Year-End Tax Planning – The Lease Vs. Buy Decision

by Mike Reilly
Tax planning throughout the year should be a key consideration for your physician practice. However, when it comes to the lease vs. buy component of tax planning, many practices only focus on the short-term benefits. In a lease vs. buy decision, it is critical that you analyze the full economic impact (not just the tax impact) on your practice for the long haul.Medical practices across the nation are becoming lessees rather than buyers because technology is changing so rapidly. Why spend hundreds of thousands of dollars on an item of equipment that is likely to be obsolete within five years, when you could lease the equipment for three years and then upgrade to a newer model?However, it is not that straight-forward. Potential obsolescence is an important consideration when you’re deciding whether to lease or buy equipment, but it shouldn’t be the only factor. And for some equipment, such as exam tables, obsolescence shouldn’t be much of a factor at all.
 
Leasing Advantages
 
Minimizing the obsolescence problem is only one of leasing’s many advantages. By leasing you also can probably avoid a down payment, and your monthly payments may be lower than on a loan. This may be especially important if you are concerned that you would not see enough patients or perform enough procedures to recoup your costs.Also keep in mind that you do not have to take the upgrade option at the end of the lease. Instead, you can choose to buy the equipment, or return it and walk away. You also would not have to worry about salvage and disposal costs, though repair costs are likely to be covered in a separate contract. 
 
Buying Advantages
 
Buying has its advantages, too. You may be able to negotiate a price reduction. Given the current financial crisis we are experiencing nationwide, profitable, less risky practices may be able to obtain an interest rate on a loan that is lower than that on a lease. If your practice has significant cash reserves, it may even be beneficial to buy the equipment outright. But you also must take into account how much investment income you’ll lose (which is probably not much in today’s environment) by putting your cash into the equipment. Will its salvage value offset that lost income?Bear in mind that the market for aging medical equipment is not good. So selling it may not be an option. And even if the equipment itself does not require much upgrading, software that drives it may. 
 
Understand the Tax Impact
 
Whether you lease or buy, you’ll reap some tax benefits. With an operating lease, for example, the lease payments are deductible as a business expense in the year paid.With a finance (or capital) lease, the cost of equipment generally is capitalized and deducted through depreciation and amortization over a period of years. Equipment purchased using a finance lease also can qualify for Internal Revenue Code Section 179 expensing.When you buy, you follow the same depreciation rules as under a finance or capital lease. And you also may be eligible for Code Section 179 expensing. In addition, loan interest payments are generally deductible as business expenses.

For you to reap these tax benefits, your lease or loan agreement must be properly structured. So talk with your CPA before entering into any such agreement.

Make it Strictly Business

The bottom line is that, whether you are getting new equipment, adding a partner, expanding your office space or selling your practice, you’re making a business decision. And you do not want the seemingly thrifty choices you make today to wind up costing you an arm and a leg tomorrow. Because the variables associated with both leasing and buying are vast, consult your financial advisor on which is best for you?

Consider Tax Law Changes

For 2013, you can write-off the full price of equipment (new or used) you buy and place in service in 2013 up to $500,000, under the Internal Revenue Code Section 179 expensing election.  You make this election on your 2013 tax return. Therefore, for 2013, this election can be made up until the due date for filing your tax returns which can be  September 15, 2014 (for corporations and partnerships) or October 15, 2014 (for individuals) if you filed for an extension. For 2014, this limit has been reduced to $25,000. However, currently, there are proposals in Congress to extend the $500,000 limit through 2014.

For 2013, the amount you can expense is phased out on a dollar-for-dollar basis when your total investment in qualifying property during the year exceeds $2,000,000. Absent an extension of this phase-out provision, this phase-out limit will be reduced to $200,000 in 2014. Due to these generous phase-out thresholds, there is not much concern here for most medical practices.

