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15 posts from May 2010

May 28, 2010

The ABCs of building a financially healthy medical practice

As changes continue to occur in the healthcare industry, physicians are taking a hard look at the numbers of a medical practice and gauging whether the year at hand will be economically successful. To analyze the productivity of the practice, physicians depend on accurate and timely information. However, with the focus of every practice on delivering quality health care, the financial side often becomes neglected or ignored.

Frequent signs that a practice may not be paying enough attention to its financial side include: a lack of documented billing procedures; lack of internal controls involving accounting and cash; lack of timeliness; no accountability for staff; missing or outdated records; and the lack of targeted benchmarks.

In order to run a practice profitably, a physician should review weekly financial and cash flow updates to calculate overhead and determine how much to collect and how many patients are needed to cover those costs. These updates also allow physicians to determine the level of patient visits, frequency of procedures, trends in expenses and changes in activities.

Develop a simple accounting system. Creating a dependable and user-friendly accounting system is the key to successful financial reporting. By engaging an accounting professional, practices can create a system that works for them. The system needs to be able to generate weekly and monthly reports on the status of the office and must be kept up-to-date.

Buying easy-to-use accounting software is the first step. Staff also must also be properly trained so data input is timely and correct.

It's also important that a professional accountant frequently review the activity in a practice's accounting records, especially if the practice is growing, adding doctors, expanding or is new. This review will allow a practice to properly report financial conditions and timely tax planning. The last thing a physician wants to find after months of recording the books are surprises in regards to gains, losses or tax liability.

Implementing and documenting medical billing procedures is critical in today’s environment. Accurate medical billing (especially CPT coding) is extremely important to the success of any practice. Creating processes that ensure data is captured properly and timely should become a top priority. Staff should be aware of what is expected of them and how to get it done effectively.

The best way to establish these procedures is to place productive but reasonable practice goals with each staff member. Goals could include daily charges input, daily payments input, acceptable lag time days, number of claims that have received follow-up, number of patient calls to make, zero lag time on correcting claims transmitted, compliance with credit balances and compliance with coding and documentation.

Several areas that should be closely monitored in the billing process include regular follow-up on claims and appropriate attention to denials, zero EOBs and transmission rejections.

Next, make sure to create a continuous communication cycle. Because of the pace of a physician's office, formal communication between doctors, management and staff often is fragmented, neglected or postponed. Animosity can develop between management and staff because of inaccurate assumptions.

Management must take ownership of this responsibility and strive to communicate with staff. Key issues such as turnover of personnel, additional hiring of personnel to support practice functions and new processes needing implementation should be communicated timely. Staff meetings with specific agenda items and formal memos documenting new policies and decisions seem to work well for physician offices.

Finally, establish your benchmarks – this I have preached to you in the past. Benchmark all practice statistics and most importantly, see how you are doing this year compared to last year. If the year is flat or declining, investigate immediately and develop an associated action plan of attack.

Through planned and integrated accounting, medical billing, communication and benchmarking, a physician's office can run smoothly and continue to care for patients while being up-to-date on the economics of the practice.

May 27, 2010

Asset protection strategies for you and your medical practice

There are a number of relatively simple strategies an organization can use to provide significant protection for its assets.

Separate Entities. Consider creating a separate entity (possibly a limited liability company) to hold real estate, machinery, or assets relating to a new line of business. If there were a future judgment against the corporation, the assets held in the separate entity or entities would likely not be subject to that judgment as long as appropriate formalities were followed. Tax issues can arise in connection with the transfer of assets, and these should be considered prior to any transfers. For example, the transfer of real estate out of a C corporation into a limited liability company could trigger a significant amount of tax, and thus make the transfer impractical. But if additional real estate or a significant piece of machinery or equipment is being acquired, having a new limited liability company purchase it (and then lease it to the corporation) could have significant advantages. 

Limited Liability Companies. A limited liability company (“LLC”) is a hybrid type of legal entity that has some characteristics of a corporation and some characteristics of a partnership. 

  • Owners of an LLC are called members;
  • They can elect to receive pass through tax treatment like a partnership or an S corporation, or to have the LLC taxed like a C corporation;
  • They have limited liability like in a corporation; 
  • They have a great deal of flexibility in management structure. 

LLCs can provide significant asset protection advantages. A creditor of an owner of a corporation (that is, a creditor of a stockholder) often can gain control of a corporation by getting control of the owner’s stock. Creditors will have a much more difficult time gaining control of an LLC. Thus, many business owners now prefer to form an LLC instead of a corporation when the need for an additional entity arises.

