Transitioning From A Solo Practice To A Group Practice

Steven Peltz, CHBC

A group podiatry practice can offer numerous financial benefits but stepping away from a solo practice can be a very difficult decision. By providing an example of a solo DPM that he worked with in weighing this decision, this practice management consultant illustrates some of the key issues and considerations for solo practitioners looking to join a group practice.

In the 1990s, I was the practice management speaker at a number of American College of Foot and Ankle Surgeons (ACFAS) meetings. One of the topics that drew a large number of participants was the topic of practice mergers. For the past five years, mergers and the creation of large single specialty and multispecialty groups have been not only topics of conversation among all specialties but more and more among solo practitioners. Solo practitioners have merged with colleagues into larger groups or are at least considering it as a defensive move in preparation for what they perceive the future holds for them.

   Over the years, I have merged practices of different sizes into groups and groups into larger groups. When all participants are sitting in a room and discussing a merger for the first time, they are all nervous about starting a new phase of their professional career at the same time. When a solo practitioner considers joining an existing large group, there is an entirely different set of considerations and circumstances.

   To give you an example, John (not his real name) was a client of mine six years ago. John had been a successful podiatrist for almost 15 years. He owns his office condo and has invested in its renovation. He offers a wide group of services to his patients including performing surgeries in his office, an ambulatory surgical center (that he is an investor in), and ultrasound. He has his nurse take care of most of the routine nail care but always walks into the exam room and says hello to those patients.

   He has privileges at the local hospital. He has been in the same coverage group for almost ten years. He visits with his referring physicians twice a year and sends them a consult letter within 48 hours of seeing a new patient they referred. His office manager knows the names and phone numbers of all the referring physicians’ office managers and she tracks how many referrals the practice gets each month from each referring physician. John has built a successful practice.

   Three years ago, John went to a meeting with seven other podiatrists. Three of those in attendance wanted to create a large single specialty practice. They explained the group could centralize billing and some other administrative functions, and have one accountant instead of eight. The group could also recruit a new podiatrist to work at more than one office part time. The other four listened and began to agree with the concept.

   John did not. He knew them for a number of years, shared calls with some and respected all of them. However, he could not bring himself to give up what his wife called his mistress and child. He grew it from nothing and now it supplied his family with a comfortable lifestyle. He did not think he could work with partners after having none for so many years.

   Three years later, the large group has become his competitor. The seven partners stayed in their offices for two years. Then two partners consolidated their office into a larger office. The new office is closer to John’s office. John’s patients used to wait two weeks for an appointment. His wait time is now down to a few days. In a meeting with his office manager, John discovered that many of his patients who had a two-week wait decided to see someone else and never came back. John and his accountant calculated that he could not afford to bring in a new podiatrist even though it would help him maintain the financial health of his practice.

A Closer Look At The Terms Of The Potential Merger

The partners of the large practice talk to John often and they remain friendly. They tell John if he does become interested in joining their practice, he should let them know and they will put together a term sheet for him to review. It will outline the process to join the group. After talking to his family and office manager and giving it much thought, John decided to request the term sheet.

   The term sheet explained that if John joined the group, the partners would perform the following due diligence on John and his practice.

• Obtain the last three years’ tax returns of the practice
• Send an inquiry to his malpractice company for his history
• Review his staff’s benefits
• Review his year end productivity reports by CPT code and payer
• Get a list of his office furniture and equipment
• Review his office insurance policy, office lease, hours and policies
• Review his practice management system (all partners in the group have the same practice management system and electronic health records (EHR))
• Obtain a listing all his outside related activities or investments
• Review his office payroll (his wife could not stay on as manager)
• Gather other operational data

   John would come in as an equal partner and would pay one-eighth of the start-up costs payable to the new practice. At 18 months, he would have to decide to make a commitment. If he wanted to leave before 18 months, he could take his accounts receivable and go back to his original practice. If he decided to leave after 18 months, he could go back to his original practice but could not take his accounts receivable. John would continue to own his office, furniture and equipment. However, if he wanted to purchase new equipment above a specific threshold, he would need a majority of the partners to approve. That applied to all partners. Since the group’s offices were not too far apart, they tried to send patients to the office that had a specific piece of equipment instead of all purchasing the same equipment. Revenue from those procedures went into a pool.

