Healthcare Business Restructures, Hedges Against Liability

Nov
29

Considerations

1. Taxes
2. Disability
3. Premature Death
4. Retirement Accounts
5. Fees and Costs
6. Uninsured and Underinsured Risks
7. Exit and Succession Planning
8. Revenue Centers
9. Asset Protection

Goals

Cut More Costs
Retain More Earnings
Reduce Their Tax Burden
Address Exit and Succession Concerns
Provide for the Retirement Plans of the Partners and Employees

Overview 

When there’s a large aggregate amount of revenue generated from multiple profit centers, there are a number of possible planning strategies that can create better measurement and greater operating efficiencies. Take for instance a common business structure for many plastic surgeons.

Revenue typically comes from four sources:

1. Clinical Patient Care
2. Ambulatory Surgery Center (ASC)
3. Spa Services
4. Real Estate

When Addicus considers planning strategies for a business structure of this nature, the primary goals are to increase brand loyalty, revenue and profitability. At the same time, we look to assess areas that most commonly lead to wealth erosion of partner revenue. 

So what are common areas that need to be addressed? How do these areas affect greater operating efficiency and increased profitability? We’ll answer these questions and others while keeping considerations like taxes, disability, fees and costs, revenue centers and asset protection in mind. A complete list of considerations are listed above, along with a list of goals. 

Spa Services and Surgical Services: Addressing the Differences

Your spa is a business with a brand name. It has revenue and, more importantly, recurring revenue. Much of which may be generated by non-physicians. We define spa services as any non-surgical service, and some spa services may not even be considered health care services. 

In many states, these services can be delivered via non-MD professionals such as a nurse practitioner (APRN), registered nurse (RN), physician assistant (PA), aesthetic specialist or medical assistant. Treatments can include age management, body treatments, botox, chemical peels, hCG weight loss, laser tattoo removal, skin rejuvenation and peels and waxing treatments.

Given these attributes, spa services more closely resemble passive income than the typical surgical income that’s directly related to expertise of the practice physicians. Yet, despite the clear difference between surgical services and spa services, many practices treat both types of services the same. 

Accounting and Tax Planning: Measurement Is Key 

When we mention accounting, we focus on measurement. Without measurement, there is no management. Measurement comes in two forms:

1. Profit & Loss (current practice financial health)
2. Balance Sheet (historical practice financial health)

As a separate profit center, the Spa can be measured differently than the Clinic and Ambulatory Surgery Center (or ASC), and accordingly, builds its own value proposition.

The Spa has its own set of specific expenses, personnel, and items that correlate to a particular origin of revenue (examples: sculpting, botox, laser, facials, etc.). Measurement is key for employee incentive pay and pay for performance programs. Spas are also more inventory specific and can use an accrual methodology of accounting, while medical/clinical services typically use a cash basis method. 

At Addicus, we consistently see the Spa commingled with the Clinic on a cash methodology, which is likely less than optimal for tracking the profitability of spa services. Alternatively, if spa services are tracked on a cash basis, this method will likely lead to a false sense of the practice profitability. As a result, this can lead to faulty decision-making by, for instance, investing in new equipment, technology and staffing.

Structuring the Spa as a Separate Business Offers Benefits

When we consider banking and financing, we’re looking at investors and banking relationships. By structuring the Spa as a separate business apart from other entities, a practice can secure investors or private equity from a third party and can be treated like any other business sourcing capital or planning expansion.  

Often, lending institutions seek out these investment types. Traditional debt financing is always popular, and a spa business opens another door to these lending opportunities. As such, a spa business can now offer private equity and private investors ownership interests without debt service as an alternative. A separate and independent Spa is subject to less restrictions of ownership, banking and financing. These lower restrictions increase the number of potential investors/purchasers, making the Spa more valuable than many traditional surgical practices, dollar-for-dollar, when earnings are measured before interest, taxes, depreciation and amortization.

Asset Protection

First, when we start to develop planning strategies for a surgical practice, we begin by assuming these clients have medical malpractice coverages and proper liability coverages. These coverages may be provided by either a third party, self-insurance or a captive insurance arrangement. 

However, what’s important here is this: The separation of liability. 

For example, if a plaintiff sues the practice for damage to a facial nerve during a surgical procedure, the Spa — inclusive of its revenues — is exposed. And, if the business is commingled with the Clinic (or surgical practice), it’s exposed to the aggregate liability. 

By splitting and dividing the two services (Surgical and Spa) a judgment against the more vulnerable surgical practice generally will not affect the Spa and vice versa. If our physician clients own businesses that provide multiple revenue streams and do not constitute the business of medicine, we recommend that these clients move those services to unrelated entities. Think real estate. Many real estate investors have been advised to own their income-producing real estate in an unrelated LLC, apart from their primary clinical business. Why? To detach the real estate from the liability of the practice. 

Estate and Succession Planning

It is possible to sell your clinic versus your ASC versus your commercial real estate versus … your Spa? For those approaching retirement from a clinical practice, which assets have the highest multiple and potential return? The answer: Those that produce recurring revenue such as real estate, ASC and spa services. 

And for those considering purchasing a practice or buying into a partnership, we promote knowing exactly what you are purchasing and why. Physicians — both experienced and new — can negotiate each aspect of their partnership and possibly choose appropriately based on their own styles. Matching a buyer and seller to a spa business may be easier than finding a physician to purchase an existing clinical practice. 

Financial Planning and Practice Management

In business, a financial forecasting of annual income and expenses is commonplace. From there, capital budgets and personal budgets are created. Revenue cycle management is a term frequently used in healthcare to include all the administrative and clinical functions that contribute to the capture, management and collection of patient-service revenue. 

Management Service Organizations (MSO) exist to facilitate and expedite this service. Separating clinical revenue management from ASC and spa service revenue management can simplify your life and lower operating expenses. Some of our clients prefer to keep clinical management in-house and outsource the Spa, or vice versa — all lifestyle preference. The details of these options are beyond the scope of this case study. The takeaway is choice and options for your management aptitude.

There may be additional wealth accumulation, retirement planning, tax reduction, buy-sell and employee benefits available via a multiple entity structure. Work with your practice’s board of advisors, and inform them of your particular fact pattern. It’s best if they’re professional experience is in the business of medicine. Navigating fraud, abuse compliance and other healthcare law nuances, accounting and tax, and financial products specific to the healthcare space is of particular relevance.

Conclusion

Our focus is a multidimensional approach. Structuring your surgical practice’s spa services as an LLC offers many benefits including liability protection, ownership opportunity, creative finance, wealth efficiency and an exit-and-succession planning strategy. The moving parts involved in this level of strategic planning require professionals with healthcare experience. For those physician clients creating a board of advisors and for those seeking a second opinion, contact Addicus for a complimentary consultation or to obtain greater details on any of the content presented.

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