Avoiding Three New Financial Threats to Your Group Practice - Part II

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You are about to face your largest fiscal challenge ever: reimbursement cuts, tax increases, and lowest common denominator planning. The most obscure of the three is also your biggest liability.

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You are about to face your largest financial challenge ever.

Medicare reimbursement cutbacks will reduce the income of most doctors, the federal government is on the verge of significant tax increases for high wage earners, and your group practice probably suffers from some form of "lowest common denominator planning."

LCD planning occurs when a practice will only implement planning techniques that everyone can agree on, despite the fact that there are too many distractions for a group of doctors to unanimously agree on anything other than the simplest (and least beneficial) strategies.

If you would like to address these challenges, the following recommendations will help you explore advanced planning options to do so.

Use a “Hybrid” Benefit Plan

If you are in a LCD situation, you should consider using a hybrid benefit plan in addition to a traditional qualified plan (401(k), profit-sharing plan, money purchase plan or defined benefit plan). The main attraction of a hybrid benefit plan created under new pension rules is that each physician can choose the amount he or she wants to contribute in the plan formula. This can vary from $150 to $100,000 per year.

This simple plan can be implemented for a one-entity medical group with one, two or even dozens of doctors. Other benefits of this type of plan include:

  • Utilization of the plan in addition to a qualified plan like pension, profit-sharing plan/401(k) or SEP IRA;
  • Contributions can qualify for current tax deductions;
  • The plan acts as an ideal “tax hedge” technique against future income and capital gains tax increases;
  • Balances can grow in a top asset protected environment;
  • Employee participation requires a minimal funding outlay; and
  • There are no minimum age requirements for withdrawing income (no early withdrawal penalties).

Employ a more flexible corporate structure

The plan above is the only significant plan a practice with a “one entity structure” (PC, PA, etc.) can utilize. This one entity structure promotes LCD planning gridlock. A common way to solve this problem is to alter the practice’s legal structure so that it allows individual physicians their own planning flexibility, without disrupting your day-to-day operations or requiring new insurance contracts of Medicare provider numbers.

In the typical medical group structure, there is one legal entity — like a corporation, LLC, or professional association (PA). Physicians are either owners of the entity (informally referring to themselves as “partners”) or non-owner employees. In all such cases, the physicians have no ability to separate themselves from the central legal entity. If the central entity does not adopt a planning strategy, no individual doctor has any flexibility to adopt beneficial corporate planning strategies for his or her benefit.

If this is the case in your practice, you might consider a superior structure. Doctors can own their share of the practice through their own professional corporations (PCs) or PAs. In this way, the group is paid by the insurers, pays its bills and overhead and then pays the physicians’ PCs — best through 1099 independent contractor income.

For the physicians who want to implement planning strategies beyond LCD, they may do so through their own individual PCs without any impact to partners’ planning or operations. The strategies will be implemented at each doctor’s PC level, leaving the central entity and its operations unchanged. We have seen this strategy used successfully in some of the largest medical practices in the United States.

Bring in an expert

In our interactions with over 1,000 physicians each year, we find the most common hurdle to implementing advanced planning to be planning gridlock. Unfortunately, most find no solution to this dilemma as their practice planning gridlock is what stops them from creating a structure that allows them to avoid gridlock — a Catch-22. Because of practice politics, the doctors who are able to navigate past the gridlock generally have the help of outside experts (with whom none of the partners or other legal or tax advisors have any negative history).

Experts in the fields of tax, benefits planning and corporate law have the credibility and expertise that increase the probability that you will be able to convince your partners to “see the light” in a way that fellow physicians cannot. These advisors can often explain the suggested structure from attorney-to-attorney or CPA-to-CPA so that the local advisors are on board, agreeable and involved in the planning.

Conclusion: Push Your Partners Now!

The changes are coming. Financial success in the practice of medicine is going to be harder than ever. Even if you are grappling with financial gridlock in group practice, you can explore advanced planning options to address these challenges. Share this article with your partners so they can become aware of the threats and potential solutions.

Jason O’Dell is a consultant, author of two books for doctors, and principal of the financial consulting firm O’Dell Jarvis Mandell LLC, where Carole Foos works as a CPA and tax consultant. The authors welcome your questions. You can contact them at (877) 656-4362 or www.ojmgroup.com.