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Are you using your brother-in-law Larry to handle all your practice’s accounting? Big mistake - unless Larry happens to have a good understanding of the peculiarities of healthcare economics and can do more than fill out tax forms. Your practice is your livelihood. You need a pro.
The trouble started the day Robert Meacham’s accountant told him his nurse practitioners were losing him money. Meacham, the sole owner of Baxter Clinic in Hernando, Miss., was baffled. He knew he paid his three nurse practitioners reasonably well, and they certainly saw plenty of patients.
Convinced that something wasn’t adding up, Meacham took his books to his banker, who looked only at the bottom line and sided with the accountant. Still not buying it, he hired a practice management consultant who immediately saw the problem: Thanks to Meacham’s accountant - who specialized in construction firms, not physician practices - his office’s books were an unintelligible mess of misclassified expenses. Patient insurance overpayments, for example, were lumped in the same category as premium payments for the practice’s group health insurance. Meacham’s medical supply expenses appeared - incorrectly - to be five times those of other practices the same size. And, most important, his NPs were not losing him money; in fact, just the opposite.
“My accountant had said, ‘You don’t need all [these categories] broken down. We can simplify it,’” recalls Meacham. “His categories may have, at some point, made sense from a tax standpoint, but from a practice management standpoint, it was impossible to analyze anything, to tell how the practice was doing.”
Experts say this is exactly what can happen if practices fail to conduct due diligence when choosing an accountant - that all-important adviser who not only addresses your tax concerns, but also helps you organize your books so you can see how your office is faring from a practice management perspective.
Many physicians don’t know that their accounting needs change as their practices grow - a serious oversight - says David Mandell, a New York City-based attorney who has many healthcare clients. “Just like my father did when he came out of med school in 1965, young doctors just need someone to do their very simple 1040,” Mandell says. “But when things get busy - they get married, have a family, and their practice grows - they are still working with the same accountant, and that’s a mistake. How many of us still go to a pediatrician for our healthcare? It’s the same thing.”
As your financial needs change, Mandell suggests asking either your attorney or practices similar to yours for recommendations. Are your colleagues happy with their current accounting services? Do their CPAs’ skills match their practices’ level of sophistication? Search for that perfect balance to find the right fit for your needs.
The selection process
What do you need to know, first and foremost, when interviewing prospective accountants? “Hands down, [you should ask] whether or not they have worked with other physician practices,” says Ken Hertz, an Alexandria, La.-based consultant with the Medical Group Management Association (MGMA). Accounting-wise, the medical world is nothing like other industries. Reimbursements are different, as is the chart of accounts; ditto for benchmarking and software. Hertz suggests asking detailed questions regarding the candidate’s medical practice work experience during an initial accountant interview. If the candidate has such experience, ask for those clients’ contact information, and get in touch with them.
Ron Lamberth, a partner with the Charlotte, N.C., accounting firm Cherry, Bekaert and Holland, advises physicians interviewing accountants to ask the following: “Are those practices [you are working with] achieving the levels of profitability that practices in their peer group should achieve? Is the accounting firm familiar with MGMA’s statistics on how practices in different specialties are performing?” As he points out, “They need to be, in order to keep the practice up-to-date and on track.”
Size does matter - a lot. Hertz recommends shying away from firms that have worked solely with practices significantly smaller than yours. “If you are a 25-doctor group and the CPA you’re considering has only ever done a one-doctor practice, when you talk about developing a sophisticated cost system, he may say, ‘I don’t have experience with that,’ or worse yet, he won’t say it and you will find out later,” says Hertz.
Hertz says it’s imperative to determine during the interview exactly what your prospective accountant plans to do for you and your practice. Tax accounting - including quarterly payroll taxes - should be a given. But will he also go deeper, producing analytical management reports, monthly financial statements, and the like? Or will your office manager or bookkeeper take care of those tasks? Hertz says that in general, an office manager or bookkeeper should have a solid grip on basic accounting principles - including processing all the practice’s account data, posting receipts, and making payments on invoices. But you should expect an accountant to be able to help establish the underlying architecture for those functions, ensuring accuracy by instituting proper checks and balances within your system.
