Getting Out Alive

November 15, 2005

The road to greater revenue isn't always smooth. Sometimes business deals go bad. You'd better know how to get out safely.

Have you made a bad business decision and need a safe escape? You're not alone - mistakes are common in the business of medicine.

But the last thing you want to do is to compound your first mistake by making matters worse in an effort to free yourself - or worse, to simply let the problem fester, out of embarrassment, ignorance, or just plain inertia.

In today's healthcare business climate, practices are making changes at a dizzying pace: adding new ancillaries, buying new equipment, expanding clinic space, and adding new physicians, among many other risks.

Unfortunately, in the quest to generate new practice revenue some deals will go bad. It's inevitable. Sometimes, market conditions change. Sometimes, it was just a bad idea.

"All the hoopla for physicians to generate facility charges to boost their own revenue has caused some people to go into deals blindly," says David Hilger, an attorney in Austin, Texas.

You may feel there are few options when a new piece of equipment or an office expansion fails to produce the expected revenue. But Hilger and other experts agree that medical practices tend to overlook many options to salvage underperforming business ventures.

Bob Bohlmann, principal with the MGMA Health Care Consulting Group, says practices tend to see only two options: live with continued losses or bail out completely at a loss. In fact, there may be several middle-ground approaches to salvage a deal, he says.

Laura Jacobs, vice president of Camden Consulting Group in El Segundo, Calif., agrees. "I'm always reminding groups that a deal can usually be reopened or you can at least try to reopen it or make some other changes that could save it for you."

For example, perhaps find alternative uses for the unneeded office space when the arrangement you originally planned for it goes bad, or find another practice to buy or sublease under-used equipment.

Of course, you can't get out of a bad deal if you don't know you've made one. That's one of the biggest roadblocks practices face when it comes to fixing their mistakes, according to experts: group leaders are often slow to realize how badly the new venture is performing. Careful analysis of a venture's performance against financial goals is critical, says Hilger. Many times, physicians further compound their problems by failing to recognize when it is better to take the financial hit of buying their way out of a contract instead of trying to live with the losses, he says.

The biggest blunders

Whether it is a complex venture with other physicians to operate an MRI facility or a simple lease for a photocopier, there may be several options to change course. The first step, says Bohlmann, is to not make a bad situation worse. Topping his "dumbest-things-doctors-do-after-a-business-deal-goes-bad" list are:

  • Making decisions too quickly - before assessing the new venture's financial performance for the causes and, perhaps, solutions to the underperformance.

  • Taking too long to make a decision once the losses become obvious.

  • Accepting losses easily instead of examining other options to salvage a deal.

  • Failing to act because a recalcitrant minority of the practice's shareholders refuses.

  • Setting unrealistic terms to resell or sublease unneeded equipment or facilities, or to buy out a partner who should not have been added.

Washington, D.C.-based attorney Marla Spindell adds to Bohlmann's list: Not trying to work things out with the vendor or the other parties to the deal.

"If you wait until things get heated between you and the other parties then you'll need an attorney," she says. "And the minute you bring in attorneys, everything gets ratcheted up."

Know why it went wrong


Unexpected changes in the market can shoot down even the best-designed venture. But a deal can cripple a medical practice for other reasons, even when the balance sheet looks favorable.

Many practices underestimate the amount of energy a new venture can consume, says Douglas Iliff, a family physician, who has eyeballed - and passed on - adding several ancillary services to his Topeka, Kan., practice. In addition to the costs of training current employees or hiring part-timers to staff a new ancillary, Iliff points to energy drain that a new service can produce.

"I've known doctors who just end up getting run ragged because the new service takes up so much of their time," Iliff says. "They start feeling that they are just doing it to make a buck and it's not really satisfying to be practicing medicine like that."

You should expect to spend as much or more energy and time to run a new enterprise during its first year as you put into getting it off the ground. "They [physicians] open it up and expect it to just start running itself," says Jacobs. Expect to spend several hours a week checking milestones, mentoring and training staff, and assessing the organizational impact of the new service or expansion, she says.

