Going solo in a group.

Over the last decade, our practice, like many other primary care groups, was beset with rising costs, diminishing revenues, several malpractice suits and continuing doctor disgruntlement.

We began to question whether a traditional solo practice model would give us better protection against all of these. We were in a partnership and we all suffered when one of us was sued. Both the physician and the practice were held liable for the suit. Although these legal problems have thankfully passed, they spurred an evolution to a practice model, that led to our current makeup.

Initially we only sought a way to avoid the jointly liable situation that partnerships involve. One way to get around that risk was to separate into individual practices. Then if one of us were sued, the others would not be liable unless they were also directly involved in the case.

By separating into solo practices, we immediately made our pockets "shallower" to any plaintiff's attorney. We became smaller targets. We returned to the historical model of the solo practitioner caring for his or her own patients.

However, we realized that the dissolution of our partnership led to increased costs because of the loss of economies-of-scale enjoyed by the larger group. Only when physicians share costs can the overhead for each be lowered effectively with increased purchasing power.

We understood that to share costs we would still have to share space, staff and back office functions just as if we were still partners. We realized that we needed to direct revenue and cost streams into separate entities.

So we decided to form a company that managed the operations of the doctors while at the same time maintained the legal separation of the solo practices.

Practice design

We created a management services organization (MSO) that operates all the non-clinical aspects of the practices. Each doctor incorporated individually and obtained separate tax ID and insurance numbers. All the medical billings could then go through each doctor's separate ID numbers.

The MSO provides turnkey operations to the doctors. It hires staff, pays rent, buys supplies and pays all overhead costs. Lawsuits cannot spread from one doctor to another through the MSO staff.

We agreed to share our consulting and examining rooms, divide equipment fees and all other costs. By coalescing all the overhead costs into a separate company, the economy-of-scale is preserved and each doctor can maintain a lower overhead cost than if in solo practice.

Funding

At this point we needed to decide how our MSO would be funded. Certainly each doctor would have to pay a share of the overhead, but what would be equitable? In most partnerships, there is a constant battle between productivity and costs.

In a percentage-of-revenues cost sharing arrangement, doctors who work long hours and see many patients complain that a straight percentage cut of their income subsidizes the lesser producers.

They argue that once their share of rent and utilities is paid they should no longer have to pay as high a percentage of their income. They lose the benefits of seeing more patients in the same place; they lose the marginal gains of reduced unit costs with increasing volume.

Conversely, in a fixed-cost system, where each doctor pays a set fee, the smaller providers complain that they are subsidizing the "big hitters" who are much heavier users of staff, supplies and equipment. That system discriminates against doctors who have fewer patients and are either just starting out in practice or moving toward the end of their careers and slowing down.

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Additionally, both the big and little producers complain when someone is out of the office and not seeing patients. Then the ones who are working in the office are paying the way for those who are sick or on vacations. Obviously, some costs continue even when a doctor is away.

This conflict in practice styles leads to internal arguments, compensation committees, turf battles and staffing headaches. Partnerships are constantly trying to figure out how to give doctors more incentive to produce while at the same time encouraging them to keep costs down.

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As we found in our prior partnership, doctors argue over pay, workloads, schedules, staffing and benefits. Squabbling and loss of efficiency quickly overcome the economies-of-scale on which the partnerships were based.

Rational cost sharing

We developed an equitable cost system where each doctor pays a fixed and variable overhead fee to the MSO. Fixed costs are those that were present even before we opened the door to the first patient or even if no patients were ever seen. They include rent, utilities, telephones, office maintenance, computers and the office manager's salary.

Variable costs are those driven by the number of patients seen; this is what we call "traffic." These include any expenses that increase or decrease based on the traffic. Included in these costs are office supplies, stationery, billing staff and med-techs.

Management, on a needs basis, can adjust each of these expenditures. Certainly staffing is somewhat less flexible but can be altered if needed. Although some of these line item allocations might be arguable, here is a list of fixed and variable expenses:

At the end of each quarter, the fixed costs are added up and divided equally among the doctors. The deciding factor on allocating fixed costs is the consulting room.

If a doctor has a personal consulting room, he or she will share equally in the fixed costs. Even if the doctor is away and sees no patients, a fixed cost will be levied. Malpractice premiums are each individual's responsibility.

The variable costs are allocated by the percent of patients seen in the prior quarter by each doctor. All the visits by all the doctors are counted. Each doctor's individual number of visits is divided by the total and the result is that doctor's percent share of the variable costs.

That percentage is multiplied by the total variable costs for the MSO. The resulting amount is the individual physician's portion of the variable costs. (Because visits in hospitals and nursing homes use less staff they are counted at a lower relative value than in-office visits.)

