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Ask-A-Consultant: New Physician Impact

Q:

I am a partner in a two-doctor OB/GYN practice. We presently have a main office and a small satellite office. We continue to experience a significant backlog of patient appointments and want to add a third doctor. While we believe that the practice could ultimately support a third doctor, we are concerned about the effect on our income.

A:

Physician partner income could certainly be impacted depending upon the specific circumstances of your practice. These typically relate to space, support staff, and the intended compensation method for the proposed associate physician. In most situations, it is advisable to evaluate a number of economic factors, as well as local market factors, before making a decision to hire an associate physician.

In general, there should be excess demand for physician services. In your case, this is apparent due to your appointment backlog. If the practice has significant dependence upon third party payors (PPO, HMO, commercial insurance, Medicare, Medicaid, etc.), you should determine if they will allow you to add a third doctor to your contract. Even then, the process for credentialing new physicians with third party payors, even for established practices, is time-consuming and requires significant follow-through on the practice’s part.

In order to evaluate the potential economic impact, the practice and its advisors should determine any anticipated increases in costs for space, staffing and supplies, as well as any capital purchases or leases for furniture and equipment. Several budget scenarios should be prepared assuming various levels of associate physician charges and collections. The resulting difference between these estimated associate collections and increased expenses for space, staff, supplies and associate compensation is referred to as marginal profit. In most situations, during the first six to nine months, the increase in costs will exceed the increase in collections and, therefore, negatively impact partner income in the near term. In this regard, you need to consider how fast you expect the new associate to develop a gynecology practice (with female OB/GYNs typically building a gynecology base more quickly than their male counterparts), the willingness of you and your partner to share your referrals and many other factors.

You also need to consider the impact of the cash flow lag associated with increases in the associate’s obstetrical volume given the lengthy delay between when a new obstetrical patient is initially seen and when the claim for complete obstetrical care is paid. As a result, it is difficult to justify a buy-in before the associate has worked for the practice for at least two (we prefer three) years.

 

Peter F. Lyle
Director, Practice Management Services

MMA does not provide legal, accounting, or tax advice.  If you need assistance in these areas, we recommend that you consult a qualified professional.  In addition, please note that a client relationship with MMA is not established by the submission of a question to this forum or by the publishing of MMA's response.



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