To sell or not to sell: Practice independence in light of tax reform

March 31, 2018

By Kevin Schmitt, CPA, CFP®
Partner

Over the last 5-10 years, hospital systems have made a strong effort to buy up physician practices in hopes of purchasing the physician/patient relationship. In the last five years, the amount of practices for sale escalated but leveled out in 2017. Additionally in 2017, tax reform provided a significant tax break for businesses with the qualified business income deduction (QBI); however, service-based businesses and those in the health care industry did not realize the same QBI deduction. Subsequently, physicians may once again be considering whether selling is the right choice for them if they are feeling the pinch in costs and taxes.

Regardless of how the effects of the Tax Cuts and Jobs Act (TCJA) will materialize, the principles behind choosing independence or selling remain the same. Poor relationship maintenance between physicians and their hospital systems over management disagreements and limited financial rewards were common root causes of practices selling in recent years – issues not solved in the TCJA.

Practices who went through the selling process realized that illustrating the hard-monetary value of an independent practice can be difficult, as revenue and profit is often channeled out each year to shareholders for those with an S-corp or C-corp structure. From a business valuation standpoint, this left only a few hard assets and the workforce to measure practice value. Despite this, the hospital groups purchasing these independent practices viewed the physician relationship as a pathway to direct patients to other areas of their facility. However, as time passed, groups willing to pay the up-front premium to purchase the practice and their client relationships were not willing to pay the same expenses moving forward. The perceived value of the practice was not homogenous between the physician and the hospital group and often resulted in a breakdown and disenchantment with the relationship.

What continues to hold true is independent physicians discover they have the greatest control over their medical career and financial destiny because independence:

• Creates opportunities to make more revenue long-term, over being an employee of a system where income is dictated by outside influence
• Provides physicians the freedom to determine how to practice their medicine, versus being directed toward policies and procedures to which they don’t subscribe
• Leads to a direct correlation of effort to return on investment, rather than a reward system based on budget
• Offers the opportunity to build equity in equipment and real estate
• Presents physicians with a self-managed schedule and lifestyle not dictated by a large health group’s hours and demands

While large health care systems are able to offer more enticing packages up front such as sign-on bonuses, loans, benefits and resources to new physicians, for those with the entrepreneurial spirit, independence offers the potential for the greatest reward, regardless of any changes to the tax code.

Any physician who chooses to remain independent needs to surround themselves with a business advisory team who understands the dynamics and challenges of operating an independent medical practice. Successful independent practices have proactive, knowledgeable and forward-thinking teams to help make better-informed decisions about their practice management. The right team will set a physician up for success over the long term and allow them to practice medicine their way while maintaining a profitable and progressive business.

For assistance with managing the business side of your practice, reach out to the specialists at HK. Call 888-556-0123 or fill out our form.