Spring Break Friday Musings

This week's installment has a little of something for everyone.  I will lead off with several tidbits related to medical clinic operations.

Medicare Payments to Physicians

The Centers for Medicare and Medicaid Services (CMS) recently sent a letter to the Medicare Payment Advisory Commission (MedPAC).  CMS estimates that payments to physicians in 2012 will be cut by 29.5% in the aggregate.  As has become customary, Congress will probably intervene and reduce this adjustment.  In the meantime, as required by Congress, MedPAC filed its 2012 recommendations on Medicare payments to Congress earlier this month.  As one of its recommendations, MedPAC endorsed a 1% increase in Medicare payments to physicians for 2012.  The disparity in these recommendations points up the ongoing fight over the relevance of using the Sustainable Growth Rate ("SGR") in setting Medicare payment levels.  The SGR uses a convoluted formula to derive the change in payment levels.  The SGR has been in place for a number of years.  However, in the last five years, it has been overridden by acts of Congress.  Hence, the adjustment indicated by the SGR has accumulated to the point where it is almost 30% for 2012.  Apparently, MedPAC saw the hand writing on the wall when it made its 2012 recommendation to Congress.

I believe physicians will not see their payments reduced by 29.5%.  Congress will either adopt MedPAC's suggested 1% increase or will freeze the payments at current levels.  However, in an earlier post, I discussed the ramifications of the Patient Protection and Affordable Care Act ("PPACA") on provider payments.  PPACA will create the independent payment advisory board ("IPAB").  IPAB will be tasked with reducing the per capita cost of Medicare.  PPACA restricts the actions available to IPAB in carrying out this mission.  Basically, IPAB is precluded from doing anything other than reducing payments to providers.  Physicians will continue to work harder and get paid less.


Red Flag Rules Update

The Red Flag Rules were created as part of the Fair and Accurate Credit Transactions Act.  The Red Flag Rules require that creditors take steps to protect the identity of customers.  The Federal Trade Commission ("FTC") applied a broad definition to creditor.  Under the FTC's definition, accountants, attorneys, physicians, and others were included as creditors.  Several ongoing lawsuits challenged the FTC's definition and Congress has intervened to clarify its definition of creditor.  Based on this clarification, physicians are no longer considered creditors and will not have to implement the Red Flag Rules.


Is Overhead Too High for Your Medical Practice

I regularly consult with medical practices of varying size and specialty.  Many of my client-physicians want to know how they can keep more money by reducing overhead.   I believe that most practices are being run efficiently.  Cutting overhead can save some nickels and dimes; but it may end up being penny-wise and pound-foolish.  The biggest component of overhead in a medical practice is personnel.  Reducing personnel, may increase overtime, which cuts into the savings.  However, the impact on morale could be devestating.

Currently, I believe that a better approach is to explore ways to grow top line collected revenue.  Some options for doing this include:

1. Add ancillaries that you currently refer out.  Pathology, lab, ambulatory surgery centeres, and imaging are popular choices.  Employing a physician in a role that complements your patient base can be an alternative.
2. Add a new location.
3. Pursue joint ventures.  Often, rural hospitals are short on capital and will lease equipment such as CT Scanners from physicians.
4. Make your employees stakeholders by rewarding them for recommendations that enhance profitability.

Wall Street Recovery Not Making It to Main Street

Lately, there has been much discussion of the record profits of American corporations juxtaposed against the continued elevated unemployment level.  As it turns out, American companies are creating lots of jobs.  These jobs just happen to be outside the United States.  The jobs are closer to the international consumer, saving shipping costs.  The international labor tends to be cheaper.  It is no longer just toys and clothing, high tech jobs are being created overseas.  With China becoming the second largest economy, this shift makes sense.  Consumer demand in the U.S. remains subdued due to high unemployment and the sluggish housing market.  Until demand increases or labor becomes affordable, the recovery of the U.S. economy will continue to be slow and uneven.


Tax Effecting in S Corporation Valuations

The argument over to tax-effect or not tax-effect has raged for years.  Is there a value to an S Corporation that can be captured and transferred?  Should the avoidance of double-taxation be considered?  Practitioners far smarter than I hold both positions.  Personally, I tax-effect when I value pass-through entities.  The components of our cost of capital build-ups are after-tax.  To apply these to pre-tax benefit streams seems intuitively illogical to me.  Regardless of which side you take, you need to be able to defend your position.