Insurance. Review all of your business insurance with both your attorney and your insurance agent. Since your attorney is not selling any insurance products, he or she can often provide an objective review of the types and amount of your business insurance. Having adequate insurance is one of the most important (and generally one of the most cost effective) ways to provide protection for your business.

Update Corporate Records and Follow Required Formalities. Many physician practices do not keep their corporate record books up to date. In the event of a lawsuit against the company, a plaintiff’s attorney can attempt to “pierce to corporate veil”. This means the corporation will essentially be ignored and the owners (shareholders) will be personally liable for the corporate debts.  Following basic corporate formalities, including

  • Holding an annual shareholders meeting;
  • Holding regular meetings of the Board of Directors;
  • Avoiding any mixing of personal and corporate assets; and
  • Keeping corporate records up to date.

will all help to insure that the assets of the owner(s) of the medical practice are insulated from any judgment against the business. One of the many advantages of an LLC over a corporation is that LLCs require fewer formalities in both their organization and operation. However, piercing of the LLC veil is also possible under various circumstances, including inadequate capitalization or failure to maintain a separate indentity (for example, failing to have a separate bank account for the LLC). 

Business Succession Plan. Many physician owners lose sleep worrying about lawsuits and other potential legal claims. While these concerns are often justified, more businesses collapse from lack of a business succession plan than from a lawsuit bought by a party unrelated to the business. Lack of such a plan can lead to fights among family members, including litigation, which can be disastrous at both a business and a personal level. Paying attention in advance to at least some form of succession plan can save an enormous amount of trouble later. Life insurance should be considered as one part of the business succession arrangement. Good business succession planning is also a form of asset protection planning. 

General Legal Review of Business Operations. Is your physician practice in compliance with applicable employment laws and other regulatory requirements? Has your employee manual been reviewed recently? One lawsuit will likely cost far more than a basic legal compliance review. A legal “check up” is like a medical checkup: identifying one or more serious problems and taking care of them now can avoid a much greater problem later. 

May 26, 2010

Review Your Physician Practice Personnel Manual From A Legal Standpoint

While not intended as a legal document, your personnel manual may have the force

of an employment contract. Review it to be sure it won't cause unintended problems.

 

Perhaps you think your personnel manual the booklet describing policies and benefits for your staff is a low-key presentation. Unfortunately, it's loaded with dynamite. A variety of court decisions make this apparent.

 

"At-Will" Employment?

 

Some courts have held that representations in a personnel manual can become part of the employee's employment contract. Thus, a manual's language may legally prevent an employer from firing a staff member ``at will.'' 

 

Be careful, for instance, how your manual describes the employment relationship.  Nothing in it should imply that the staff member’s role is “permanent.”  For some years our own manual casually said that after an initial three months’ probationary employment, the position would become permanent; it’s much safer to describe the employment relationship as becoming “regular.”

 

As another means of assuring that you can fire an employee if dissatisfied with performance, have your manual specifically state that each staffer's employment is "at will."  The following helps make the point:

 

  "The Practice retains its right to terminate employment with or without good cause; by the same token, you have the right to leave with or without good

cause."

 

Watch out, too, if your manual sets out a pre-firing procedure like a set of progressive disciplinary steps.  Courts have held employers liable for "wrongful discharge" when those steps were not followed. In the same vein, language saying that discharge will only be for certain types of behavior ("for cause," for example) may make a termination illegal if you do not or cannot document that behavior.

 

Promises of Benefits

 

Statements of an employee's benefits can be held against you even if you had changed those arrangements. We recall a practice whose manual promised all regular employees term life insurance of one times salary. The doctors dropped the group's term life insurance contract, but the promise lived on in the manual much to their financial risk.

 

Consider deleting from manuals all specific description of benefits. Instead, the manual should simply refer employees to the actual benefit plan documents. If you prefer describing benefits, be sure to include a protective statement along these lines:

 

"The material in this manual represents our informal summary of benefits at the time of publication.  Those benefits are under continuing review, and they are fully described in our formal summary plan descriptions and/or insurance subscription agreements. Refer to those sources for a full description of each plan's benefits and limits. If any provisions are inconsistent with this manual, the formal plan documents are controlling. We reserve the right to change or terminate any benefit plan at any time in accordance with the formal plan documents."

 

So be sure to draft your personnel manual with real care. Be aware, too, that the law varies significantly from state to state on the entire subject of employee manuals and rights thereunder. Review your manual and significant changes with your attorney to be sure you are not creating any undue problems for yourself and your practice.

