DOCTORS: Seek Business Advice on How to Start a Healthy Practice : Doctors Seek Advice on Starting a Healthy Practice
They are among America’s best and brightest--the 15,000 graduates who each year venture forth from a grueling tour of medical school and several years of hospital apprenticeship.
But the 40% of those graduates who enter private practice often find that the years spent probing with tongue depressors have taught them little about business. Now, more of them are seeking advice on how to watch the bottom line--especially in California, where the proliferation of prepaid health plans has made medical competition among the stiffest in the nation.
“Starting a practice is just like opening a small business,” said William G. Plested, past president of the Los Angeles County Medical Society and now a heart surgeon in Santa Monica. “But, in general, doctors are not good businessmen. There are more people out there who are trying to sell doctors the Brooklyn Bridge . . . because we don’t have business training.”
Neither medical schools nor physicians’ naivete is entirely to blame.
Medical practice has grown more complex in the past decade. According to the Health Insurance Assn. of America in Washington, about 85% of Americans now have private health insurance, creating an avalanche of paper work for doctors.
There’s more competition, too. While the U.S. population grew only 14.7% between 1970 and 1983, the number of licensed practicing physicians jumped 41% to 485,123 in 1983 from 310,845 in 1970, according to the American Medical Assn. in Chicago. Meanwhile, the average number of patient visits per week dropped 38.5% to 81.8 in 1983 from 132.5 in 1970 as more people defected to prepaid health plans or decided to forgo follow-up office visits.
Even so, doctors aren’t headed for the soup line. In 1983, the average net income for physicians was $106,000, according to the AMA, compared to $41,789 in 1970. And the Labor Department reports that last year’s unemployment rate for physicians was less than 1%.
But as office rents, equipment costs and malpractice insurance rates soar, doctors are turning to business consultants for advice. They’re also hiring office design specialists and shopping for computers to handle billing.
Costly Start-Up
They will need the help because it can cost $50,000 to $1 million to start a solo practice, depending on the specialty, and $150,000 on up for a group practice of four to five doctors, said James E. Mahoney, a vice president at the Phoenix Medical Services Department of Arizona Bank, which has written loans for about 2,000 physicians since it was set up in 1971.
Salaries and malpractice insurance--which in California can run as high as $60,000 annually for some specialists and $9,000 for a family doctor--make up the biggest expense. But equipment costs can be substantial, too. Examples: a stethoscope, $50 to $200; an electrocardiogram machine, $2,000 to $6,000, and a blood pressure unit, about $100.
“There’s a quiet revolution going on in the medical world,” said Donald W. Fisher, executive vice president of the American Group Practice Assn. in Alexandria, Va., a trade group that represents doctors in group practices. “There is increasing competition at the same time the government and insurers are curtailing the amount of (health insurance) reimbursements. Physicians are seeking knowledge about business. The average physician out there is quite frightened.”
Difficult to Compete
Sanford Marcus, president of the Oakland-based Union of American Physicians and Dentists, the nation’s largest doctors union with about 14,000 members, said that because large investor-owned health-care companies are flexing their muscles in the field, it might be too late for doctors in private practice to keep up. Even the largest of private group practices, he says, will find it difficult to compete against the wealthy corporate health-care providers.
“The doctor as entrepreneur is as obsolete as a dodo bird,” said Marcus, who has a general medical practice in Daly City, Calif. “The little local doctor--even with access to improved management know-how--is up against too big a poker player, and he doesn’t have the money or the resources to up the ante.
“What is happening now is analogous to a mom-and-pop grocery store, next door to which a giant supermarket is opening to take all the customers,” Marcus said.
Despite the ominous signs of competition and doctors’ frequent lack of business acumen, physicians seeking loans to open a private practice are regarded as good credit risks.
“There is much greater risk in funding a dentist or a fast-food franchise,” said Mahoney of Arizona Bank.
Unrealistic Plans
Nevertheless, Mahoney said he has been approached by several doctors who presented him with unrealistic financial plans. Fortunately, Mahoney said, those doctors can benefit from advice from groups offering training in practice management such as Zirkle, Lee & Associates in Denver, the AMA and the Medical Group Management Assn. in Denver.
There is even a company in Battle Creek, Mich., Black & Skaggs Associates Inc., that franchises management consultant offices to advise doctors.
“By their conservative nature, doctors don’t appreciate the value of business training as much as” other professionals, said Frederic W. DeVall, director of management development at Black & Skaggs. But such training can make a difference, he added. “I just compared our clients to AMA’s own data on doctors. . . . From 1982 to 1983 the average income for our clients increased 7.9%, compared to 6.8% for” the doctors surveyed by the AMA.
One of the oldest and most successful of the management firms is Conomikes Associates Inc. in Marina del Rey, which had revenues of about $1 million last year.