The sum of the individual fixed and variable costs over the prior quarter are assessed to each doctor to be paid on a monthly, pro-rated basis over the next quarter. These overhead payments are due, in advance, on the first of the month and are paid by each individual doctor to the MSO.

For example:

* Dr. A. has a consult room and sees 10 percent of the total visits to the office in a quarter. In a practice of six doctors, she will pay one sixth of the fixed costs and 10 percent of the variable.

* Dr. B. works long hours sees 45 percent of the patient traffic. His bill will be one sixth of the fixed and 45 percent of the variable costs.

* Dr. C. takes a long vacation and sees no patients. He is still responsible for one sixth of the fixed cost but has no variable costs.

Because costs are usually steady or only slowly rising, this system of overhead payment has led to very few arguments and a very stable financial situation in our group. Complaints about overhead are minimized because each of us can plan budgets in advance and stabilize our own personal finances.

Any revenues generated by an individual doctor go directly into his or her LLC account. From these revenues, he or she pays overhead. What is left is the individual doctor's income.

Benefits

In this system everyone is responsible for generating as much or as little income as he or she desires. The type of work done--such as office, hospital, nursing home, legal or teaching--does not matter to the MSO.

By knowing overhead costs in advance, each doctor can properly budget. None is pushed to work harder than tolerable or commanded to use less of the office assets. Differing styles of practice are easily accommodated.

The accounting of costs is transparently shared among the providers so each one knows that the overhead is allotted fairly. The costs and the allocation of overhead are printed and distributed to each participant quarterly.

In this way every doctor knows what the others owe but not their exact incomes. Each doctor can work independently but still benefit from cost sharing.

Additionally, we set up a 401(k) plan for the staff of the MSO. Each doctor contributes to this 401(k). By meeting "safe harbor" requirements for the staff, each of us can contribute to a SEP-IRA plan set up in each doctor's LLC. Each physician can maximize tax-deferred savings and still provide a nice benefit to the staff.

Governance

A board of directors made up of the practicing doctors provides governance to this MSO. This board meets regularly and discusses important company issues. If an issue cannot be settled by negotiation, a vote is taken among the board of directors.

Physicians in the group who have skills in finance and operations are paid by the board to provide these services.

As in days before partnerships, each doctor's income depends on the practice he or she builds--the larger the practice the greater the income. Physician's finances are no longer dependent on the fortunes of the partnership.

The annual bonus might disappear but so does the unanticipated annual assessment. Uncertainties, based on partners' performances, are eliminated.

The physician/patient relationship flowers because it becomes the guarantor of the physician's livelihood, not office politics. The security of both the patient and the doctor are enhanced. The historic mutual dependence of the patient and the doctor grows stronger. Eliminating the partnership layer improves both patient and doctor satisfaction.

Even though we still depend on third-party payers, each doctor can pick and choose what insurances to take and which patients to see. Practices can be finely tuned to the likes of the physician and his patients.

The tyranny of the group disappears but the strength of the group remains. Purchasing power, negotiating leverage and clout within the community are enhanced but risks and costs go down. With this system, we have maintained an overhead level of 40 percent while the average overhead in internal medicine groups runs 55.8 percent. (1)

Potential new problems

Obviously some new problems arise in this form of practice. A separate set of books with separate ID numbers must be kept for each provider. Accounting costs rise slightly, but proper computer utilization mitigates these increases. Billing must be watched closely to avoid confusing different practice ID numbers.

Most importantly, the doctors must agree to cooperate. Examining rooms, staff, supplies and all other materials must be available and freely shared to maintain the lower cost structure. The development of individual fiefdoms must be strenuously avoided.

The central power of the partnership dissolves and individual autonomy remains. Cooperation replaces rule by executive fiat. The benefit of improved income for each motivates all to participate in this new system. Additionally, decreased liability and improved morale makes this model a success.

Ken Zonies, MD, MBA, is a founder and managing partner of Atlantic Medical Administrative Services, LLC, a management services organization in Baltimore, Md. He lectures at The University of Maryland School of Medicine on the business of medicine. He can be reached at [e-mail]

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Reference

1. Medical Economics, Exclusive Survey: Earnings: Primary Care Tries to Hold On, http://www.memag.com/memag/article/articleList.jsp?categoryld=8426 Sept. 17, 2004.

By Ken Zonies, MD, MBA

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Fixed expenses

unrelated to patient encounters

Accounting

Computer

Employment services

Furnishings 

Insurance, business

Legal

Maintenance-building

Equipment-equipment

Manager-salary/benefits/payroll taxes

Payroll administration

Property insurance

Rent

Subscriptions

Telephone

Variable expenses

related to patient encounters

Insurance, health, life, dental

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