When Leaving Private Practice Doesn't Make Sense

Being an employee at a hospital can be a great fit for many doctors. But, for high-income specialists, this decision could come at an unnecessarily high financial cost. If you invest in better management and systems, it is possible to generate higher income (net of overhead and taxes). By doing so, you will be able to more fairly assess the costs and benefits of giving up private practice for hospital employment.

For most physicians, the problem isn’t that the healthcare system is broken. The problem is the doctor’s approach to navigating the healthcare system is broken. If managed properly, your practice can reasonably expect to:

1. Improve net revenue;

2. Reduce overhead;

3. Improve compliance with minimal effort;

4. Lower taxes by $20,000 to $200,000 annually; and

5. Increase retirement savings for the physician owners.

If you could collect more, spend less, and keep more of the increased profit from your practice by working smarter, not harder, you would need a much more attractive offer from hospital system before you would agree to give up on private practice and become an employee of a hospital. Even if you have already made up your mind that you will eventually join a hospital practice, you should implement the strategies outlined here so you can be in a stronger negotiating position.

The Trend Toward Hospital Practice

“Integration” is one of the today’s buzzwords, as physicians all across the U.S. are “integrating” their practices with hospitals and becoming employees. Because of unique local market forces, some physicians are practically forced to align with a hospital. For most specialists, however, the situation is not so dire. The healthcare environment used to allow practice owners to “get by” with mediocre management and systems when insurance reimbursements were generous. Those days are over and reductions in payments can cause many practices to struggle financially. The good news is that practices can make small changes that will not only help them survive, but also ensure that they enjoy a reasonable profit.

Many physicians see hospital integration as a haven from the “hassles” of running a practice. In conversations with Karen Zupko, founder of Karen Zupko & Associates Inc. in Chicago, a leading consulting firm for many surgical specialists, we came up the following reasons for doctors’ increased interest in hospital-based practice:

Top 5 Reasons for Leaving Private Practice

1. Reduced reimbursements from insurers/Medicare.

2. Increased complexity of billing and coding.

3. Increased tension of being audited.

4. Difficulty in recruiting young physicians to private practice.

5. Lack of awareness of financial benefits available to private practices.

Regardless of the reasons for the shift, perception is becoming reality. A 2009 survey by the American College of Cardiology found that only 33% of cardiologists expect to remain in private practice or a small group practice. Another 38.1% said they will actively pursue integration with a health care system, partly in response to a federal government proposal to cut the overall cardiology fee schedule by about 20%.

The trend is also evident in data from Colorado-based Medical Group Management Association (MGMA). MGMA’s hospital membership increased 20% between 2003 and 2008. Meanwhile, the number of physicians overall who own their practices has dropped 2% annually for the past 25 years.

Misconceptions Can Lead to Bad Decisions

Leaving practice and becoming employed certainly may have its benefits. However, we believe that physicians overestimate the true benefits they will receive from joining a hospital and underestimate -- if not completely ignore -- the financial benefits available to those in private practice. If specialists fully understood how to easily and efficiently increase revenue, reduce costs, and increase net after tax income, the trend toward hospital employment would slow significantly. Let’s consider a few of these dangerous misconceptions:

Misconception No. 1: Coding Can’t Make or Break Your Practice. Zupko says poor practice management has an enormous impact on revenue and expenses. Not only have reimbursements for properly coded procedures been declining, but more importantly, failing to keep up with the coding changes has led to mistakes that result in a staggering amount of lost annual revenue. Estimates from coding professionals range from an average of $20,000 per surgical specialist to more than $40,000 in some cases. Doctors lose over $25 billion per year in denied or reduced reimbursements, according to software developer Medical Design Technologies in Newport Beach, Calif.

Most practices today have yet to realistically address the growing accounts receivable owed by patients with insurance coverage. These uncollected revenues have resulted from skyrocketing deductibles, ever-increasing coinsurance and copays, and an expanding list of uncovered services in patients’ health insurance plans. With systems left over from the 1990s, many practices are ill-equipped to handle the challenge of tracking down and collecting this revenue!

Another big problem is the Catch-22 most physicians face: Reduced reimbursements and lost revenue cause physician partners to try and cut costs in the office to maintain the profit margin of the practice. Many struggling medical practices have hired only the moderately competent staffers and supervised them with mediocre managers, or hired low-tech administrative staff to handle billing problems. It may seem a natural reaction, but this is not a strategy that savvy business owners outside of healthcare would employ. The key to addressing this solvable problem is to make an investment in your staffing operation. You may not need to hire a seasoned expert to work for your practice, but you do have to hire experts to train your staff who must have baseline competencies.

For a small investment, experts are available to not only train your staff, but also serve as a resource as problems arise, according to Zupko. “A commitment to education and training and a modest investment of less than $10,000 in coding education for staff over two years could result in decreased risks and increased annual revenues of $10,000 to $40,000 per MD, depending on the practice type and specialty,” she says. “Physicians are always focused on costs. Rarely are they aware of how much they are losing. Ignorance is expensive.”

Misconception No. 2: I Can’t Save $100,000 Per Year in Private Practice. According to David Mandell, an attorney and co-author of “For Doctors Only: A Guide to Working Less and Building More,” the single greatest planning opportunity for high-income taxpayers is to use sophisticated corporate structures and nontraditional retirement-planning options. “If successful specialists knew how to increase tax-efficient retirement contributions by $50,000 to $250,000 per year, there would be much less interest in hospital-based practice integration,” he says.

Traditional retirement plans offered by hospital employers will limit annual contributions to $16,500 per year, the 2010 limit for a 403(b) plan for someone under the age of 50. Doctors over the age of 50 may be able to save $5,500 more as a “catch-up” contribution. The basic rule of thumb is that ALL qualified retirement plan contributions cannot exceed $49,000 per year -- and that is hard to achieve as a full-time employee of a hospital.

For physicians who earn $50,000 to $100,000 more per year -- or could earn that much more if they improved their billing, reimbursement processes and actually collected what’s owed to them -- than they need to support their lifestyle, the idea of joining a hospital-based practice as an employee should be very unattractive. There are advanced-planning techniques that allow tax-efficient contributions of $100,000 to more than $1 million per year, per practice.

Unfortunately, physicians spend so much time learning their craft and very little time learning how to navigate the business issues that have a growing impact on their financial success. For specialists, the time required to master their sub-specialty is even greater. As a result, the “business of medicine” seemingly punishes those who take the time to excel at the clinical side of medicine, and rewards those who develop the financial expertise necessary to profitably practice medicine today.

Before you throw your hands up and give in to becoming an employee, make sure that you understand the costs and benefits of your decision. You owe it to yourself to explore ways to legitimately increase your revenue, reduce your compliance risks, and enjoy more of your profit by way of reduced tax liabilities. You don’t have to become a financial expert to succeed, but you do need to make an investment in time and money to consult with experts who have an outstanding track record working with specialists like you. After you explore your options, you will have a sharper understanding of what kind of deal a hospital is offering and whether or not it is worth your time.

Chris Jarvis is a principal at O'Dell Jarvis Mandell LLC, an author of six books for physicians, and presenter to medical groups and conferences. He lives in Southlake, Texas and can be reached at (877) 656-4362. Karen Zupko & Associates can be reached at (312) 642-5616. “For Doctors Only: A Guide to Working Less and Building More” and other valuable materials for doctors can be downloaded here.

Disclosure: This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein. Pricing ranges are for informational guidelines only and prices for more complex circumstances may exceed these published ranges. For additional information about the OJM Group, including fees and services, send for our disclosure statement as set forth on Form ADV using the contact information herein.