May 25, 2010

IRS employment updates that may impact physician practices

HIRE Act Payroll Tax Exemption: Following changes by the HIRE Act signed by President Obama on 3/18/10, employers hiring unemployed workers after 2/3/10 and before 1/1/11 may qualify for a 6.2% payroll tax incentive, in effect exempting them from their share of the Social Security tax on wages paid to these workers after 3/18/10. The employee's 6.2% share of Social Security tax, as well as the employer and employee share of Medicare tax, still apply to the wages. A revised Form 941 (Employer's Quarterly Federal Tax Return) and instructions, to be used in claiming the exemption beginning with the second calendar quarter of 2010, are now available on www.irs.gov . The IRS also updated its series of Frequently Asked Questions (FAQs) on the HIRE Act payroll tax exemption—click on www.irs.gov/businesses/small/article/0,,id=220750,00.html  

Small Business Healthcare Tax Credit: The IRS posted detailed guidance for eligible small employers purchasing employee health insurance, which describes the steps for claiming the credit made available in 2010 under the Patient Protection and Affordable Care Act. The steps include (1) determining the employees to be taken into account, (2) determining the hours of service performed, (3) calculating the number of Full-time Equivalent Employees (FTEs), (4) determining average annual wages paid per FTE, and (5) determining the premiums paid that are taken into account. The notice clarifies that state credits and subsidies for health insurance do not reduce the amount of the Section 45R credit available. In addition, the credit can be reflected in determining estimated tax payments for the year and can be used to offset AMT liability, subject to certain limitations.

May 24, 2010

Factors of Fair Market Value: A Few Keys

One of the most problematic areas of medical practice valuation is establishing a clear understanding of the factors a valuator must assess in order to arrive at an appropriate fair market value for a medical practice. Failure by one valuator or another to understand these factors can lead to an incorrect valuation, usually an overstatement of the true value of the medical practice. The following are factors you should consider when valuing any medical practice - as a colleague once said to me, “valuation is an art and unfortunately not a science”:

 

Defining Fair Market Value

 

According to the International Glossary of Business Valuation Terms, fair market value is defined as “The price, expressed in terms of cash equivalents, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arms length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.” This is the definition generally accepted in the valuation community.

 

Under the Stark II regulations, the following is the definition of fair market value:

 

“Fair market value means the value in arm’s length transactions, consistent with the general market value. “General market value’’ means the price that an asset would bring as the result of bona fide bargaining between well-informed buyers and sellers who are not otherwise in a position to generate business for the other party, or the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party, on the date of acquisition of the asset or at the time of the service agreement. Usually, the fair market price is the price at which bona fide sales have been consummated for assets of like type, quality, and quantity in a particular market at the time of acquisition, or the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the price or compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.”

 

When valuing a medical practice, it is important to know therefore whether or not the Stark regulations come in to play.  Within Stark, any arrangement must be considered “commercially reasonable” in the absence of referrals if the arrangement would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician (or family member or group practice) of similar scope and specialty, even if there were no potential DHS referrals.

 

So what does this mean if indeed the fair market value is affected by the Stark regulations

 

  • The Stark definition of fair market value may restrict and prevent the use of certain market comps since use of such comps may not be “commercially reasonable”;
  • Just because a transaction may be “fair market value” does not necessarily make it “commercially reasonable”.

 

Using the Wrong Assumptions in a Fair Market Value Appraisal

All (that’s all) valuation is about future cash flow, not historical cash flow. This is why the Income Approach methodology is commonly used to value a medical practice. This method converts/discounts an anticipated benefits stream in to a single present value amount. The valuation of a medical practice therefore relies upon risk-based assumptions as to what patients, procedures or tests will occur in the future as of the valuation date.  So when projecting out in to the future, does the volume and related expected reimbursement make sense? Is the revenue assumption too aggressive? Does it make sense to increase significantly cash flow revenues in an era of declining physician reimbursement?

 

You should also look for overstated revenues as well as missing revenues. If overstated revenues are included in the calculation of practice value, the result is often on overstatement of value. To reiterate, the objective is to determine the real income stream of the practice. There are often three types of overstatement situations: (a) The commitment of fraud and abuse by the practice, (b) Utilization abuse by the practice, and (c) Upcoding of visit services normally due to a lack of coding education by the doctors.

