Corporatisation 2 - Best Practice News Alert 135

HEALTH & LIFE’S BEST PRACTICE NEWS ALERT CURRENT CIRCULATION: DATE: ISSUE NO:

7006 11th December 2006 135

Welcome to Health & Life’s free email newsletter service. Tell a friend that we would be happy to add their email address to the distribution list. This service is to provide Health and Life’s clients and those who attended our presentations with up to date information on key financial and practice management issues that may affect your practice. Please do not use this as a substitute to seeking professional advice.

Writer in charge: Mr David Dahm CPA, BA Acc, FTIA, FFin, FAAPM,GLF.

Corporatisation the Second Wave!

Problem: Make me an offer I can’t refuse!

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Make me an offer I can’t refuse!

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Corporate Tactics To sell or not to sell?

They cannot tell me how to practice medicine . yes they can!

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Corporatisation the Second Wave - Are you affected?

If you are being corporatised If your local competitor is a corporate

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What should you consider if you are thinking about joining a corporate?

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Offer Price – what is my practice worth?

Is the Goodwill Payment Really Tax Free?

Independence and Control Am I really better off?

What should I do next?

Corporatisation the Second Wave!

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Problem: Make me an offer I can’t refuse!

I had a doctor call me recently saying his practice was keen on joining a corporate his doctors were “fed up” and the deal looked pretty good. This was one of the “better” corporates he said.

There is a second wave of corporatisation in Australia both in urban and rural practices.

Some may argue this is before the Tsunami. I write this article after reflecting on my own experiences in the US and the role healthcare corporates in the 1990’s and 2000 and also being involved in a number of corporate negotiations throughout Australia.

In this edition we cover corporate negotiation tactics, what questions you need to ask and how to assess if you have a good deal and what are some of the pitfalls.

I welcome any changes to the healthcare system that seeks to improve the efficiencies and sustainability of the healthcare system. More importantly it has to be in the patients and the community’s best interest.

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Corporate Tactics Like in the US, corporates in Australia are making impressive presentations at conferences and seminars about the merits of going corporate.

We can report renewed corporate activity in QLD, VIC, TAS and WA and it is not only the urban practices that are being approached but also large rural general practices.

The new CEO’s are actually doctors and gone are the non-medico CEO’s. It is a trust me campaign with promises of a better life. What we have learnt is that well spoken CEO’s and their promises can be easily replaced, however the contracts a doctor signs cannot.

Practices are urged to look very carefully before signing up as it is a one way ticket. You only have one chance to get it right (if that is possible).

We have no concerns with corporates so long as they do not interfere with the ethical and moral relationships a doctor has with his/her patient. The reality is there are no laws to protect this relationship, yet there significant opportunities for clinical interference and this may be too tempting to resist. The corporation’s law states a corporates paramount responsibility is to make a profit for its shareholder. It is not to look after the patient first.

They can never promise this. Hippocrates has very little relevance in this environment. The business of medicine is like oil and water they can never mix. For a corporate this is an impossible challenge because shareholders demand for profits and profit growth is insatiable. There is a third hand that needs to be fed in your practice.

The upfront offer of a $300,000 half tax free payment, no red tape, better work and lifestyle sounds almost too good to be true. So who is going to pay for it – the corporate doctors are. You will be obliged to refer to all the in-house preferred suppliers from drug companies, pathology, radiology and allied health. In future with the new Private Health Insurance legislation we shall see specialists and private hospitals will be brought under this model.

If corporates do not make this happen their profits and share price will slide. Even the good corporates are vulnerable to a takeover from a more aggressive player. There are no guarantees who will be your next boss. I say always back the jockeys and not the horses.

Get used to your masters changing on a regular basis. Don’t be surprised the guy who convinced you to join has long gone. The corporate world focuses more on transactions and not on relationships.

It is interesting to note media reports the share market darling Primary Health Care tried to takeover IPN earlier this year. IPN has not been the best the performer out of the corporates. Media reports state the group head by IPN’s parent company Sonic, are subjects of a possible takeover bid. This is only illustrates my point.

To sell or not to sell?

Recently we have received reports from practices that “fear and intimidation” tactics were being used to coerce owners to sell their practices to a corporate. Furthermore corporates do have significant contractual influence on how doctors practice medicine. Whether these claims can be substantiated or not is yet to be seen, however they provide a useful warning to check your contracts carefully before signing.

