Part 1 Succession planning

HEALTH & LIFE’S BEST PRACTICE NEWS ALERT Current circulation:

6975

DATE: ISSUE NO:

11th July 2006 126

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.

Health and Life News th

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1. Melbourne – Practice Visits on 19 to 21 July 2006 th

David Dahm will be in Melbourne from 19 to 21st July 2006 for practices new to Health and Life if you are keen to catch up with him for a no obligation chat about your practice contact Kellie on 08 8415 5400 or email to pa@healthandlife.com.au.

2. Another New Senior Staff Appointment Darren Phillips – Senior Accountant As we are growing quite quickly we have appointed another senior, Darren Phillips to join our team. He is a Certified Practising Accountant and has spent 8 years working in a Chartered Accounting. He also has worked for the international merchant bank JP Morgan. His speciality experience and interests are in personal taxation, medical business migration tax and agribusiness.

Personal interests are family and friends and fitness. Darren and his wife Alessia are also foster parents to two beautiful girls called Angel and Susi!

3. Events AAPM SA – Practice Manager Salary Survey and Negotiating your Salary Package David Dahm will present on behalf of the Australian Association of Practice Managers SA on th Salary Packaging - “What is in your Bundle” on the 15 August 2006. The following topics will be covered: 1. National Practice Manager Salary Survey Results (SA emphasis) – University of New England/AAPM Study 2005.

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Job Descriptions – from senior receptionist to business development manager Performance based remuneration Salary Negotiation Tips!

Salary sacrifice arrangements – cars, computers, laptops etc..

For more information contact AAPM SA Secretariat Kim Monu at sa@aapm.org.au or on (09) 8342 4548 or www.cmebookings.com.

Cover Story: When is a KICK BACK not a KICK BACK? Problem: Proposed Pathology Kick Back Rules may have wider adverse implications! th

The Australian Doctor reported on 9 June 2006 H. “Govt to get tough on pathology kickbacks” “The Federal Government will launch a legal crackdown on pathology providers offering GP’s kickbacks to secure referral streams or encourage doctors to send patients for unnecessary tests.

The current legal framework will be tightened to prevent practitioners and their associates from receiving any financial benefit as a direct result of referring requests for pathology services” Some of the benefits in return for referrals include: 1. Expensive Cars 2. Medical Equipment 3. Inflated lease payments We do not condone kickback arrangements. A “kick back” is to receive something for nothing. To what extent a GP charges a $1 or $200,000 p.a. rent to a pathology provider that influences referrals, so long it is “commercial” and not excessive (sounds like service trust fees!!) it is allowed. However what is an appropriate commercial fee is like arguing how “blue” is the sky. We will all have a different opinion and there is no unanimous consensus as each agreement depends on its facts such as location, fit outs and other services provided such as staff etcHThe practical reality there is no denying any commercial relationship will cause a natural bias towards on-site preferred providers – because it is convenient for patients and providers. When it results in over-servicing or excessive payments only then should it be illegal.

Our key concern is that a level playing field exists for both corporates and independently owned multi-disciplinary general practices. Furthermore legitimate arrangements do not fall victim to these changes or imply in appropriate behaviour, when they are normal commercial arrangements.

It is an unfair outcome that listed companies can own both general practices and diagnositic services such as pathology and radiology practices and yet these arrangements are illegal and seen as a “rort” if independently own practitioners owned these types services.

The current legislation encourages more corporate ownership of general practice. Potentially the new laws would only encourage and not discourage corporates as the dominant

employer/provider of GP’s and further add to the demise of independently owned general practices.

Is this the thin edge of the wedge?

Any new rules could have wider adverse implications than first intended by the Government. Any reform can send the wrong message. It can imply that innocent practice arrangements detailed below maybe seen as kickbacks which encourage over-servicing or may create inappropriate external or inter-referrals such as: 1. charging commercial rents and support services to co-located specialists and allied health providers; 2. where a doctor owned practices charge management fees such as a percentage of gross fees to competing self-employed co-located doctors (or associates) within the same practice.

