Group Practice Economics

Happy together: What makes a practice endure?

Why do some groups survive when so many others fail? Our experts have the answers.

By Anne L. Finger, Senior Editor

It's often said that a business partnership is like a marriage, and in both relationships, large dollops of chemistry and luck are needed to keep things together. Still, anyone who's been in a long partnership—medical or connubial—will acknowledge that chemistry and luck can take you only so far. Beyond that, hard work, willingness to compromise, and flexibility are all-important.

What else distinguishes medical practices that thrive from those that wither or implode? Physicians who go into private practice are, for the most part, famously individualistic. How can they possibly be persuaded to repeatedly set aside their self-interests for the long-term good of the group?

The answers lie in a series of business arrangements and strategies that—unlike chemistry and luck—are well within the control of the members.

Getting a grip on governance is critical

"The first thing that holds groups together is leadership," says David C. Scroggins, a practice management consultant in Cincinnati. "In successful groups of up to five physicians, we usually find a strong physician leader who's fair and takes on a lot of administrative planning work." With the right person in charge, the CEO physician is the most streamlined form of governance, according to Scroggins.

One such leader is James R. Smith, an FP in Shelbyville, KY, whose five-doctor practice, located on two sites, includes four partners, a part-time physician, and three PAs. The part-timer has been with the practice five years; all the others have been there from 10 to 16 years.

Smith and the practice manager meet weekly to deal with problems they can handle without going to the board, which meets bimonthly. "Any physician or PA can put an item on the agenda," Smith says. "Everything is presented, debated, and voted upon, and a majority rules. The key is to not hide anything. As long as people know everything's on the table, they feel good about the vote—even if they lose."

Leaders can be too strong, of course. Practice management consultant Michael J. Wiley of Healthcare Management and Consulting Services in Bay Shore, NY, has seen groups that are run by virtual dictators. "Dictatorships are efficient, but they don't work over time," he says. "They lead to high physician turnover." Also ineffective, says Wiley, are rudderless democracies where "everybody talks about what has to be done, and nobody does anything."

After the strong leader, the next best approach to governing is an executive committee. Scroggins recommends a committee of three doctors, with one in charge of personnel, one finances, and one facilities and operations. Wiley suggests four committees: accounts receivable, which includes billing, coding, and documentation; accounts payable, which includes facilities and operations; personnel; and marketing. Normally, says Wiley, it becomes obvious who's suited to do what: "If you hate it when Mary asks for a raise, you don't want to handle personnel."

Once the committees are formed, they need decision-making authority. "One group of eight doctors, which was dominated by three strong leaders, had set up a committee system with two doctors on each committee," says Scroggins. "But because the three dominant doctors wouldn't cede authority, the practice manager had to keep polling everyone for input. All the doctors were in on every decision."

Smaller groups can get away with meeting frequently and making decisions informally. Gastroenterologist Kenneth P. Rubin of Englewood, NJ, has two partners. He opened his practice with one of them in 1981; the other joined in 1987. "Once or twice a week, we're usually curbsiding each other about business issues we think are important. We may meet at the end of office hours, during lunch, or whenever we can catch some time," Rubin says.

Groups of a dozen or more need structured meetings with administrators and managers. Governance is most difficult for groups of six to 12 doctors, says consultant Michael LaPenna of Grand Rapids, MI. "They think they can act as though they were still three people," he says. "They may want to make more money or add a site, but they haven't figured out how to do it. I call them prepubescent." Such groups must formalize their meetings if they're to survive.

Regardless of how large the practice may be, it's important that physicians hold the reins. Consultants warn against delegating everything to the practice manager. "The doctors' income is at risk," stresses Wiley. "They have to be involved in the decision-making."

Clarifying your goals can alleviate problems

Groups that stay together share the same goals. The specifics of those goals, consultants agree, are often less important than the fact that they're held in common.

"I've seen groups that are stable even though they have horribly high overhead, and their profitability is only 70 percent of what you'd expect," says Scroggins. The reason for the stability: The physicians are mostly part-timers with a similar work ethic, so the business objective is being met. However, Scroggins notes, "when you add doctors to your group, you have to accommodate different work ethics. Sometimes you need to make changes to keep fairness and trust."

In Jim Smith's practice, lifestyle goals are paramount. "Everyone has six to eight weeks' vacation and a very favorable call schedule," he says. Call averages every fourth night during the week, and every fifth weekend. (The part-timer participates in weekend call.) "Quality of life, with time to enjoy ourselves away from work, is important to us." But there's a closely allied goal. "If we're going to take that much vacation time," Smith says, "we have to make the time we're here as productive as possible." Toward this end, the group has one physician do only hospital rounds for a week at a time, freeing the others to start seeing patients in the office at 8 am. "We've seen a 14 percent income increase because of that," says Smith.