Sometimes, a deal disappoints because it's just a bad decision, says Will Latham, president of the consulting firm of Latham and Associates in Charlotte, N.C. Knowing why your group has made a bad decision can help prevent similar, or perhaps worse, missteps as you try to find your way out of a money-losing venture.

What causes decisions to go south most of the time? "Lack of buy-in," Latham says. "There's no baseline agreement among shareholders to go along with majority decisions they don't agree with. It's amazing how many groups - big, small, and in-between - never had a conversation about following through on group decisions."

Sometimes, one holdout physician-owner can prevent a medical group from escaping a bad deal. "I see groups where one physician - often it's the mover and shaker in the practice - is forcing other doctors to stay in a bad deal," says Bohlmann. "But I also see cases where one influential physician is trying get out of a deal too soon or at too high a cost when maybe there are other options that are more affordable and reasonable."

While many ventures do work out, the list of those gone bad is long. The most troublesome ones involve ancillary services, office expansion, satellite clinics, new physicians, and contractual agreements for services and equipment.

Adding ancillaries

Maybe buying that bone densitometry device or setting up the infusion center looked good on paper. But six months later the new service is causing dissention among physicians and draining the practice's coffers. What happened?

A new service may cause increased bickering among physicians over how to allocate costs and revenue. This is especially likely in service areas where the Stark law against physician self-referral prohibits division of income based on volume of referrals.

"One of the really unhappy situations is when you have a number of doctors who are utilizing the facility or the device at different volumes," Hilger says. "It's impossible to overestimate the divisions that can cause when they get down to splitting the income."

While an overly optimistic or vague market analysis is often the culprit, Hilger says some ancillaries underperform when the practice tries to operate them at the same pace, or in the same space, as the rest of the office. Consider setting up a separate waiting area for DEXI-scan patients, he suggests. Some ancillaries, such as wellness centers and day spas will do better when
separated physically from the faster pace of the rest of the practice.

If the business model calls for the practice's physicians and staff to also operate the ancillary, schedule them to do so in dedicated blocks of time, such as half-days, so they can give full attention to those patients and equipment, Hilger says.

An ancillary service enterprise also can underperform if a practice adds it for the wrong reasons. Iliff says he and his practice partner review ancillaries by asking if providing the service in-house would provide any benefit to patients.


"If it's not something we really think is part of our practice as family physicians and would make any difference to our patients by having it here, then we just don't think it's going to be worth the stress and time for us to make it work," Iliff says.

Some groups may create an ancillary service for the right reasons but still fail. When a mistake is made in forecasting and it's too late to turn back, Latham suggests revising the business plan. For example, you may have purchased the MRI to recapture patients you referred to other physicians, but it turns out you did not refer that many MRIs in the first place. "Now that you've bought the machine your business plan has to have a strategy to capture more
market share to get those new MRI patients," Latham says.

When it's just not possible to make a profit, Bohlmann suggests trying to sell the service or equipment, or lease it to another practice.

"Look for a buyer. Maybe a hospital wants to help you or wants to get into that business - or wants to get you out of that business," he suggests.

Adds Jacobs, "There are Stark regulations to consider, but maybe you could sublease the equipment to other physicians. That's the easiest thing and I see it done often."

Satellites and expansions

Many practices underestimate the additional, and sometimes hidden, costs of running a satellite office, Latham says. For the majority of medical groups that still use paper records, packaging and transporting records between a satellite and the main office for each day's appointments can eat up valuable staff time, and possibly incur courier fees. The practice may also need to revise its appointment scheduling processes and teach staff how to handle patients who walk in or request same-day appointments when their records are at another location.

Latham warns that a satellite office can cause the practice's days in A/R to creep up. That tends to happen when medical charge-entry at a part-time facility is batched to one or two days a week or transferred to the main office for processing.