For 2013, you can also take a first-year depreciation deduction equal to 100% of the purchase cost for most new (not used) equipment and off-the-shelf software purchased and placed in service in 2013. So that means that, even if you cannot expense a purchase (or you can expense only part of its cost) under Section 179 because of the phase-out, you may be able to take the 100% “bonus” depreciation. Absent an extension of this provision by Congress, this goes away in 2014.

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Michael J. Reilly, CPA/ABV, CVA, CDA, is a partner in Dannible & McKee, LLP. He is the partner-in-charge of the firm’s Tax Services and Health Care Services divisions. He has an expertise in practice valuations, succession planning and the design of employee benefit and physician compensation plans. He is also a member of the national CPA Health Care Advisors Association (HCAA), which is a national organization comprised of CPA firms who specialize in the health care industry. You may contact him at (315) 472-9127 or via e-mail at mreilly@dmcpas.com.

Know Your Value Before You Sell

In the course of performing several medical practice valuations for both hospitals and physician groups we continue to see medical groups entering negotiations unarmed so to speak and agreeing to a price based primarily, if not solely, by the hospital’s certified valuation. This leaves a medical group at a total disadvantage. Having your own certified valuation is crucial to arguing your case and insuring a fair agreed upon sale price and the ensuing multi-year employment contract with the hospital.

 

Whether selling your practice or simply just wanting to know if your practice has any intrinsic value (goodwill), it behooves you to have your own certified valuation done.  The results of the valuation will clearly impact your future business plan and strategy. If there is intrinsic/goodwill value, how long will it hold up? If there is little to no intrinsic value, what can be done, if anything, to increase the value? In either case, you should know what you can reasonably expect for your practice from an interested hospital before you enter into negotiations.  Hospitals are not going to buy every group out there, but most prefer to go after local practices first before going to the expense and hassle of importing unknown and unestablished physicians. When a hospital calls it might be your only opportunity, so make the most of it and be prepared.

 

Fair market valuations of medical groups are tightly regulated by Stark, anti-kickback and private inurement (benefit) laws. However, there is no perfect, generally accepted valuation methodology. There is art and science to them. So having two valid valuations on the table means there is room for intelligent, informed, rational and professional negotiation between the two parties. There are a lot of business valuators out there, but few have a thorough understanding of how physician practices operate, so they can come up short on price and in negotiations with the hospital. You need someone who has walked the walk on your side of the negotiating table to insure that the price and ensuing employment contract are right.

 

 

Improve By Asking (Surveying)

Former three term New York City mayor Ed Koch was famous for continually asking his constituents, “How am I doing?” Rather than looking for a pat on the back, Koch was truly interested in making things better for NYC.  NYC voters understood he was looking out for them and were more prone to offer suggestions or constructive criticism rather than simply complaining or blaming him for all their woes. Koch garnered 75% of the vote his first two terms and is credited with bringing the city out of insolvency and laying the groundwork for its current prosperity. Rather than resting on his laurels, he continued to ask the question throughout his 12 years in office.

It is human nature to help others, but it is also human nature to complain. Most people do not voice their complaints directly to the practice because they believe nothing will come of it or they fear some sort of reprisal from difficulty getting an appointment to outright discharge from the practice. This is probably truer of seniors. So, what do they do? They will tell as many other people about what’s wrong with your practice as they can. The rule used to be we tell ten people about what’s wrong, but only one about what’s right. Thanks to social media, you can tell the world what’s wrong with your physician. Any practice can do what Koch did by surveying their patients.  When you ask “how am I doing?” you are re-directing negative thoughts into constructive criticism or suggestions for improvement. This creates a sense of ownership among your patients making them staunch proponents and defenders of your practice.

If YOU don’t take the initiative to survey your own patients you can rest assured someone else will. Medicare has been surveying seniors who had been discharged from hospitals for years.  Commercial carriers are surveying their members in order to “weed out” certain practices.  The payer survey questions ask about timely care and appointments, communications, referrals, privacy, staff courtesy and helpfulness, health education, health and functional status, care coordination, between visits communication and stewardship of patient resources like the cost of their drugs. Very soon these payer surveys will impact both your reimbursement and may impact your future as a participating provider.  If you’re not out ahead of this, you are putting yourself and your bottom line at the mercy of uninformed, disgruntled patients.

