Selecting a Financially Healthy Practice: A Guide for Graduating Residents and Other Job Hunters - February 1996 -- Family Practice Management

Family Practice Management

Selecting a Financially Healthy Practice:
A Guide for Graduating Residents and Other Job Hunters

Financial weakness can nix an otherwise attractive practice opportunity -- assuming you know how to do the financial assessment.

Bo Greaves, MD

Covered in FPM Quiz

Tool inside

SPEEDBAR_®
» Know patient-panel size and daily patient load for each doctor and the number of new patients the practice adds each month.

» Examine carefully the practice's ability to function efficiently and to reward physicians appropriately under capitation.

» Billings per physician and collection ratios tell you a great deal about the financial health of a practice.

» Make sure the practice's physicians maintain a strong presence in the local medical community.

» Don't be taken in by a practice's low overhead, find out how it was achieved.

» Secure as much information as possible about your compensation package, including projections about your earnings for one, three and five years.

» Don't hesitate to talk to colleagues about a practice's offer before making your decision.

» Before you sign an employment agreement or partnership agreement, have an attorney review the provisions.

So you've pared your short list down to a couple of practices you'd really like to be a part of. You like both locations, the two practices both seem to offer excellent care, they'll both support you in providing maternity care and they both seem to be happy, smoothly functioning organizations. To make your final choice, you need only get the answer to one more question: Which one is more likely to prosper in the coming years?

But wait, you say. I'm the applicant here. How can I presume to ask potentially embarrassing questions about the financial condition of practices I'm applying to? The fact is, you've got to. Remember, you are looking for a star to tie your future to. You don't want it to be a shooting star that dies after a brief burst of light. A financial assessment is crucial. (Naturally, you'll also want to learn the specifics of the compensation you can expect and the kinds of agreements you'll be expected to sign.)

Most practices will welcome your questions, at least as long as you are clearly interested in becoming part of the practice. One managing partner in a large group in California told me, "We're happy to go into detail on our current finances and our future. We want good family physicians to know we are a sound operation with a clear vision of a bright future. If I were an applicant, I'd wonder if a practice that refused to discuss its financial statement had something to hide." Moreover, if you find that the practice you're considering can't answer reasonable questions about its financial shape because the information simply isn't available, you have learned something else valuable -- that you'd be stepping off into the dark to join that practice.

So how do you become your own Dun and Bradstreet? It's not as hard as it may sound to get at least a fair idea of the financial strength of a practice.

Is the practice financially sound?

Determine whether the practice is busy enough to justify the addition of a new physician. How many active charts does the practice have? A general rule of thumb for an adequate practice is 2,000 lives per family physician (3,000 for a team composed of one family physician and one midlevel provider). Ask to look at the final schedules for each provider for a typical week. Do they consistently see 35 or more patients each full day? If a practice expects you to see that many patients as a normal workload, you will want to make sure you feel comfortable with that pace. Make sure you will have some control over your schedule. And what does the group consider a full day? An appropriate patient load is about 28 patients per day or 3.5 to 4 patients per hour. On the other hand, if the current providers are consistently seeing fewer than 22 patients a day, it may indicate that the practice is not busy enough to justify adding a new physician.

How many new patients have selected the practice per month for the past year? For example, a four-physician group with a good reputation in the community and a practice growing fast enough to accommodate you might be adding 20 patients a month. Sometimes a practice's patient capacity is at its maximum, and no new patients can be accommodated. If that's the case, ask how many requests the practice turned down because the physicians' patient panels were just too full. Five such calls a week indicate that practice could use another physician.

Also learn how many patients deselected the practice each month, moving to other physicians. You want a practice that's concerned about these numbers and tries to address factors leading to deselection. Certainly beware of the practice where the number of deselecting patients outpaces the number of new patients.

A general rule of thumb for an adequate practice is 2,000 lives per family physician.

Know the payer mix. Find out the percentage of revenue and percentage of patient visits from capitated systems. For stability, the mix should usually resemble that of the marketplace as a whole. Does it? If the practice is mostly capitated, you would like to see that it has assumed more than minimal risk for its patient population. Savings from the efficient use of hospitalizations and referral specialists can be great and are more likely to be achieved by high-quality primary care physicians. Your group (and you) should share in as much of those savings as possible because you work hard to provide efficient primary care.

Also watch how the practice rewards physicians under capitation. While no one has figured out how best to provide physician incentives in a capitated practice, it is generally accepted that once the revenues from capitation exceed 30 to 40 percent of the total, it no longer makes sense to reward physicians purely with a fee-for-service productivity formula. That simply promotes the wrong behavior. Other kinds of physician rewards can work better in a capitated environment. For example, if the practice's utilization numbers are less than anticipated for a specified time period, the money saved (or at least a portion of it) should go to the physicians who achieved utilization goals.

Find out how the practice is faring with capitation. Is the practice making more from capitation than it would from providing the same care under a fee-for-service arrangement? Capitation revenues should at least match what fee-for-service revenues would be. Does more than 15 to 20 percent of the practice revenue come from a single HMO contract? Losing that contract could destroy a practice.

Check the billings. Do the billings per physician indicate a busy, thriving practice? In general, you should see gross billings greater than $300,000 per full-time physician. Also look at the collection ratio. If collections from fee for service and capitation are less than 80 percent of billings, the practice's billing and collection procedures may be substandard.