One practice recently reported that if they were not to join, they would approach the other non-contracted doctors working at the practice (i.e. those who did not have any signed written employment agreements or contracts with the practice). Furthermore if they were to continue discussions a confidentiality agreement needed to be signed and this could not be discussed with other practices. A practice reported this did happen with one group of practices and the corporate withdrew all offers to those practices that met.

Another tactic worth mentioning is where the most influential doctor in a group is confidentially offered additional “speed money” to get a deal through where the remaining partners are resisting.

We have also seen this happen in local communities where highly reputable doctors that own high profiled flagship practice are also offered a confidential premium for their practice.

This endorsement approach is a good way of getting other practices to join and also creates panic and fear amongst the smaller practices.

They cannot tell me how to practice medicine . yes they can!

Other reports include doctors being asked to pay back some or all of their goodwill payment for not meeting the corporates key performance indicators (“KPI’s”) such as referrals to inhouse services. Where such an incident occurred support staff were partially withdrawn to a point where it was even more difficult to meet the KPI targets and the doctor was forced to improve or find the money to buy back the practice.

We are not alleging all corporates have conducted themselves in this manner, but are concerned about the perception this has left in the mind of a number of practice owners, doctors and practice staff.

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Corporatisation the Second Wave - Are you affected?

Corporatisation is here to stay and it is not going away. I was interviewed in the Business rd Review Magazine on 23 November 2007 called a Healthy Business and the bottom line is that corporatisation is that here to stay and it is doing really well. The AMA’s policy silence on this issue in this article was quiet deafening. For a copy of the article download at BRW A Healthy Business 23.11.06 or email us at pa@healthandlife.com.au .

The Medical Observer (MO) reported in their article “Sleeping Giants” on the 13 October 2006I.

th

of

“The corporates are upping the ante by attracting GP’s turned off by red tape” If you are concerned about my earlier comment, then maybe having a signed written practice agreement with your doctors is a bit of red tape you should attend to asap!

MO reported in Australia between 3 major listed companies and one private operator corporatisation covered 1850 GP’s and 186 practices representing 8.5% of the GP population and 2.8% of practices.

I note the significant growth in the corporatisation of specialist’s practices. Specifically cardiology, ophthalmology, radiology, pathology and recently a new dental corporate hit the market a few months ago. Allied health predominately in physiotherapy have also been affected.

Some of the key factors that have led to this new trend are: 1. Failure to have a succession plan; 2. Ageing workforce with no exit strategy; 3. Changing workforce attitude – “work to live not live to work” a large growth in part-timers which adds to the work force shortage; 4. Red tape; 5. Money – new doctors have large (up to $200,000) HEC’s debts and retiring doctors have insufficient retirement savings; 6. Poor business model, systems, procedures and training; 7. The profession devaluing itself and selling out a bargain basement prices because it is all too hard due to changing laws and the environment.

If you are being corporatised Everyone is affected by corporatisation. If your practice is being corporatised patients may experience a sense of disconnection with the practice as the doctors, staff and practice policies change to conform to an invisible head office in a remote location.

Doctors and staff report a disconnection with patients and a lack of continuity as nonperforming staff are moved on. For practice managers (if they still have a job) they find their roles are more about monitoring statistics and key performance indicators report every week to the Head Office.

If budgets are not met in one month this leads to cuts in the subsequent month to meet monthly profit targets.

If your local competitor is a corporate Many practices report they are concerned they will lose patients to a neighbouring corporate. The reality is the patients do stay after a short term loss but the practice tends to see more complex and longer consult cases. The quickies tend to stay with the corporates as it is usually easier to get in and out and it is bulk billed.

Recent press reports are that corporates are poaching patients to access the chronic disease management item numbers. Patients may perceive this as better and more proactive care. Practices will need to upgrade their computer systems, staff training and clinical support systems to attract and keep the more lucrative end of the work.

It will not be enough to sit back and complain about the red tape and hope it will go away.

The reality is the corporates make it their business model to deal with these issues because they have the economies of scale to employ full time practice nurses and practice managers to deal for this purpose. Unless your practice does the same it will fall behind.

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What should you consider if you are thinking about joining a corporate?

Practices thinking of corporatisation are usually at a their cross roads where they are deciding whether they should throw good money into restructuring their practice operations and take on the additional headache or finding an easier way out that devolves them of this responsibility without compromising what they already have. The closer the partners are nearing retirement the more likely corporatisation is a strong option.