The new government rules have not been announced yet and we call for a formal response by the medical industry associations to ensure there is not an over reaction to Government investigation into pathology kickbacks by the Federally commissioned lawyers, Phillip Fox. In particular this issue has the potential to fragment patient care as independent practices attempt to discourage co-location of complementary services.

Furthermore this can have a significant impact on the bottom line of practices and affect the recruitment and retention of GP’s and the viability of non-corporatised practices. At worst this will discourage GP’s from becoming owners of practices and only result in a further withdrawal of capital investment in general practice by GP’s.

As explained in this broadcast, ultimately this will severely compound the workforce shortages and succession planning problems in General Practice.

In our cover story we look at: 1. Are financial arrangements inappropriate – can they be stopped?

2. Corporates can make a profit why can’t I !

It will cut off my passive income stream?

Profits are the life blood of my independently owned general practice:

Encourages Investment!

Succession Planning and Practice Sustainability Rewards Owners for Effort and Risk

3. Is there a level playing field?

4. Where to from here?

When is a KICK BACK not a KICK BACK?

1. Are financial arrangements inappropriate – can they be stopped?

We have been watching for the last 10 years the corporatisation of medicine and recently dentistry.

This year the Health Minister – Tony Abbott expressed concerned about the growth of corporate medicine.

“He said he feared a blurring of the needs of patient care with the need for corporates to generate profits, adding he was “highly unenthusiastic about any further moves to corporatise medicine”. th

Australian Doctor 18 January 2006

The reality is that for any business or practice to survive a profit needs to be made whether it is a corporate or you’re a solo practitioner.

We are concerned with any legal reform where the “baby may be thrown out with the bath water”.

It is too simplistic to suggest a profit motive itself results in over-servicing or should be seen to be unethical or in appropriate practice. The issue is a little more complex than this.

The reality is that corporatised competition in general practice proves that patients are voting with their feet and do prefer co-located one-stop facilities. The zero price signal and convenience factor is a compelling competitive advantage. With a growing part-time medical workforce and a reduced availability of doctors, patients are getting used to seeing a different doctor each time they visit the practice.

The reality is patients will avoid making multiple appointments at multiple locations if there is a easier alternative.

Common sense prevails. This co-located business model provides a more convenient and efficient service for both providers and patients and it is more cost effective. The business model is simple and is compelling from a financial and service provision point of view.

Combine this with more opportunities for peer review and support and economies of scale giving rise to cheaper shared access to high quality medical facilities and well trained support staff, it is no wonder we will continue to see the isolated solo practitioner medical care model converge towards a more multi-disciplinary co-located primary health care model.

For practices to compete in this provider/consumer demand, practices must change and provide on site access to complimentary services. Whether they charge a commercial rent or not this will implicitly result in a captured referral base. Should this be illegal in itself? Will the new laws begin to turn back the clock in the interests of the medical profession and at whose expense?

2. Corporates can make a profit why can’t I !

A practice that does not make a profit is not sustainable and will fail to recruit and retain doctors and will ultimately close down.

The margins in general practice are under major pressure from endless demands from non-owner doctors for a higher percentage of their gross fees. Owners acquiesce fearing a lack of after hours coverage, back up or coverage. For the most part owners subsidise non-owner doctors practices. The only saving grace is the opportunity to earn an income stream from alternative sources.

It will cut off my passive income stream?

Owing a general practice that is not financially attractive if every dollar earnt is based on “eat what you kill” i.e. fee for service. Being paid without having to be see a patient 9 am every morning is one of the attractions to becoming a practice owner. This mainly achieved by earning “passive income”.

Practices can generate a passive income stream that enhances practice services to patients as well take pressure off meeting ever increasing overheads. This also increases the working life of a practitioner.

Practices are worth more and are financially more attractive if their “business model” can show they can generate “passive” income from the following sources: 1.

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Non-owner providers Employee/ Contract doctors/providers Government Grants e.g. Practice Incentive Payments/ practice nurses Sale of Consumables Sub-leasing arrangements from tenants such as specialists, allied health providers, pathology, radiology and pharmacy 5. Outsourcing practice staff and facilities to co-located providers 6. Subsidised consulting rooms from local councils, hospitals or corporations.

