operations depend on outside vendors which can actually create a bottleneck. A vendor bottleneck may delay deliverables and interfere with a practice’s schedule and ability to provide patients with services in a timely manner. This business model also allows more players to participate, which lowers barriers to entry and may crowd the marketplace.
And when it comes to the sharing of patient data with outside vendors, there is an opportunity for data security to become compromised where patient data is leaked, so it is extremely important that asset-light medical practices thoroughly evaluate how vendors protect patient data, and that they implement a strong strategic plan in the case of a vendor bottleneck.
Asset-Heavy Private Medical Practices
On the other hand, asset-heavy practices who invest large amounts of capital into purchasing their building, equipment, and investing in staff training to cover as many procedures as possible in-house may reap a range of different benefits.
An asset-heavy medical practice with moderate to full vertical integration has much more control regarding service coordination, service speed, and knowledge-sharing as well as having a greater pool of knowledge amongst their employees without relying on outside vendors. However, a large level of vertical integration can be costly and does require large capital investment.
Additionally, when core assets are scarce and outside vendors cannot be found, an asset-light business model will fail to provide practices with access to the required equipment and expertise while an asset-heavy, vertically integrated practice would be able to allocate additional capital into acquiring those core assets.
An asset-heavy operation may then lead to monopolistic conditions that benefit the practice in environments with a limited number of players. When a practice is able to offer a full range of services in-house that are scarce in the local area, they will benefit from an increased demand with minimal service competition.
Asset-heavy operations may also generate higher margins due to their exclusivity, which can actually offset the initial capital investment and risk.
The downsides for asset-heavy medical practices are that to begin with, they will need access to large amounts of capital for acquiring all of the necessary assets for their practice. For many medical practices, this is simply not possible since for the first few years. They will be fighting against interest and principal payments and will have to cope with the inherent risk of failure due to financial leverage which would result in a direct loss of investment.
In summary, asset-light medical practices are great for those who do not have access to large amounts of initial capital and who have a number of vendors to choose from when outsourcing, allowing them to allocate capital to targeted growth areas within the business. This approach also saves money when services and equipment are only used occasionally since they pay on a per-use basis. Asset-heavy practices on the other hand will benefit from scenarios where outsourcing vendors are not easily available where vertical integration of assets and services gives them a local monopoly that insures that they have consistent demand and can make regular and full use of their assets.