Medical Practice Technology

Medical practices often find themselves trying to keep pace with advancements in technology, but keeping up is easier said than done.  Investment in technology places heavy demands on capital resources.  As a result, administrators are exploring alternative sources of capital beyond customary bank loans.

Many administrators are taking a fresh look at lease financing and that’s raising some significant questions.  Administrators should know what leasing options are available, when leasing is an appropriate solution, and what business issues must be addressed in a leasing program.

When seeking a means to fund expensive but essential technologies, operating and capital leases are two options that administrators should consider.  The differences between the two options have to do mainly with the accounting method, the tax treatment, and the ownership of the equipment.  Here’s how to determine what approach is right for your practice.

Operating Leases

An operating lease is more like the monthly rent that you pay on your medical building.  It is a lease with no transfer of ownership interest or title between lessor and lessee.

Unlike with a capital lease, equipment tied to an operating lease is not considered an asset.  The operating lease payments are treated as operational expenses on your profit and loss statement.

An operating lease may be appropriate if the asset being financed is not a mature technology and it poses a high risk of technological obsolescence, which would cause major problems for you.  It also may be appropriate in any instance where the asset is likely to be used for five years or fewer.  Since there is no ownership involved, operating leases offer a great deal of flexibility.

Capital Leases

A capital lease is similar to a loan in that you are seeking a long-term commitment to use a piece of equipment with or without the eventual opportunity to purchase that asset.  The equipment you are leasing is treated as an asset on your balance sheet and the loan payments are treated as liabilities.

The most common type of capital lease is the full-payout lease, often referred to as a “dollar-out” lease.  It functions like a lease-purchase contract in that at the end of the lease term and upon payment of the final lease installment, you will automatically acquire title to the asset.  Your accountant treats the related depreciation and the interest portion of each lease payment as expenses to the income statement.

A capital lease may be appropriate when the asset being financed is a mature technology with little or no risk that technological obsolescence would be problematic for you and/or the asset is likely to be used for more than five years.  Practices can fully deduct depreciation and lease payments against their income taxes, while only lease payments are deductible with operating leases.

The issue of being the owner of obsolete equipment is one to consider when you are comparing capital versus operating leases. Since you will retain ownership of the equipment at the end of the term of the capital-type lease, you could be the owner of obsolete equipment that is difficult to get rid of but can no longer be used in your field.

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Contact ABISA, a consultancy specializing in solo and small group practice management. Visit us at ABISALLC.com.

Healthcare M&A Trends

Wow, this has been a busy time for M&A activity in the healthcare industry! Over the past year, healthcare companies in the S&P 500 have risen 26% with gains being fueled by strong earnings and revenue. Healthcare currently ranks second as the most expensive sector in the S&P 500 and stocks here are trading at 23.4 times the past 12 months of earnings.

We have seen acquisitions in the pharmaceutical sector for years and that will surely continue for some time. Additionally, there have been the widely publicized potential mergers in the health insurance world . . . Anthem wants Cigna, and United wants Aetna who wants Humana.

The shakeup in other sectors of the healthcare industry is indeed noteworthy as well as the shifting focus over the past couple of years. Here’s a look at some of the numbers.

Long-Term Care has led the healthcare sector in transaction volumes for the past three years, with 2014 raking in a lot of movement at nearly 300 transactions totaling over $29 billion. Last year’s transaction value was nearly triple that in 2013 and 2012. Much focus was given to hospitals recently and that sector’s numbers tell an interesting story. There was a huge spike in transaction value ($19 billion) in 2013, though that was the lowest volume in the past three years. The hospital sector’s transaction volume and value in 2014 is equivalent to 2012. Perhaps because many hospital big deals have since occurred explains why 2014 transaction value was a mere 14% of 2013’s peak.

The healthcare sector of dialysis, labs, and MRI saw a surge in transaction value last year to $11 billion which is 5.5 times greater than the previous two years. The volume of transactions, however, has fallen off rather sharply over recent years.

Physician groups, home health, and hospice transactions are relatively small compared to the long-term care and hospital sectors. Of note is that the number of transactions of physician groups has been steadily declining over the past three years whereas home health and hospice transactions have been steadily increasing over the same timeframe.

Lastly, the rehabilitation and behavioral care sectors have held relatively flat in their transactions over the 2012-2014 timeframe. The managed care sector has also been lukewarm since a spike in 2012 yielded nearly $19 billion in transaction value.

There is no doubt that we will continue to see much M&A activity in the U.S. healthcare industry mostly due to healthcare reform legislation and technology costs. The U.S. Supreme Court ruling (either way) on the Affordable Care Act will most likely have a significant impact on several sectors within the healthcare arena.

What are your predictions on various healthcare sectors?

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Contact ABISA, a consultancy specializing in solo and small group practice management. Visit us at ABISALLC.com.

The Importance of Succession Planning

Leadership transitions are risky times for medical practices. When the departing lead physician has had a strong run, there is worry about his successor’s ability to maintain the momentum. When he has performed poorly, there’s anxiety about whether and how fast his successor will be able correct course. Physician owners are responsible for ensuring that the practice continually has high-quality operations and employees. One of the most important pieces to meet this responsibility is to conduct successful succession planning.

Having a strategic plan that clearly conveys the practice’s mission and current strategic priorities is essential. The plan should include specific actions that detail who is going to do what and by when in order to address each priority. Succession planning isn’t something you can do once and forget. It is also advisable to have at least annual discussions with key employees regarding succession planning, including how to manage effectively during a transition.