   The group divided up the pool at the end of the year. They distributed 40 percent of the revenue equally among the partners. They divided the rest of the revenue by how many patients a partner saw in his office.

   John’s office would become a profit center. John would continue to make all the day-to-day decisions for his office. He could fire and hire staff, give bonuses, take vacations, decide on his office hours and continue to refer to those specialists he had a relationship with. All invoices for purchases went to the central business office for payment. That office also billed for all partner’s services. Payroll occurred online for all offices. At the beginning of each month, John would receive a profit and loss statement for his profit center for the previous month. He could not be paid or spend more than his account balance would allow.

   John would have to freeze or terminate his retirement plan, and he and his staff could participate in the group’s 401k plan. His staff would have the same benefits as all other employees and the cost would be debited against his profit center. He could only advertise his office as part of the group. If his office was very busy, he could request that the group hire someone who could work at more than one office. The profit from that employee after paying for the direct expenses goes into the pool described above.

   The group had formulas for what they would pay to a partner or his estate in case of death, disability or retirement.

Weighing The Options And Making A Decision

John, his wife, accountant and I had several meetings over two months and discussed the following issues.

• John was at least 15 years from retirement and knew how difficult it was to recruit and pay for a new associate.
• John has seen his referral base decrease, not by a lot, but decrease nonetheless.
• He is seeing almost 5 percent more patients but his net has decreased.
• His procedural reimbursement has decreased.
• He has not had the time to investigate which EHR is best for him.
• Over the past few years, he has seen other groups form.
• He is not confident his billing staff is accurate but has no time to check.

   I explained to John that he had the following choices.

   He could continue as he is but would need to expand his hours in order to be more accessible to patients. He would have to invest in more patient friendly activities, such as taking the time to call the patient after every surgery, brighten up the office and add a water dispenser and maybe coffee along with having his staff take courses in customer service. However, in the long run, it will be more difficult to maintain his current cash flow.

   He could join the group and jump in full force to see how it impacts his quality of life. He would have to work with the group’s bookkeeper and his wife would have to leave after a transition. He should do everything he can to understand everything about the group as quickly as he can so before 18 months is up, he can make an informed decision whether to stay or leave. He tried to sell his practice but no one was interested in paying what he asked for.

When There Is A Competing Offer From Another Group

John’s brother-in-law Paul is an internist in a group of 12 about 15 miles from his office. He gets referrals from that practice but knows that they also send their patients to a number of other podiatrists in town, including the seven-man group.

   While John and his wife were considering what to do about the invitation from the large group, one night at dinner with his brother-in-law and both wives, his sister-in-law said, “John, why don’t you consider joining Paul’s group?” John and his wife looked at each other and were speechless for a moment. John’s wife broke the silence and asked what she meant.

   She said that Paul has often said that his group could use a full time podiatrist in the office and it would be great if John were to be the one. That precipitated a cascade of questions from John and his wife. What would he do with his office? Could he rent it? Would his patients follow him? What would happen to his referral base? Three days later, John received a summary of an offer to join Paul’s group practice.

   The offer was as important for what it said as for what it did not say.

   In the group, John would receive 50 percent of collections from his services. He now receives between 45 and 50 percent of his collections. He would be the only podiatrist the internists could refer to. He could set up his office, buy new equipment and would have to have the same malpractice insurance as the others in the group. He would have to purchase a tail from his present company. The tail insurance (extended endorsement) covers practitioners when they leave a claims made malpractice policy and go to another malpractice policy. It may be equal to about the fifth year premium on the claims made policy. The group would pay all those expenses and they wanted to set up an in-office surgical suite for him.