To William A. Frumovitz, senior partner in a five-member ob/gyn practice in Santa Monica, CA, the practice's survival is itself a significant goal. "Your aim should be to keep the practice going and to be successful," he says. "If everybody has the same objective, somehow you figure out how to get through all the arguments people have." Frumovitz and two of his partners have been together for 10 years or more; another joined five years ago; the fifth arrived in 1998.

Too often, according to Medical Group Management Association consultant Darrell L. Schryver, groups totally lack goals. "I have them identify the purpose of the organization, where they want to go, and how they plan to get there," he says. "That reduces problems by 60 to 70 percent."

Be clear but flexible about potentially divisive issues

How do medical groups handle the emotionally charged matter of income division, which involves the ego as much as the bottom line? Although successful groups have varying compensation formulas, "the one common denominator," says the MGMA, "[is] the inclusion of a productivity component." But practically any arrangement works, as long as the terms are fair and well thought out, and there are no surprises. It's important, too, that arrangements are examined over time to see whether they're viable as circumstances change.

In Kenneth Rubin's three-man group, all income is split equally. "We didn't want to fight over whose consult or whose procedure something is, because that's destructive to a practice," he says. "It's healthier to have people you trust, and not base things on productivity." Rubin notes, however, that the three-way split works because the doctors' patient loads are comparable: "Obviously, if one person in the group wasn't productive, that could be an issue."

The same system works for a team of cardiologists—some doing three and four invasive procedures a day, while their noninvasive partners see 30 to 40 patients. "Their philosophy is, 'We're all working hard,' " says consultant Schryver, " 'so let's share and share alike.' "

Income division at Smith's practice is 80 percent equal, 20 percent based on production. "You have an incentive to work harder, but you're not autonomous. That has worked well for us," he observes.

But even when contracts are in place, thorny issues need resolution—and that's where flexibility is required. "Sometimes," says ob/gyn Jon S. Matsunaga, one of Frumovitz's partners, "it takes months of discussion before people soften up. One of us will say, 'I should get paid more for that'; others will say, 'No, you shouldn't.' Finally, it comes down to the doctor who wants the change saying, 'I'll take a little of it,' and the doctor who'd been opposed saying, 'Okay, I'll accept that.' "

Buy-ins and buyouts can be sensitive areas, too. When a third partner joined Kenneth Rubin's practice, he wasn't asked to put up buy-in money. "We thought that would be a point of contention for a new associate, so we just graduated his salary until after six years he was a full partner," Rubin says. The practice is now looking for a fourth partner, and the doctors plan to handle things the same way.

In Frumovitz and Matsunaga's practice, all the physicians are partners. The three who've been there at least 10 years are 100 percent vested; the other two are vested based on the number of years they've been there: six and three. They also have no buy-in. Says Frumovitz: "We don't want to make money from a new partner. We tell people, 'This is your salary the first year, and if you make more, you get more.'

"Because we can't afford to pay a huge salary, and we want the very best people, we say, 'You don't have to come up with a huge amount of money to participate in the assets of the practice; you'll do that by spending years here.' It had been five years, but we're changing it to between 10 and 15."

The group is steadfast in this approach—although the partners have been advised that they're making it too easy on incoming physicians. "This is the way we've done it, and it's worked well for us, so we're going to continue," says Frumovitz. Their buyout, however, is more formalized. "We have it fixed at a certain percentage of the physician's income at a specific point in his career, calculated on a two-year average. The practice has the option of paying it immediately or over a period of time."

Because the concept of goodwill in medicine has been questioned, notions of what constitutes a fair buyout have been evolving. That's why it's important to revisit buyout agreements that were drawn up years ago. "Those who are ready to leave should be able to plan, and not have to negotiate," says Scroggins.

"Update your buy-in/buyout methodology every few years," says LaPenna. This is especially important in groups with five to eight physicians. "People start thinking, 'What's this person putting in compared with what I had to pay?' Or, 'How does my 20 percent compare with the 20 percent of the person who's leaving?' Often, groups can't remember why they made the rules."

Call can present problems— or solutions

If, like Kenneth Rubin, you're in a group of three, call isn't much of an issue. "Our call is divided evenly," says Rubin. "We do one week on, two weeks off. It's a lot; that's one reason we're looking for an associate."

Frumovitz, as the the senior person in his Santa Monica practice, chooses not to take night call. "To compensate, we have a formula that almost wipes out my earnings from two-thirds of the obstetrical work I do," he says.

Call should be a part of contract negotiations, stresses consultant Wiley. If people accept a disparity of coverage, there should be a clear understanding about when a person earns the right to have less call, how this issue affects income distribution and buyout, and how long the doctor who isn't taking call will continue with the practice. Otherwise, call disputes could undermine a practice's harmony.