 

In addition to revenues, take a hard look at the expense assumptions. Do anticipated expenses really match the anticipated revenue stream? You cannot significantly increase gross revenues without possibly adding personnel, increasing space, using additional supply costs, etc.

 

Finally, when making adjustments to future cash flows and expenses, you must keep in mind the difference between fair market value adjustments and investment value adjustments (which cannot be included in the valuation). Investment value represents what a medical practice might be worth to a potential investor. As such, investment value represents individual investment requirements and opportunities; it reflects the synergies that might occur after the purchase of the medical practice. Many times a person will say “If you buy or take over this practice, you can increase revenues __% because you’ll now be doing these services and I don’t currently or you can eliminate $__ of expenses because you can move the practice to your location.” These are “investment” type of adjustments and should never be included in a fair market value appraisal.

 

Relying on the Market Approach to Value

 

This approach is defined as a general way of determining a value indication of a business or business ownership interest using one or more methods that compare to similar businesses that have been sold. In other words, this approach calculates the value of the medical practice based on prices actually paid for comparable entities.  It follows the simple mathematical process of determining the sales price as a ratio to net discretionary income available for owner compensation calculated from the comparable sales data and applying these ratios to revenues of the entity being valued.

 

But can you REALLY find a “comparable” sale of a medical practice today to the one which is being valued? Is the sale transaction(s) you are looking at really “apples to apples”? If you don’t think you are, don’t use it in the valuation (REMEMBER: buyers buy cash flow – i.e. the cash flow of the target medical practice).

 

Conclusion

 

When valuing a medical practice, you will need to assess not only these factors but many, many more. A failure to do so could have a major impact on the final valuation figure. This is arguably one of the most important parts of the valuation process and one where valuators, especially inexperienced ones, usually stub their toe. So to assist you, I have included the following checklist of special issues to consider in any medical practice valuation engagement. Make sure, as you look at each one, the potential impact on the potential impact on the valuation is analyzed and assessed.

May 20, 2010

E-prescribing: A Free Tool to Get You Started

If you haven’t yet used electronic prescribing, there’s no reason to wait. E-prescribing software is available free through the National ePrescribing Patient Safety Initiative (NEPSI, at http://www.nationalerx.com/). It’s based on software offered commercially by Allscripts and it’s free. It’s basically an on-ramp to electronic health records - The tool lets users enter a patient’s current medications, problem list, and allergies (which it uses to automatically check for side effects and interactions;), write a prescription; and send it directly to a pharmacy. The pharmacist can use the system to return a message alerting the physician to allergies or other potential problems noted on the patient’s pharmacy record, or to let the physician know when the patient needs a refill.

 

http://www.nationalerx.com/

 

May 19, 2010

What is your practice worth?

How much is your practice worth? Often, it depends on who wants to know and why. Valuation professionals follow different methodologies tacks depending on whether a practice will be sold to another physician, valued for a divorce proceeding, or if practice partners just want to go their separate ways.

 

The traditional building blocks of practice value are:

 

  • Hard assets – equipment, facilities, supplies, patient records, etc.
  • Cash – what’s left after expenses, including physician compensation
  • Accounts receivables – money due for professional services
  • Goodwill –anything paid above the value of hard assets, cash and A/R

 

You can follow several pathways to put a value on these four items. The market value approach – what other practices in the area sold for recently – is dandy for houses but can be an exercise in uncertainty to compare medical practices in different parts of the country.

 

Another approach is to try and project future cash flow, the component most important to business investors. While it works well for many types of businesses, cash flow valuation is of little help to the typical medical practice owner since most have little cash left after paying for overhead expenses and physician compensation – in other words, medical practices do not retain earnings.

 

Physician owners tend to take whatever’s left after expenses as their compensation. If physician compensation is set at a fair market level for the same area but there’s never any cash left at the end of the year, then what’s it worth to an investor? Unless a physician earns substantially more than the fair market rate for his or her specialty and the area, that money is physician compensation, not profit. That’s why figuring in goodwill – the ability to make profits – is such a major component in determining practice value. 

 

Very Basic Valuation

 

One way to determine if goodwill might exist for your medical practice is to figure out what it would cost to hire a doctor to take your place, assuming the same level of experience and expertise that you have. The difference between your compensation and that replacement doctor might be considered goodwill.

 

To get a quick, very rough estimate of what your practice might be worth in today’s market, try a ‘back of the napkin’ valuation. This bare bones approach looks at free cash flow and the rate of return a hypothetical investor might expect for buying your practice.