Many satellite offices operate part-time, so your practice may also incur higher costs to find and hire part-time staff. "You can create a half-time FTE (full time equivalent) on paper but you cannot cut a person in half," Latham says. Juggling the shifts of full-time staff at the main office to fill in at the satellite can disrupt operations at the practice's main office, he says.

The options to recoup the cost of an underused satellite or unneeded office space include selling the space or subleasing it to other providers. Perhaps you could reconfigure the space to make it more appealing for general commercial use, says Bohlmann, though that will likely carry some cost.

Focus first on covering the fixed costs of the unused space, such as the monthly lease payments, Jacobs says. Some of her clients have come up with creative ways to reduce office space costs, including leasing a waiting room to a community group after hours or on weekends. That option only works if you can keep your clinical areas and records secure, she adds.

Contracts for leased space are not easy to get out of and the more specialized the space, the less flexible you can be in reconfiguring it, Spindell warns. Deciding whether to break or live with a lease or a contract is usually a matter of dollars and cents - take the option that is cheaper, she suggests.

New physicians

Adding a new physician to the practice, and then changing your mind about her, can be one of the most contentious and costly errors you can make. Sometimes the problems are caused by clashes of personality or practice style, but you can also love your new doctor on a personal level yet find your market assessment was wrong or the market changed. The new physician becomes a liability when a payer slashes reimbursement for her specialty, subsequent to her hiring.

Hilger recommends always bringing in new physicians as associates and including a clause in the buy-in agreement that there is no expectation of partnership until it is offered.

Whether adding a new physician or new equipment, be sure to conduct periodic evaluations of performance and revenue goals, Latham suggests. Without those evaluations you may eventually offer the physician a partnership, unaware that doing so may be financially unwise.


And don't forget the costs of asking an associate to leave, says Spindell. Questions that are typically raised are: Does she get a full, partial, or no bonus if leaving midyear? Does his noncompete clause still apply? Who pays for medical malpractice coverage? "We always recommend you pay departing physicians tail coverage regardless of whether they leave voluntarily or not, because what's at stake is what they did on your watch," she says.

Merge or die

Sometimes you get in so deep that selling the practice or merging with another group are the only reasonable options, says Bohlmann. He recalls an oncology practice that built a "Taj Mahal" facility that included a wellness center, top-of-the-line diagnostic equipment, well-appointed waiting areas, and a spacious infusion center. Unfortunately, the practice grossly overestimated how many new patients it would attract. In the end, Bohlmann recounts, the practice opted to find a merger partner, but the physician owners took losses on the deal. Their only other option was bankruptcy.

Bohlmann says the three critical documents to develop when getting into any venture are the:

  • Business plan. Make sure to include a realistic market forecast and don't underestimate the cost of debt service, staffing, organization impact, and any other direct and indirect costs.

  • Contingency plan. Know in advance what steps you will take if things go wrong. This plan should include options and related costs for solutions such as converting or selling the new facility, dismissing the new physician, or voiding equipment leases.

  • Documentation. Make sure to put into writing how and when the project's progress will be evaluated and how the group will make any decisions required to alter the plan.

Jacobs recommends appointing one or more physician shareholders to keep a close watch over a new project. That shareholder can champion the organizational changes needed to make a new project work.

The physician-watchdog also should keep an eye on the mood and morale of the staff and the other physicians, and be a first-responder when problems arise, says Bohlmann.

"When you get into something new and then you have to shift gears or change course, you are always going to be asking yourself if you are just throwing good money after bad," Bohlmann says. "You just have to realize that for all your planning, the future is unknowable."

What is under your control, Bohlmann and other experts agree, are the choices you make to the inevitable changes that occur in your practice's business performance and local market.

Bob Redling, a former editor for Physicians Practice, has extensive experience writing about medical practice management. He can be reached via editor@physicianspractice.com.
This article originally appeared in the November/December 2005 issue of
Physicians Practice.