When talking to others about succession, realism must be your foundation. Having a clear leader is key. This is no time for wishful thinking, hoping that an uninterested or incapable physician will suddenly become full of passion and business skills. Objectively evaluate (ideally with the help of knowledgeable outsiders) physician candidates for their experience and potential. After this tough decision, take the systematic steps to pass the reins of leadership. This may take some time, but remember, the best successions are those that end with a clean and certain break. In other words, after you give up the reins, get off the wagon.

Again, seek outside help. Even if you would never use an outside adviser for any other decision, consider the value that a qualified consultant can bring to this important event. Don’t ignore succession planning. By obtaining help from a professional, you’ll be working to reap the rewards of succession in a different and smarter way.

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Contact ABISA, a consultancy specializing in solo and small group practice management. Visit us at ABISALLC.com.

Managing Change in Physician Practices

Good is rarely good enough, and opportunities for improvement are never lacking. Unfortunately, the success rate of major change initiatives in medical practices is often low due to poor management of the change. Although medical practice leadership is often to blame when new projects and initiatives fail, there are ways to increase the likelihood of success.

Physician leaders and practice managers should expect and accept disruption and resistance to change, and never lose sight of the fact that costs are high when change efforts go wrong.

The consequences of poorly executed change are not only financial costs, but also lost opportunity, wasted resources, confusion, and diminished morale. Here are three major areas to focus on to help with your change management efforts.

Clarify direction

As the saying goes, “culture is everything.” To effectively manage change, you must consider your practice culture, and thus clarify how the change relates to your practice culture, vision, and goals.

Communication is paramount when trying to raise the level of understanding of why the change is taking place. Employees should be told why the change is taking place, what the change will mean for them, when the change will be happening, how the change will be carried out, what support will be available to help them adjust to the change, and what will be expected of employees as a result of the change.

Over-communicate your goals, direction, and expectations. It’s not enough to send out an e-mail addressing those points. Communication should be regular and should continue over an extended period of time.

Invite and acknowledge concerns

Make change a part of your business and an expectation among staff and providers. Many members of your practice are innovative and eager to contribute their insights and suggestions for improvement. Treat them as a natural part of the process and address resistance by asking for input.

Work with all staff to measure “real” vs. “perceived” disruption. The path of rolling out change is immeasurably smoother if these people are tapped early for input on issues that will affect their jobs.

The goal is to quickly get employees through the denial and resistance stages and on to the commitment phase where you get the buy-in from staff.

Develop commitment

Work on developing commitment from the staff and avoid demanding compliance. People respond to calls to action that engage their hearts as well as their minds, making them feel as if they’re part of something consequential, so make the rational and emotional case for change together.

Their full-hearted engagement can smooth the way for complex change initiatives, whereas their resistance will make implementation an ongoing challenge. Address any reservations and give some consideration to possibly rewarding initiative. You must either build commitment or prepare for the consequences.

Medical practices must constantly change in order to survive in today’s competitive healthcare arena. Practices should never settle for something that is considered completed; all things can improve with change.

Managing change in an already busy practice environment, however, can be challenging and you may want to consider bringing someone in to help structure the rollout of a project and guide you through key change initiative milestones. When employees who have endured real upheaval and put in significant extra hours for an initiative that was announced with great fanfare see it simply fizzle out, cynicism sets in.

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Contact ABISA, a consultancy specializing in solo and small group practice management. Visit us at ABISALLC.com.

Canadian Healthcare System

The U.S. Supreme Court is set to rule yet again on the Affordable Care Act in June. Their large ruling thus far declared Obamacare legal because it is a tax. This next ruling regarding the legality of federal subsidies is also poised to send shockwaves throughout the country. Discussions about healthcare reform in the United States often contain references to Canada, but many of those references are inaccurate. The intent here is not to discuss healthcare reform in the U.S. nor other healthcare systems (socialized or otherwise). Rather, this is a clarification on what occurs in Canada. This will be a brief (short and to the point like all my posts) three-part summation. We have taken a brief look at the Canadian physicians and also how healthcare in Canada is funded. Finally, let’s take a look at the structure of the Canadian healthcare system.

The Canadian Health Act of 1984 is the law that frameworks healthcare in that country. As individuals enroll in the program they are issued a health card which enables them to receive health care services which the government deems “essential”. As I outlined in yesterday’s post, there are a multitude of services which are not covered and thus the individual must pay for themselves (either out-of-pocket or through insurance). It is unlawful for private insurance to duplicate public healthcare system benefits. Private insurance is only allowed to address coverage gaps, similar to supplemental insurance in the United States (yes, the AFLAC duck).

I think one of the biggest misnomers about Canadian healthcare is that it is “free”. It definitely is NOT free. Canadians pay heavily for healthcare through the tax system. In 2013, the average Canadian family paid $11,320 in taxes just for the public healthcare insurance. Furthermore, the cost of public healthcare (before inflation) has increased 53% just in the past 10 years and is now running a deficit of $540 billion.

Hospital care is provided by publicly funded hospitals and under the law, hospitals are required to operate within their budget. Since the cost of healthcare is rising (in Canada as it is everywhere else), hospitals are cutting costs and eliminating services. Approximately 30% of the healthcare budget is consumed by hospitals.

Canadian healthcare is very controversial and it is beyond the scope here to get into that debate. I will however end with a few items. Canadian healthcare receives very high marks for breast and colorectal cancer survival rates, primary care, and preventing costly hospital admissions from chronic conditions such as asthma and uncontrolled diabetes. The system receives very low marks for the extensive wait times that patients experience. Poll after poll show that Canadians like the notion of public healthcare, but those polls also show that Canadians understand the system is unstainable and in need of massive reform.

This concludes our three-part summation of Canadian healthcare. I hope you found it insightful and perhaps it helped to clarify some questions and misnomers.

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Contact ABISA, a consultancy specializing in solo and small group practice management. Visit us at ABISALLC.com.