At times, who handles which financial tasks can get way out of whack. Consider what happened at Physicians to Women, an OB/GYN practice in Stuart, Fla. Over a 10-year period, this five-doctor, 30-employee practice neither hired a bookkeeper nor properly delineated its office manager’s financial duties. So the practice’s accountant did it all by default. This person spent inordinate amounts of time performing office tasks that included reconciling bank statements, reviewing accounts payable, calculating revenue allocation, providing profit and loss statements, etc. Such tasks are typically outside the boundaries of a CPA’s job description, and indeed the practice was paying double for its accountant to perform services that were more appropriate for an office manager or bookkeeper. “Even our accountant told us we were spending too much money on him, and we should just get a bookkeeper,” says Peter Dayton, an OB/GYN at the practice. “But we were so busy all the time, we just got complacent.”
The practice finally hired Hertz, who all but insisted that Physicians to Women hire a bookkeeper - which it did - thereby cutting the responsibilities (and the cost) of the accountant’s work in half.
Tax planning certainly springs to mind when one thinks of accountants. But nowadays, accountants should be doing much more, says Mandell: “The vast majority of accountants look backwards at what happened earlier in the year. They should instead say, ‘OK, let’s see where you are now, and let’s try and implement some things so that you’re not in that position again next year and the year after that.’”
Lamberth concurs: “You want someone who is leading the charge instead of just reacting to things the client brings. The ones that stand out now are assisting the client in planning for the future.”
Assemble a dream team
How can you tell whether a prospective accounting firm is of this ilk? Lamberth advises outlining the current financial state of your practice during the initial interview and then listening closely for any innovative planning ideas your candidate may suggest. Or just ask outright, says Hertz: “What are some specific ways you plan to be proactive in helping our firm plan for the future?” If you get a blank look in response, you’ll know this is not the candidate for you.
Hertz says that new practices trying to start out properly - or old practices attempting to reboot - can benefit from three advisers: an accountant, an attorney, and a practice management consultant. These three professionals should work in concert with one another to ensure your practice’s financial systems are both saving and earning money. Problems can occur if any of these three advisers stops being a good team player.
“You want to make sure none of them has too big an ego,” says Lamberth. “Some accountants may try to protect their turf,” especially if their firm offers add-on services that the practice’s attorney or consultant may already be handling. If that’s the case, the accountant may have an eye toward finding an opportunity to shoot the other advisers out of their saddles rather than cooperate with them in your practice’s best interests. (Of course, this undermining can stem from any member of the team, not just the accountant, so beware.)
How can you assess the likelihood of such corporate competition occurring with your practice in the balance? Lamberth suggests querying your CPA candidates on their teamwork experience, especially within medical practices. Get the details on past collaborations. What was the division of labor, and who decided what that division would be? What were some of the key group tasks that benefited the practice? If the prospective accountant stumbles over her answers during the interview, you may want to move on.
The best-case scenario? Without your prodding, the prospective CPA will volunteer to collaborate with other financial professionals. “He should be saying, ‘I want to make sure I’m part of a team of advisers for you,’” says Lamberth. “He should be bringing up the idea himself.”
Don’t be shy about seeking a second opinion on any of your accountant’s recommendations, says Mandell. Often a second accountant will spot issues the first one missed.
Mandell describes one such situation in which an accountant he knows was called in by a client as a second CPA. His fresh set of eyes immediately spotted an area in which the client could reduce his taxes by $2.5 million - well beyond what the first accountant had identified. “The only way to know whether or not you’ve gotten good advice is to see a second person,” says Mandell. “Your CPA is never going to say, ‘Go get a second opinion on what I told you.’ You are the only one, and it’s important to do it.”
Also guard against over-paying for such services, advises Hertz. According to the MGMA, outside fees for professionals who assist physicians in business matters - which include attorneys, consultants, and accountants - should total 1 percent or less of a practice’s annual revenue. “If an accountant says, ‘It will cost you $75,000 for me,’ I’d make sure and run the other way unless he’s going to be your surgical assistant as well,” says Hertz.
Both Lamberth and Mandell agree that doctors often make the mistake of delegating to their office managers or another employee the task of retaining an accountant. “The doctor shouldn’t expect that by hiring an accountant or a bookkeeper that it relieves him of all the responsibility of watching the finances,” says Mandell. “He still needs to be exercising basic controls, looking at bank statements, signing checks. He still needs to maintain oversight of the money.”
As a physician business owner, you must walk that fine line between appropriately involving yourself in your office’s important business transactions and micromanaging them. In this case, trust your employees to do their jobs, but take a hand in interviewing prospective accountants, and always retain ultimate control over important financial decisions. It is, after all, your practice.
Suz Redfearn is an award-winning healthcare writer living in Falls Church, Va., who has written for a variety of publications, including The Washington Post and Men’s Health. She can be reached via email@example.com.
This article originally appeared in the June 2007 issue of Physicians Practice.