 

 

A simple paper survey handed to the patient when they check in will result in the highest response rate (versus phone, mail or computer) because you have a “captive” respondent. There are plenty of free medical surveys/questionnaires on line you use to create your own survey.  Your survey shouldn’t take more than a few minutes to complete. Make it clear you are looking to provide better service and encourage comments and suggestions. This will increase constructive criticism and reduce useless negative comments. To insure confidentiality, have a locked container for the completed surveys in the reception area. Ask the patient to identify their physician. The more responses you get, the more valid the results. A busy practice should be able to get at least ten completed surveys per physician per day.  I suggest collecting at least 100 surveys per physician which should take about 10 days or so.

There are businesses that specialize in medical surveys. (I would be happy to recommend one.) They have experience and expertise and don’t require any of your staff’s time. Your patients may be more forthright with their responses knowing that they are not talking with anyone on your staff.  The downside is this option might be too expensive for smaller to mid-sized practices. There are pros and cons to doing anything yourself. Some practices have done their own surveys initially and then had an outside agency do a follow up survey later to see if implemented changes have resulted in improvement. In any event, you should survey annually.

Once the results of your survey have been tabulated, depending on the rating scale used (“1 to 10”, “never to always”, “very dissatisfied to very satisfied”, etc.) most practices focus on the areas with the lowest average score. People usually aren’t at the root of a problem. Typically problem areas are caused by the combination of lack of leadership/direction and adequate resources. Results should be shared with all staff then, just as you asked your patients for honest, constructive feedback, ask your staff. Everyone has to buy into improvement. It will become infectious and part of your culture. It is empowering and falls right to the bottom line.

 

 

 

The Marketplace Will Increase the Value of Primary Care

Every year, there are fewer and fewer US applicants to family practice and internal medicine residency programs. Less than 40% of the 5,100 internal medicine slots and 3,400 family practice slots are filled by US MD grads.  With a predicted physician shortage looming on the horizon, are medical schools sending a message, subliminally or outright, that students selecting primary residencies must be crazy? As long as primary care is undervalued, you can’t expect medical schools or the National Residency Matching Program to solve the problem.  Market forces are gradually increasing the value of primary care and the number of US medical school grads opting for primary care should eventually respond. .

The government (CMS) has been reducing the income disparity between primary care and specialty physicians by using RVU based fees and placing more emphasis (money) on E&M codes which are the bread and butter of primary care physicians. But CMS has made it clear that this is a zero sum game, so the shift of dollars to E&M codes comes at the expense of specialty codes. This makes RVUs a political as well as financial football. Also, the shift towards E&M codes has slowed considerably in the past few years because the conversion factor has remained virtually unchanged. So, while the switch to RVU based fees was welcomed by primary care physicians, it has been painstakingly slow and has done little to increase the value of primary care or to attract new MD grads.

Most agree fee for service or volume based reimbursement has resulted in a very expensive, fragmented and ineffective healthcare system. We have the highest cost per capita but rank poorly in outcomes when ranked worldwide. The movement by payers away from RVU based fee for service reimbursement to some form of pay for performance or outcome/quality based reimbursement should result in higher incomes for primary care physicians. CMS and most commercial payers will begin to reimburse primary care physicians for management of their patient panel, management of their referrals to specialists, and for the overall health status of their panel.

Accountable Care Organizations are placing more value on primary care physicians.  ACO membership or head count is based on the number of patients cared for and aligned with the primary care physicians that belong to the ACO. Primary care physicians can belong to only one ACO and all ACO members must identify and select a primary care physician. Monthly capitation to the ACO for a basic set of services as well as rewards for overall patient satisfaction and health status are attached to the primary care members. (Patients cannot select a specialist as their primary physician.) So, in order to build members, ACOs need to attract primary care physicians which should result in higher salaries. ACOs calculate the specific number of specialists they will need per 100,000 members. More primary care physicians, not more specialists, mean more revenue to an ACO. .