1. Offer Price – what is my practice worth?

The price offered per practitioner ranges from $300,000 up to $600,000 per full time equivalent doctor. The price is affected by the terms and conditions of the contract. Usually the term is for 5 years where a doctor must continue to work at the practice. An offer usually involves a mix of cash and equity (i.e. shares in the company). In the early days many deals went sour because the share price of the corporate collapsed – so be careful, I say always take the cash.

2. Is the Goodwill Payment Really Tax Free?

Another common claim is that much of the (upfront) goodwill payment is capital gains tax free. This is correct to a certain extent; however practices need to be very careful when signing off. Legally many structures are not sold in the process and therefore no real business is sold in order for the practice to be eligible for the tax concessions. This issue depends on your practice structure and the sale purchase contract.

Most of these payments appear more as a prepayment of earnings for services to be rendered by the doctor in the future and therefore no actual ongoing business is sold. This is because when you normally sell a business you sell it immediately and go retire in the South of France. You are normally not required to come back to work on Monday morning.

The Tax Office may take an alternate view and treat such payments as normal income and therefore tax them at the highest rate of tax.

Practices often fall into the trap of accepting the corporates lawyers advice which is not independent and fully disclaimed should there be any adverse tax consequences. No one

will ever know the right answer until it is subject to a tax audit and court case. So once again tread carefully and get written independent advice on this.

3. Independence and Control Doctors cherish independence control; this is lost from day one when you join a corporate.

A new bureaucracy is in place and many of the key decisions are made by a faceless Board. It would be naïve to think that your are so important that your voice will be heard after being corporatised.

Clinical studies on GP’s show doctors are more stressed if they do not have control of their work environment. A corporates promise of “clinical sovereignty” is hard to legally enforce as good as this may sound. This is a is highly subjective clause which is difficult to prove.

There is no such thing as independence as you are tied to your contract – you are expected to turn up for work. The reality is if your contract is subject to key performance indicators and it is left open to you having to pay it back on death, ill health, or failure to perform then the corporate will always have the upper hand on your activities. If the agreements are subject to confidentiality clauses you have very few rights of appeal as this locks out the AMA or other similar organisations from hearing, airing or dealing with your concerns on your behalf. I do not know many doctors that have the will or financial access to legal resources to fight a dispute with a corporates highly paid lawyers.

4. Am I really better off?

Generally if you are planning to retire from practice within 3 years and you are comfortable with the issues raised above, corporatisation is a good deal especially if you have a run down practice that needs more money. If you have no desire to amalgamate then this becomes a real option for you if you need the money.

If you plan on working another 5 to 10 years this argument starts to fade away quickly.

Corporate doctors miss out on the tax benefits of income splitting up to $15,000 p.a. per FTE doctor, PIP’s, the new Chronic Disease Management items numbers and lost passive income from sale of consumables, pathology, specialist and allied health rents.

Furthermore they lose the tax benefits of buying the practice building in their superfund.

They also lose the benefit of being able to sell their practice to younger doctors which is really possible if you go to the trouble of getting it right in the first place.

As a footnote, I am amazed to see under the relatively new Chronic Disease item numbers, if you structure your practice correctly at least 75% of the work can be done by a trained nurse and a doctor can bill from $300 to $500 an hour. You could not achieve this in a corporate practice.

The reality is most doctors eat humble pie and serve their time – it is very difficult to renegotiate your contracts.

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So where do you go to from here?

1. Assess whether corporatisation is for you; 2. Do reference checks speak to other corporate doctors and staff; 3. Ask for it in writing to waiver confidentiality clauses in relation to the treatment of patients and insist patients are entitled to full disclosure of their care. Insist on no KPI’s;

4. Make sure all your existing doctors have employment contracts or service agreements to prevent poaching, they should have restraint of trade, conflicts of interest and confidentiality contracts. Contact us to purchase template agreements; 5. Get independent expert independent advice. Call us on 1800 077 222 we are happy to receive any feedback and will provide a free initial telephone consult.

If you are in doubt don’t join – sometimes it is better the devil you know than the one you don’t. If their behavior appears non transparent and unethical don’t waste your time.

For those that are interested about corporatisation in Australia and in the world this is an interesting website.

You be the judge and visit I http://www.uow.edu.au/arts/sts/bmartin/dissent/documents/health/Primaryhlthcare.html.

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