Instead of being divisive, call agreements can actually enhance physician satisfaction. One group that Michael LaPenna advised began to find call a bone of contention after the group grew to seven doctors. They changed their policy so that physicians who didn't want to take call could compensate those who did. Placing a dollar amount on each evening call and on weekend call, they moved from arguing over who was working harder to acknowledging the differences between the needs of the younger physicians, who wanted more money, and the older ones, who wanted to slow down. "In drawing up assignments," LaPenna recalls, "one senior doctor said, 'Put down a big fat goose egg for my call.' A younger doctor immediately asked, 'What nights do you have?' "

Another group charged several senior doctors $1,000 a day when they failed to take call. "The older guys said, 'You're sticking it to us,' " says consultant Schryver. So they came up with a formula based on the revenue generated during the call.

Still, notes Michael Wiley, many groups feel the income generated during call isn't worth the hassle. They may sweeten the pie with income borrowed from other sources—or simply grit their teeth and view call as a necessary evil.

In other practices, tradition takes care of call. A lot of groups require that the newest colleague take ER call. That works, says Judy Capko, a consultant with the Sage Group in Newbury Park, CA., because the physician can say, "When I become the senior partner, I won't take call."

Such an approach is vastly different from imposing on the new partner. "I think one of the reasons groups fail with new partners is that they take advantage of them," says Frumovitz. "They'll say, 'The four of us will take half the call, and you, as the junior person, will take the other half.' "

Pay attention to the individual

Trying to keep a bunch of headstrong partners moving in the same direction is a tricky business. But there are tactics for getting even the most intransigent doctor to go along with the group's decisions.

In one group, each physician was accustomed to dealing with his own receptionist. As the group grew, it became necessary to set up a central scheduling system. The highest producer, however, still wanted his own receptionist. "To get him to accept the plan," reports Capko, "we said, 'Let's try this idea one doctor at a time; you'll be the last to join.' He watched, and eventually agreed the plan worked." This strategy succeeded for two reasons, Capko says. The high producer was able to see how successful the new plan could be, and his partners made it clear that they honored and validated his concerns.

Balancing the differing needs of senior and younger members is often a make-or-break issue with practices. One group Scroggins advised was in trouble because the younger members wanted to buy a building, but were concerned that the most senior member would quash the plan. "The senior doctor was allowed to sell his shares in the partnership and take a guaranteed contract, putting his profit allocation on a historical overhead percentage," Scroggins reports. "That way, when the overhead went up with the opening of the new office, he wouldn't be penalized." To the surprise of the others, once the senior doctor understood where the other doctors wanted to take the practice, he didn't sell his stock. "I trust this group," he said, "and I want to be a part of it."

Obviously, mutual respect is paramount if practices are to endure. "When doctors join a practice where they're treated very well from the beginning, they have more respect for the established doctors," says Frumovitz. This type of practice culture perpetuates itself, with each new wave of doctors getting the same warm greeting. "When they see how well we treat them and how we all benefit," Frumovitz adds, "they back off from a lot of things that would be practice-breaking and say, 'I'll do what's good for everybody.'"

Frumovitz offers another way to honor the individual and—by extension—the practice: "You find out what people's strengths are, and you don't push them into areas where they're ill-at-ease. It's important that doctors do what they feel comfortable doing."

In Jim Smith's Kentucky practice, for example, the treasurer is computer-literate, so he's the one who spearheaded the computerization of the practice. In Rubin's New Jersey practice, "everyone has different roles," he says. One partner does more of the office business management, another is active in county medical society politics, and Rubin himself is vice president of the medical staff at the local hospital.

Respecting the individual involves taking an issues-oriented approach to problem-solving. Focus on the nature of the dispute—not on the person, advises Judy Capko. And avoid finger-pointing and placing blame.

There is, of course, such a thing as letting an individual go too far. A long-established practice almost broke up because one of the physicians was sexually harassing employees, and the other four partners ignored it. Judy Capko reports: "We said you need to address this as a group, and you'll probably have to give the physician an ultimatum." After consulting a lawyer, Capko advised the partner closest to the offending physician to meet with him. "At the meeting, the doctor stood up to walk out, but his colleague said, 'Don't do this,' " Capko recalls. "He finally cooperated and ended the harassment."

The most important strategy for practice harmony, consultants and group members agree, is to address issues before they get too big. "The No. 1 reason groups break up is failure to communicate," says Michael Wiley.

Adds Kenneth Rubin: "There are always things in a practice that you'd do differently if you were solo or practicing with two clones. Once things that bother me a lot are resolved, I get them totally out of my mind; I don't let them fester. Sometimes, there are high emotions. But an issue doesn't get resolved unless you confront it and bring it out in the open. Then you go on from there."

Longtime practice leader Jim Smith makes a similar observation about enhancing group longevity. "When all the physicians think one physician has a problem, address it. Say, 'We want you to stay, and here's what we suggest.' Be up front and don't try to tiptoe around an issue. It's like anything else in life: If you try to brush it aside, it just gets bigger and bigger."

 

Carol Pincus, ed. . Happy together: What makes a practice endure?. Medical Economics 2000;9:38.