The greatest specialty shortage, within the predicted overall physician shortage, is primary care. Simple market supply and demand should eventually result in higher incomes for primary care physicians. There will soon be a surplus in many specialties considering the current rate at which medical school grads are eschewing primary care and electing higher paying specialties. Typically, market surpluses drive prices/salaries down and shortages drive prices/salaries up. Heretofore, the healthcare industry has been somewhat immune from the law of supply and demand because of reimbursement based purely on volume. Surpluses in any specialty were easily negated by more services/volume. The trend away from FFS reimbursement towards performance and outcome will bring the reality of supply and demand to physician compensation.

The market is evolving into a perfect storm for existing primary care physicians. Hospitals and hospital based ACOs are coveting primary care physicians and their patient panels. Capitation, pay for performance/outcome and pay for overall panel status are all primary care based. Medical students are still opting for specialty residencies which keep the primary care pipelines to a trickle, further continuing and exacerbating the primary care shortage which drives up incomes for practicing primary care physicians. Eventually, medical schools and residency programs will see the light and bow to the law of supply and demand. In the meantime, primary care salaries are increasing. While there is no short term fix, the prognosis for primary care is good.

 

Why Am I Paying So Much For Malpractice Insurance?

by Brian Hurley

WHY are you paying so much for Malpractice Insurance?

It carries through in every OTHER insurance policy you buy:

• You have a good driving record … you pay less for car insurance
• You have not had any property claims … you pay less for Homeowners insurance
• Your employees have not been injured… you pay less for Workers’ Comp insurance
• You are healthy and are a non-smoker … you pay less for Life Insurance

But WHY does it not carry over into your Malpractice insurance? I keep hearing from frustrated physicians, CFOs and administrators that their practice has a great record, but they still keep getting insurance premium increases. And what is even more frustrating – they see practices in their specialty and location (the 2 major variables in rating malpractice) that have had claims, but are paying the same premiums!

I keep hearing the same thing these days: “I have been practicing for 10+ years, have not had any judgments against me, but my rates keep going up! Why don’t I get charged less than those who are paying claims? ”

With all the talk about tort reform, and taking the time out of your schedule to write your elected official, or better yet … take the bus trip to Albany to state your case … not much is changing. And many physicians feel that they are not being rewarded for a “clean record,” while others are not being made to bear the full burden of their losses. Not only is this a disservice to those whose performances result in such favorable results, it provides no incentive for those making the claims to change what they are doing. And as the situation in Albany continues to deteriorate, the frustration level is rising … rapidly.

Not to oversimplify the situation … but look at your car insurance. If you have a clean driving record, you are eligible for a “Safety Group” or “Good Driver’s Pool,” and pay significantly less that the 20 year old males with a few fender benders. It would seem strange to you if this were NOT the case, right? After all, shouldn’t your good history reward you with some kind of discount? This theory carries over to all personal and commercial lines of insurance. There are these “Safety groups” for contractors, accountants, manufacturers, schools, etc. And they all reward performance. Finally, this is making its way into malpractice insurance for New York physicians, and it is a long-awaited reward.

Some “change” can actually be good

One of the good things to come out of all this “change” we keep hearing about is that there are at long last some options for physicians. As the traditional model has deteriorated over the years, and many insurance carriers stopped writing malpractice insurance in New York, physicians were left with very few alternatives. And, as in most insurance cycles, this created a need for new “capacity,” or new alternatives to fill the void. Importantly, those programs were not put together to follow the same path as the few remaining struggling carriers, but designed to operate differently, and offer physicians with favorable records a better alternative. Just like you see in every other aspect of insurance.

What is the bigger picture?