 

Step one is to determine your practice’s free cash flow. That’s the amount of cash left after paying operating expenses (staff and nonphysician provider salaries, rent, leases, loans, insurance, etc.) and the fair market compensation of the physicians. Say you have a three-physician care practice that pulls in $1.5 million after contractual adjustments. Operating costs are $900,000, leaving $600,000 for the three of you to divvy up. Suppose a fair market compensation figure for your professional services is $185,000 each, thus leaving $45,000 in total free cash.

 

Step two is to propose a required rate of return on investment (ROI). While 20-year Treasury bills may pay a little less than 5 percent now, investors who take large business risks will look for returns closer to a 20 percent return annually.

 

Step three is to divide the cash flow ($45,000) by the ROI amount (0.20). The result is the “total” value of the practice ($225,000). This includes “all” assets of the practice, including accounts receivable and goodwill. Keep in mind the is an extremely ROUGH valuation calculation – impact of taxes would have to be considered, all risks to future cash flows would have to be considered, future capital needs, etc.

 

Now remember, this kind of calculation may get you in the church, but it certainly won’t get you into the right pew! Depending on the buyer, you also may have room to negotiate on other issues, such as your practice’s location, the quality of its management, patient growth rate, payer mix and other factors. However, no matter how you appraise a medical practice, you still won’t know what it will bring on the market.

 

I often run into doctors who think their practice should sell for its appraised value, but that’s not always the case. If you want to get a good deal, start thinking about life after the sale and how you’ll have the chance to get paid for what you do as opposed to what’s left on the table after all of the practice costs and contract discounts are taken out.

 

The hardest thing to convey in presenting appraisals is that it’s just business. It’s not personal, but to some people, hearing what their practice is worth is like we’re saying their baby is ugly. And for now, buyers seem to be getting the upper hand in determining what your baby – your practice – is worth.

May 17, 2010

Small Businesses Tax Credits Begin in 2010

Under the new healthcare reform law, companies (this includes medical practices) with fewer than 25 employees and average annual wages of less than $50,000 will be eligible for a credit for certain contributions to purchase health insurance for employees.  The credit phases in from 35% of the employers contribution to 50% by 2014. Smaller medical practices with 10 or fewer employees and average annual wages of less than $25,000 can get up to a 100% credit. The credit is effective for taxable years beginning after 2009.

 

Not included in the definition of an employee are seasonal workers, self employed individuals, 2 percent shareholders of an S Corporation , 5% owners of a small business, and dependents. Leased employees are eligible for the credit. These rules are effective as of date of enactment.

 

May 13, 2010

De-escalating an Irate Patient

1.    The first order of business is to get a screaming patient away from other patients who are within ear shot..  An irate patient wants everyone to hear his or her complaint.  If you do not fear physical harm, invite the patient away from public areas.  Try to make it neutral.  (Don’t use your office if possible – the implied power could actually make the customer more irate.)

2.    Focus on diffusing the anger.  Acknowledge that the patient is unhappy.  Remain calm and use a low, controlled tone of voice.  Do not shout back at the patient.  Control your body language.  Don’t give advice or orders.  Never touch an angry patient.

3.    After you have acknowledged the patient’s anger, wait and listen.

4.    If at all possible, work to a resolution of the anger before the patient leaves.  Sometimes no resolution will be acceptable to both parties, but at least the issues have been heard.  Giving in to a patient’s unreasonable demands is not a healthy way to resolve the issue.

May 12, 2010

Handling Unhappy Patients

Stay calm – They might be angry, but they are angry at what’s happened to them, not at you.  Your frame of mind and demeanor can greatly influence the conversation – either positively or negatively.

 

Know the problem – Do not start off on a solution without having a complete understanding of the problem.  Don’t stop talking with the patient until you’re very clear what happened and what steps they’ve taken to date.  Review what you know and make sure you aren’t missing anything.  Get as specific as you can with dates and with whom they’ve spoken.

 

Ask them what they want – You might need to do this several times, “peeling the onion” to get at what they really desire.

 

Know what you can do – Know what the limits (yours and the organization’s) are in offering a solution.  Your company’s processes and systems are a mystery to your patients.  Help them through the system.  Don’t let them get dropped or forgotten.

 

Say you’re sorry – Apologize (authentically) for anything you can own – that they are frustrated, that they got an unexpected bill, etc.  However, there is no need to apologize unnecessarily, or to admit fault.

 

Follow up – Make sure you follow through on what you say you will do.  Do not make promises that you cannot keep, or on behalf of other people.