Look at the practice's reputation. The current standing of the practice in the local medical community can give you a sense of its future. Are the leaders of the practice among the movers and shakers in the local IPA, physician-hospital organization or other managed care organizations? Are they at the forefront of evolving delivery systems locally? If not, consider that a warning signal.

Too many support staff may leave too little money for physician incomes.

Check the overhead. You can learn a lot about a practice by studying its costs. What is the total overhead as a percent of revenues? The national average for family practice offices is about 60 percent.¹ A lower percentage may indicate a highly efficient operation, or it may indicate that you won't have the support staff you need. Before you let yourself be impressed by a low overhead figure, find out how it was achieved. Inquire about the number of full-time equivalent (FTE) support staff positions (including reception, billing, administration, back-office, transcription and lab) per FTE family physician. The national average is 4.12.¹ Too many support staff may leave too little money for physician incomes. Too little may indicate inefficiencies and more ancillary work for you.

What are the compensation arrangements?

Before you decide that a given practice is for you, you'll need to consider the income it offers. Naturally, what you can reasonably expect -- and the adequacy of any salary level -- will vary from place to place in the country and from one type of practice to another. To provide a basis for a rough comparison, national and regional figures are published in the AAFP's book Facts About Family Practice.

If you are offered a guaranteed salary, find out how long the guarantee lasts. One kind of offer you are likely to encounter is a guaranteed starting salary that gradually shifts to another arrangement as you become established. As your practice becomes busier, at least some of your income may depend on your productivity as a percent of billings or other factors (quality, patient satisfaction and amount of work). Whatever the formula, your prospective practice should be able to predict your anticipated earnings in one, three and five years. In a typical practice, you should be close to the median income for family physicians in your region in five years. Depending on the hunger for family physicians in your area, however, you may encounter starting salary offers (from large groups, at least) that exceed the median.

The typical compensation package for family physicians includes benefits such as paid vacation and CME time, holidays, retirement plans and health insurance. You may also want to insist that your AAFP and other professional dues be considered part of your compensation. Some practices or local hospitals, especially in physician shortage areas, will assume and pay back student loans. Realize, however, that the amount paid back for you each year is considered taxable income by the IRS.

Practice financial report card

You may find a report card like this helpful in evaluating practices you are interested in. Using whatever scoring system makes sense to you, assign scores for each practice in the categories listed below. The scores will help you make comparisons in your final selection process.

Practice 1 Practice 2 Practice 3 Practice 4

The practice

Willingness to discuss financial issues

Patient volume

Gain and loss of patients

Expected patient load

Payer mix

Appropriateness of incentives

Capitation success

Billings per physician

Reputation in community

Overhead percentage

Total (financial stability)

Compensation

Salary

Paid vacation and amount of time off

CME reimbursement and amount of time off

Professional dues paid

Health insurance coverage

Retirement plan options

Other benefit

Total (compensation)

What do I do with an offer?

Get some feedback about an offer before you accept it. If you are just finishing your residency training, talk to fellow residents, recent residency graduates, residency faculty and the residency business manager. They could offer you perspectives about a practice offer that you might not get elsewhere. If you've been out of residency awhile, you may still find the residency to be a useful information source.

Before shaking hands, pouring the champagne and anticipating starting work in your new practice, get two legal documents in your hands -- the employment agreement and (if you are joining a partnership) the partnership agreement. Read them carefully and ask your attorney to review them as well.

The employment agreement spells out the work expected of you, whether you'll be allowed to moonlight and precisely how your compensation package will work. This document should include literally everything you agreed upon verbally. Part of the employment agreement should address how either party can end the employment and who pays the malpractice tail coverage when you leave. Usually, if you choose to leave, you pay the tail; if the practice terminates your employment, they pay the tail.

Remember the qualities that attracted you to the practice, and do your part to preserve and enhance them.

The partnership agreement is important if, like many group practices, the practice you are joining encourages new members to buy in and assume a portion of ownership in the group after several years. The agreement should detail when you may buy in, how shares of ownership are distributed and how governance is handled. Even though you may not become a partner for several years, it's important to review the current partnership agreement and make sure there's a provision in writing for you to become a partner in the future. Shared ownership is usually beneficial, both for the individual and for the group.

Once the ink is dry on the employment agreement, celebrate not just the start of a new venture but also the fact that you have done a thorough practice search, asked the hard questions and satisfied yourself that you have found the best possible practice for you. And don't mothball all the skills you used in your job search. While taking the best possible care of your patients will be eminently satisfying, it's only part of your job. You'll also need to contribute to the success of your group. Remember the qualities that attracted you to the practice -- excellent patient care, a good work environment and financial health -- and do your part to preserve and enhance them. If you make it your goal to have a group that is as attractive to new associates in 10 years as it is to you now, you'll be helping yourself, your group and your patients as well as the applicant who will someday be asking you the hard questions.

Cost Survey: 1995 Report Based on 1994 Data. Englewood, Colo: Medical Group Management Association; 1995.

This is the second article in a two-part series. The first, "Selecting the Right Practice: A Guide for Graduating Residents and Other Job Hunters," appeared in the January 1996 issue.

Dr. Greaves is a practicing partner with Primary Care Associates of Rohnert Park, Calif., and a clinical faculty member in the department of family and community medicine at the University of California-San Francisco.

Copyright © 1996 by the American Academy of Family Physicians.
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