You have been inundated with news, updates, urgent messages, etc about what to do, and what not to do, when it comes to your malpractice insurance. It all seems contradictory, and difficult to know who is giving you the facts. When it gets this confusing, remember to look at the big picture. In this case, traditional carriers are struggling, their surpluses have dwindled, the price freeze did nothing to fix the real problem, and thousands of physicians across New York are finding better solutions. The reality is that those physicians who are leaving the status-quo model are usually those paying a lot of premium, making few claims, and tired of footing the bill for others. So, in looking at the big picture, what does that do for those physicians remaining in the struggling model? Their burden increases, as they take on a higher percentage of funding those with poorer results. The insurance carriers become defensive, trying to keep these good performers in their groups, and away from these new alternatives. Would you accept that in any other area of insurance? Then don’t keep paying more than your fair share for malpractice insurance.

These “safety groups” are out there, and you owe it to yourself to find out more about them. You do it for any other line of insurance you buy … and malpractice is the most expensive of them all! Don’t listen to just the insurance company, or your specialty’s organization, or others who may not have your best interest in mind. Ask questions, talk to colleagues who have found a better solution. Find out for yourself what the best solution is for you … because after all, who else has more invested in your future?

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Brian’s work at Bailey, Haskell & LaLonde focuses on helping physicians and practices evaluate their new options, and find what works best for them. Call Brian to see how his team can help your practice cut through the confusion, save money, and protect your future at 1-800- 268-1830. Don’t accept paying more than you need to.

Third Party Contract Management

by George Chapman

You must monitor your major third party payer agreements to protect your practice and maximize your income. If you don’t know where you stand with these agreements, I suggest a meeting with your practice manager and offer the following for discussion.

Is there a separate file for each of your top payer agreements? For most practices, four or five carriers represent 80 – 90% of their commercial business. All official correspondence or staff notes relating to the payer should be kept in these files. Most practices participate with a lot of carriers, but can’t even locate the signed agreements.

Is there a current fee schedule attached? Do not accept agreements that refer to the rates from a previous agreement or that allow the carrier to adjust the fees during the term of the agreement. While no carrier can be expected to provide you with every procedure fee, you should at least know the fees for your top 15 or so procedures. If you participate with carriers through an IPA, you can get the fee schedules from them.

Is someone reviewing the files, at least annually, and then presenting a summary to the partners? It doesn’t take long. There may be an inordinate amount of problems relative to the volume of business you have with a particular carrier. You may want to reconsider renewing unless the carrier can resolve the administrative problems or improve certain fees. Most agreements automatically renew if a practice doesn’t notify the payer by a certain deadline. Don’t let any agreement, especially a high volume one, automatically renew without reviewing it first.

Do you have established or logical criteria for participation with an existing or new carrier? Are there enough covered lives to make it worthwhile? Are a lot of the employers in the area offering the plan? Is the reimbursement schedule adequate? Is it easy to do business with them? Do they pay on time? Do practices you refer business to, or practices that refer business to you, participate with the carrier?

Are you aware of what major insurances in your market you are accepting? Does your support staff know? Billing clerks need to know what patients can be balance billed because the practice does not have an agreement with their carrier. Receptionists need to know what plans require their members to make a co-pay at the time of service. Schedulers need to inform new patients. I often been told by managers they do not par with a particular carrier because they haven’t signed an agreement or don’t remember signing one. Yet, the practice has been accepting the carrier’s fee as payment in full.

Is anyone reviewing the billing process? Are copays collected the day of service? Were you paid according to the payer’s agreement? Were you paid within 30 days? Is there a pattern of being denied? Are patients balanced billed for carriers you don’t par with? Did you bill for everything that was provided?

When was the last time you updated your fee schedule? Does it make sense relative to what the market is paying for services? All payers reimburse you the lower of your charge or their fee. Often, upon an audit, you will discover that you are being paid your charge. Do not be lulled into a false sense of security if your IPA has negotiated fees on your behalf. Are you being paid according to what was negotiated, or what you charged?

Is your practice manager too busy to do a reasonable review of the billing process? Then we suggest an independent review. It is relatively inexpensive and cost effective; especially considering how much cash is at stake. An experienced reviewer will pinpoint “leaks”, offer recommendations to close them and act as a confidential sounding board to your manager.