If we are wrong then the billion dollar general practice company such as “Primary Healthcare” would not have been as successful as they are today.

Profits are the life blood of my independently owned general practice: When revenue (practice rent and/or billings) exceeds expenses (or practice overheads) this is called a profit. Why make a profit?

Profits are used for three key purposes: •

Encourages Investment!

Profits are used to pay off loans so practice facilities and services can be upgraded such as new consulting rooms/equipment, accreditation changes, quality assurance and training;

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Succession Planning and Practice Sustainability Securing a permanent medical workforce. It is easier to sell all or a part of a practice that is making a good profit – why would you buy into a practice that loses money? You would

not invest in BHP if it was losing money. Who wants to get on board the Titanic if everyone is leaving or can leave at any time?

Employees and contractors can give two weeks notice and leave. Owners are “locked in” as they are usually tied up in long term financial obligations such as property leases and practice loans. This approach GUARANTEES A MEDICAL WORKFORCE. It secures both their morale, legal and financial ownership and guarantees a practices sustainability.

Owners doctors are more likely to be concerned with recruitment and retention issues in a local area than an employee or contract doctor. Owners provide job security as well as security of tenure; •

Reward Owners for Effort and Risk Provides a fair return to owners, for the risks of establishing and running a practice. If not all owner doctors should become employee doctors for the same level of remuneration without the hassles. (Question: if everyone wants to be an employee who are going to be the future owners of the medical profession – the corporates?)

A practice that does not make a profit cannot be sold especially if its only source of income is the provider. Sustainable practices need other sources of income that supplements a provider income. An owner’s practice should always be designed to be ultimately sold. After all, this is their 9% employer super fund. Self employed people do not get super. Their practice is their retirement nest egg. (Incidentally you need at least $2m to retire on an after tax income of $70,000 p.a.).

3. Is there a level playing field?

Why should the profession pass up or be prohibited from the same opportunities as the corporates?

The reality is these companies use the profits from activities such as pathology to attract doctors (pay up to $300,000 per doctor) to join their practices. However, this same opportunity is prohibited by independently owned general practices. This does not seem to be a level of “playing field”.

The chances of a doctor re-investing back into the healthcare system is far greater than a overseas shareholder who receives a dividend from a corporate and spends it (our tax payer dollars) overseas and not locally. Logically it makes sense to support our locally owned independent practices who are more likely to invest in their own local communities where they have significant social and moral ties with their local community.

The ethics of the profession and self regulation should prevail with an independent Healthcare professional body overseeing inappropriate referrals such as the Australian Medical Association and representative professional colleges. The reality that it is the few that are spoiling it for the honest majority.

The provider is in a better position to vet and influence the quality of services a patient receives.

After all, the provider takes responsibility and sees first hand the impact their advice has on patients – this relationship and influence can better service patients by utilising an integrated approach. The normal tendering process for tenants should then be allowed. The best bidder should win using market principles as the corporates do. This should not be on an exclusive basis and be for rental periods no greater than 12 months as this will encourage active competition to provide services.

This should provide sufficient safe guards to the system and prevent over regulation and fair competition.

Recently the accounting profession faced a similar delimma over practices that refer to financial planners. Last year the Institute of Chartered Accountants and Certified Practising Accountants issued joint guidelines on what are appropriate referral and ownership structures, including recommending accountants own at least 50.1% of a financial planning practice. There is no need to reinvent the wheel we can learn from other professions and professional bodies. It may be a useful starting point.

4. Where to from here?

1. Practices who support the rationale or a modified version of this news alert should email their support and this broadcast to the Australian Medical Association at ama@ama.com.au and the Royal Australian College of General Practice at vicmember@racgp.org.au expressing their concerns and a need to lobby for changes that support the profession.

2. Practices should carefully review all pathology and radiology arrangements when the new laws apply and review the impact this will have on your practice income.

3. If you require more information about any issues raised in this article. Call us on 1800 077 222 or email David Dahm on pa@healthandlife.com.au . We are happy to receive any feedback.

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