Although there are many benefits to consolidation, there are a few factors you should consider before making that move - including your compensation.
A growing trend among solo practitioners and small physician practices is joining larger practice groups or hospitals. Although there are many benefits to consolidation, there are also important tradeoffs to consider.
Over the past several years, mid-sized and large practices have become more of the norm. Plus, more recently, the Health Information Technology for Economic and Clinical Health (HITECH) Act and the Patient Protection and Affordable Care Act (ACA) have made consolidation an even more attractive option for solo providers and small practice groups.
The HITECH Act has led to increased costs for physicians who have had to implement electronic health records (EHR) systems and increase data security to protect patient information. The ACA has been increasing demand for health care, especially for primary care doctors. With this rise in demand comes more pressure to operate efficiently. As a result, the consolidation that has occurred in recent years is forecast to continue.
Financial considerations are one of the main drivers of this trend.
The larger the group, the more you are able to divide expenses across a larger revenue base. Instead of carrying all the costs of support staff, professional fees, EHR systems, insurance, billing services, IT, office rent, etc., you can share the expenses with several other physicians. And with more purchasing power, a larger group is often able to negotiate group discounts on medical supplies and equipment as well as better health insurance rates for employees. All of these factors lead to an increase in profitability.
Other advantages to joining a large group include brand awareness. For example, an independent otolaryngologist who joins a 100-physician group that is well known in the community will benefit from increased brand recognition and better exposure than she would have been able to generate as a solo practitioner.
Some physicians consider consolidation because they simply don’t want to deal with the hassle of paperwork, fighting with insurance companies, marketing and other tasks that take them away from their patients. Medical practice management companies provide managed care support, human resources, bookkeeping and other services, essentially allowing physicians to outsource their back office.
Consolidation is not always the best option, and there are a few factors you should consider before making that move — including your compensation.
There are several different physician compensation models. Small private practices have traditionally used an “eat-what-you-kill” model in which each provider’s clinical revenue is treated as his own. Therefore pay is based on individual productivity, and expenses are divided according to a method that accounts for fixed and variable overhead.
While some large groups and multispecialty practices have a model similar to the one above, many have a cost-sharing pool, which requires each physician to contribute to everyone’s base salary, or a base pay plan, with incentives. In cases where the physicians are considered employees, such as in a hospital system, there is often an annual salary — with or without additional incentive compensation. The incentive pay may be based on productivity, quality or other factors.
For example, let’s say a physician has a minimum base salary of $200,000 per year and an incentive payment of 30% of the collections the physician brings in over $200,000. If by the end of the fiscal year, this physician has brought in collections of $300,000, he would have surpassed the minimum threshold and would receive a $30,000 bonus.
Biggest tradeoff: independence
Before agreeing to a merger of affiliation with another group, you should perform proper due diligence, examining the potential partner’s financial health, leverage in the market, experience with managing care, service line strength, performance expectations and your organization’s decision making power.
One of the biggest tradeoffs for solo providers who join large groups is independence. In most cases, you will have to give up some (if not all) control over operational decisions. In a hospital setting, for instance, you may have limited input in hiring scheduling staff or selecting a billing service provider.
Succession planning is another factor to consider. If you dream of selling your practice when you retire, it might suit you to remain a solo practitioner. You might also find that your retirement plan options are better than if you were in a large group.
If you are considering joining a larger practice group, speak to an accounting professional who can help you determine the financial ramifications and decide if it is the right move for you and your practice.
David Merzel, EA, CFE, is an accounting principal at Kaufman, Rossin & Co., one of the top CPA firms in the country. He is a New York State licensed CPA and a federally licensed IRS Enrolled Agent. David can be reached at email@example.com.