BUSINESS PARTNERS OR ASSOCIATES?

Practice manager Ed Toland MBA, of the Wellington Clinic, Dublin, Ireland, recalls a particularly messy group break-up in another clinic from his days as a medical management consultant. "Of the doctors in the partnership, one was bringing in 60 per cent of the revenue but receiving only 20 per cent of the profits," Mr Toland recalls. In his mid-50s and facing uncertain retirement prospects, the energetic partner wanted more. After protracted negotiations, the group broke up.

The case shows that the choice of practice structure has profound long-term financial and cultural consequences. Yet it is often made with little or no reflection on the goals and personalities of the individuals involved, says Mr Toland, who will be presenting on practice business and financial planning at the Practice Development Workshops at the XXX ESCRS Congress in Milan.

"There is always a tendency among doctors to be the hail-fellow-well-met until it gets down to the nitty-gritty," says Mr Toland, who has valued dozens of practices in Australia and Europe. But when money gets short, so do tempers. Financial problems often seem to strike out of nowhere in part because doctors typically have no idea what it actually costs – for rent, for staff, for supplies – for each service they provide.

What is needed is strategic and financial planning, Mr Toland says. Establishing upfront what your practice goals are and how you intend to achieve them, and how you will divide financial responsibilities can save a lot of trouble. Your strategy should then be tied to a concrete financial plan that takes into account your actual cost of overhead and your expected revenue volume. Periodic reviews of your financial assumptions can help you adjust your practice strategy as market conditions change.

Form follows function
How you structure a private group depends largely on what kind of practice environment you and your colleagues want, Mr Toland says. He notes that the classic choice is between a partnership, in which all expenses and all proceeds are equally shared, and an association, in which expenses are shared, but members are paid in proportion to the revenue they bring in. Each has advantages and disadvantages. Because it does not pit one doctor against another for pay, a partnership tends to promote cooperation and harmonious relationships within the practice, Mr Toland observes. "With an association, I've seen arguments at the front desk over which patients are being booked with which doctors. This can be very disruptive."

On the other hand, a partnership may be less productive overall than an association because it provides less direct financial incentive for individual effort, Mr Toland points out. Also, the harmony can be destroyed if one or more partners feel taken advantage of. This feeling may develop over time for good cause, as in the case above. But it may also develop quickly when taking on new partners, he warns.

"Unless he/she is coming in with a ready-made practice, the new doctor will benefit from the goodwill established by your practice in the community. But once his/her practice is up and running after a few months, he/she may forget how it started and won't understand that he/she has benefited from your goodwill, and may not want to pay to buy in," Mr Toland says. Therefore, it is very important to establish upfront, in writing, what a new doctor will be paid, whether and under what circumstances they will be allowed to buy in, and the basis for valuing the buy-in.

Strong administration
A trial period before a buy-in is a good idea to help determine how the new doctor will fit in, Mr Toland adds. A partnership may also decide to take on associates on salary without offering a buy-in. Because it directly rewards extra work financially, an association tends to promote individual effort and innovation, Mr Toland explains. But this structure, too, can lead to real and imagined abuses, leaving some doctors feeling they are being cheated by aggressive colleagues. Establishing clear rules of conduct and office procedures – and hiring a strong administrator – helps too. "Someone has to manage the staff so they don't lose sight that they work for all the doctors collectively, or if they work for one doctor they still have a responsibility to the wider practice."

Mr Toland notes that hybrids of partnerships and associations are emerging as a viable practice structure. These may share expenses and profits up to a point, but encourage doctors to bring in more revenue by allowing them to keep a larger share of profits once an overall financial target is met. Whatever the practice structure, a clear vision of what the practice is and where it is going helps keep doctors and employees on track, Mr Toland says. "If you have a plan in place, everyone faces the sun and they have a better understanding of the organisation and how it creates value beyond each individual's efforts."

A private practice is a business, and a business cannot function well without financial oversight, Mr Toland emphasises. He recommends developing a five-year budget based on your practice. It doesn't have to be extremely detailed, but it must be based on realistic assumptions about practice overhead. Benchmarking staff and other costs against other practices of similar size and services can improve financial performance. "I've seen nearly identical practices with one having twice the overhead of the other," Mr Toland says. The budget should be monitored continuously and used to revise practice strategy, Mr Toland says. For example, if you assumed a certain level of refractive demand two years ago, but your budget monitoring makes it clear your assumptions are not panning out, you can change course. "Once you know what your overheads are, you can stress test it and see the impact of a downturn in business," he says. "This will help you manage through good times and in bad."