Its president, George Conomikes, said medical practices can’t be judged by commonly used barometers of business health such as return on equity or book value. Instead, he said, billing and collections should be examined.
Yardsticks for Success
“A healthy practice collects 90% to 95% of its accounts after making adjustments for things like MediCal or Blue Shield,” which pay only an average of 30% of actual doctor’s fees, Conomikes said. Another yardstick, he said, is “whether the accounts receivable (represent) more than three months of billings. If a doctor is billing $20,000 during a three-month period, receivables should not be over $60,000.”
To reach that level of performance, Conomikes said physicians should promptly file insurance claims and make follow-up calls to speed reimbursements. He also suggests cutting overhead by trimming the clerical staff. Computers can help. But Conomikes said many doctors buy them without assessing whether the equipment will help cut costs.
Many doctors, he said, fail to consult lawyers and accountants before signing office leases or partnership agreements. On the other hand, he said, doctors overuse accountants for such unnecessary documents as monthly financial statements.
Paying attention to detail can help. Take the name of the business.
Some doctors confuse consumers by using the technical name for their specialty, such as otorhinolaryngology instead of ear, nose and throat, Conomikes said. Others use unpleasant descriptions.
“I was in a New Jersey office building when I spotted one doctor’s sign that read ‘Pediatric medicine and diseases of the child,’ ” Conomikes recalled. “After reading that, I didn’t even want to touch the doorknob.”
Invested $300,000
One group of physicians that went to considerable lengths to reach the state of the art of medical management are Beverly Hills eye doctors William Fein, James Sharp and David A. Wallace. The three have poured more than $300,000 into their business since leasing office space in 1983.
They hired a medical office design firm that spent $150,000 on renovation and decoration. They also bought about $112,000 in medical equipment for seven examining rooms; spent several thousand dollars on typewriters, telephones and office equipment; installed a $37,000 computer system to handle billing, and hired six employees. Finally, they took a management seminar from Conomikes.
Wallace said, for example, that Medical Environmental Designs Inc. of Los Angeles determined how large a waiting room was needed, made bathrooms accessible to the handicapped and shortened hallways so that patients wouldn’t have to walk long distances to examining rooms. The designers even put unflattering wallpaper--”a garish silver,” Wallace said--in the restrooms to keep staff and patient visits short.
From Conomikes, Wallace learned how to market the practice through newsletters and brochures, weigh the financial pros and cons of providing optometry services for patients needing glasses and cut accounting costs by eliminating monthly financial statements.
“In the old days you could put on a white coat, open your doors and people would come in,” Wallace observed. “But in an era of diminishing resources to pay for health care, it behooves all but the wealthiest of physicians to be aware of costs and efficiency. Medicine has been like an ostrich for years with its head in the ground.”
Money Well Spent
Wallace said it’s too early to judge whether the moves have paid off. But he thinks that the money was well spent.
Darrell Cannon, a Long Beach urologist, has taken similar steps.
Cannon’s firm of six physicians hired an office manager to oversee 14 workers on the yearly payroll of about $250,000. The doctors also bought a computer to handle billing and word processing and installed a phone system that enables them to speak to one another from their separate offices by intercom and conference calling. Cannon’s firm also consulted Conomikes. One idea Cannon used was to survey patients to find out how well they were being served.
“I only had one complaint,” Cannon boasted, and that “was about an insurance claim.”
Other doctors, however, have eschewed consultants in favor of simple trial-and-error.
“I don’t have a need for them,” Clifford Rubin, a Beverly Hills pediatrician, said of consultants. “I’ve been in practice over 25 years. You just have to open your eyes and ears and be aware of the changing times.”
Traditionally, medical schools have offered little guidance about managing a medical practice.
“There are only 10 schools (out of 127 nationwide) that offer an elective in practice management,” said August G. Swanson, director of the department of academic affairs at the Assn. of American Medical Colleges, a Washington-based nonprofit group that represents medical schools. “I think faculties tend to think about medicine from its standpoint as a humanitarian endeavor . . . and don’t get involved in its business aspects.”
No Courses Offered
No medical business courses are offered at UCLA Medical School in Westwood or at Stanford University Medical School in Palo Alto, although Stanford officials said students are free to take courses at the university’s business school.
But some other schools are changing.
Georgetown University’s School of Medicine in Washington--whose 1984 class members graduated with an average indebtedness of $34,000--offers a seminar on personal finance, tax planning and insurance, said Ruth Beer Bletzinger, director of student financial planning. The school has also received a grant to provide training in managing a practice.
“When your students are making a big financial commitment, I think you are required to do something,” Bletzinger said.
Cannon, the Long Beach urologist, agrees: “In this day and age, any medical school that doesn’t offer some practice management is living in the past and is doing a disservice to its students. They are throwing them out there to the wolves.”