   John knew he would probably lose his other referring physicians as they would not want to refer their podiatric patients to another primary care office. He found out that Paul had done a study to see how many podiatry referrals went out each week and it was about 10 fewer patients a week than he sees now. He felt he could attract other patients from the area surrounding the practice. He started to feel very good about the offer until he asked Paul what the buy-in would be to become a partner.

   It seems in that state and many others, owners of a medical practice must all have the same state license. That meant that only an MD could be a partner, not a DPM.

   John was still interested and asked if he could share in the profits of the large practice and still not be a partner. It took three weeks before Paul told him he could share the profits but there were a few partners who did not like the idea. John asked Paul to have his partners approve him attending a partner’s business meeting. At the meeting, it was clear that the group looked at John’s addition to the practice as a way to make a contribution to the overhead by capturing revenue that they were sending out of the office. While a few of the partners thought it was a good idea, one partner said very bluntly, if you join us and then decide to leave, or if we terminated you, you would have to start your practice all over again outside your restrictive area and we would probably hire another podiatrist.

   That night, John went home and did not sleep. He called me very early the next morning and said he could not join Paul’s practice and wanted to discuss the large podiatry group again.

   He met with the managing members of the podiatry group twice and then asked me to meet with them. I explained to them that John and I would like to perform the same type of due diligence on their practice as they proposed to perform on John’s. They agreed and John and the group exchanged and signed a nondisclosure agreement.

What The Due Diligence Revealed

After going through the group’s documents, a number of issues jumped out at John. The partners were making about 10 percent more than he was. The group had risk management meetings once per month. During these meetings, they reviewed surgeries, edited their patient consent for surgery forms, had strict rules for finishing charts on time and offered free time at the hospital emergency room. The group also had a seminar for all primary care physicians whether they referred to the practice twice a year and had guest speakers.

   If a partner became disabled, he received his base for the next month and then nothing more. The group had life insurance policies on all partners. If a partner was permanently disabled, he got his accounts receivable and then a small buyout from the practice. All partners were encouraged to purchase the maximum personal disability insurance they could. Each partner had to work 15 years as a partner to get any part of his buyout and was required to give a full 12 months’ notice before deciding to retire.

   The group was also in the process of hiring a fresh graduate to staff an office in an underserved area. They projected a small loss for the first year and then a large profit. The group had a professional administrator who held the partner’s feet to the fire when necessary. She understood her role as the manager of a practice that had thirty support staff. She understood finance, billing, was an RN, had training in human resources and knew how to communicate. She was also putting together a plan for an appraisal subcommittee owned by the group. She was also working on a collaborative effort with ophthalmologists and dieticians to form a diabetes initiative and treatment plan for all patients with diabetes. One of the partners told John she played a major role in why the practice was successful.

What The Solo DPM Decided To Do

John’s wife did not like the idea that someone else was going to take care of the practice’s finances and John did not like the idea of giving up his autonomy. However, after another meeting with John, his wife, his accountant and I, John understood that he was not going to move from his office and in fact he would have time to work in the larger office near his office and another partner would use his office when he took a vacation. He would still make the day-to-day operational decisions for his office and staff.

   The decision became clear when John attended a meeting at the hospital to learn about accountable care organizations (ACOs). John felt that if ACOs did in fact become real, the hospital or a larger group would dole out funds for primary care services. He saw many primary care physicians discuss joining a hospital or a large group. Would the large group refer to a group of specialists or to a solo specialist? He did not know the answer.

   However, if ACOs did not become a reality and if he did not like the group he joined, he would have 18 months to decide what he wanted to do. In the meantime, he could have the advantage of professional management and the security that a large podiatry group could offer him.

   Mr. Peltz is the president of Peltz Practice Management and Consulting Services. He can be reached at (845) 279-0226 (phone), (845) 279-4705 (fax) or via e-mail at .

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