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Is your medical practice at risk of subsidising its associates?

Posted by Matt Connor on 12 July 2016
Is your medical practice at risk of subsidising its associates?

Owning and operating a medical surgery is a financial balancing act.

Practice owners must juggle overhead costs, ensure the practice runs efficiently and provide a viable offer in order to attract and retain skilled associates (other medical professionals working in the practice).

A key component of managing a profitable practice involves striking a fair deal with associates who pay service fees and ensuring a win-win situation for both the business owner and its associates. It's important that associates benefit financially while also paying the market rate so the practice is able to operate efficiently with the practice owner deriving an ongoing return on their investment.

As a financial services organisation that specialises in providing accounting and tax advice to medical professionals, we do come across situations where this is an issue and, as a consequence, profits in a medical or dental practice slide downwards. If not managed, this can lead to a reduced return for the business owner at year-end. In some instances, the net effect is a situation where the practice is effectively subsidising its associate medical professionals.

In this post I'd like to touch on strategies to manage this potential issue. Indeed, there are two main options for medical practice owners to increase practice income. But keep in mind these are not without their drawbacks.

1) Increasing medical billing rates

Firstly practice owners may look to increase their medical billing rates.

As a business owner, it's important to look at your competition and understand what they're charging and decide if you have scope to charge more.

That said, this is a tricky area and one open to increasing scrutiny. My colleague Neal spoke in a recent post about the push by the health insurance industry to reduce claims and manage profits as health system costs increase.

As you can see from this link, Bupa is planning to publish price information to put pressure on surgeons charging above-average fees.

The Australian Medical Association (AMA) price lists provide a reliable source to help gauge appropriate pricing.

2) Charging associates more in service fees

Increasing surgery administration fees is an option, but attracting new medical professionals and retaining good practitioners is key to a successful practice. So pricing yourself out of the market by charging too high a fee could be an issue. If an associate is made to pay too much in service fees, independent of the succession plan, they will take their business elsewhere.

Keep in mind also that when a newly qualified medical professional commences in a private practice, it is fairly standard for a practice to provide concessional treatment (discounted service fees), in addition to mentoring by more senior associates. It's important to have a clear understanding about when the service fees will be increased commensurate with the billings of the junior associate. In our experience, these negotiations vary from practice to practice depending on circumstance.

In addition to increasing income generation, practice owners may also look at ways to more effectively manage cash flow.

In a medical practice, administrative staff are responsible for scheduling, meeting patients, collecting payments, etc. A large part of their time should also be spent on administering billings. Most of the practice income comes from third party government agencies or health funds. Time is required to prepare a bill claim correctly, then submit it and chase up third parties when things aren't paid. Problems arise with requests for payment not being submitted or processed properly.

While this can be very time consuming, if the administrative staff are not managing this well, outstanding billings can accumulate, which affects cash flow. It's important to factor this as a vital component of managing a profitable and successful practice. The level of outstanding debt is a red flag. We sometimes see medical practices that are not working efficiently and failing to successfully recover monies owed.

In conclusion

Strong practice management to anticipate and address financial problems as they arise and good external advice are vital to keep practice owners in the loop and on top of their game. Your external accountant should be aware of potential red flags and raise these. They should act as a Chief Financial Officer, review profit and costs closely, and be a sounding board for key business decisions, in addition to providing general accounting and tax advice.

If you'd like to find out more information about ways to enable your medical practice grow, our team of Brisbane-based financial services professionals is here to offer expert advice.

Author: Matt Connor
Tags: Owning a medical surgery Profitable practice Practice income

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The information on this site is of a general nature. It does not take your specific needs or circumstances into consideration, so you should look at your own financial position, objectives and requirements and seek financial advice before making any financial decisions.

The financial planning services are provided by Medical Financial Pty Ltd trading as Medical Financial Planning (AFSL 506557)