Doctor Heal Thyself: Strategies for Financially Strained Medical Practices
Ask a medical professional why they entered their field, and the answer invariably involves a desire to care for others. For most this drive never fades, but it must coexist with the reality that healthcare is a business.
As a business, private clinical healthcare requires capital, employees, vendors, insurance, third-party payor arrangements, and myriad obligations. And, of course, patients. Private practice for many disciplines is a capital-intensive endeavor, subject to the same challenges and pressures as any service business. Like any business, reaping financial rewards means accepting significant risk. Risk can come in many forms and from many angles, but it most often manifests as too much debt and insufficient cash flow. This article discusses strategies we employ to help medical practices and their owners overcome financial challenges.
Realistically Assess the Current Situation and Near-Term Prospects
An assessment starts by reviewing the assets, liabilities, income, and expenses of the practice. Assets and liabilities are reflected on the balance sheet, and income and expenses are shown on the profit and loss statement (if your practice doesn’t have reliable financial statements, talk to your accountant, and make it a priority). In reviewing the financials, also look at how things are trending over the last few months and compared to the last year or two.
In addition to the current and historical financials, consider events on the horizon that will impact cash flow. Are any loans or leases maturing? Does equipment need to be purchased or replaced? Any changes with insurance arrangements or reimbursements? Any new competition? No one has a crystal ball, and black swan events certainly occur, but trying to anticipate changes that may affect the bottom line is smart and proactive.
Cash is the life blood of any business, and conserving cash must be a primary focus if your practice is struggling. Consider all possibilities for building liquidity, including infusions of equity or debt. Whether or not those options exist, work on reducing expenses, postponing expenditures, and boosting collections (consider offering a healthy discount for lump sum payment of outstanding balances).
Depending on the nature of the practice, it may be possible to liquidate nonessential assets or eliminate unprofitable offerings. Often this means booking losses as assets are written-down to market value. These losses are less important than the cash generated. Of course, efforts to conserve cash can’t come at the expense of patient care.
Negotiate with Lenders, Lessors and Vendors
If the practice is at risk of defaulting on obligations – or has already defaulted – it usually makes sense to communicate with the affected creditors to see if an accommodation can be reached. If the practice rents its space, the landlord might be motivated to grant a moratorium or other flexibility to keep a good tenant. If you own the real estate and have a mortgage, talk to your banker about refinancing or extending payments. Same for equipment financers. You may be surprised by how much flexibility some creditors are willing to show if they know the practice is working its way through difficult, but temporary, financial challenges. It’s often more advantageous for the creditor to renegotiate than repossess. The same generally does not hold true when dealing with software providers, so special caution should be exercised when seeking to renegotiate these arrangements. While repossessing equipment can be costly and challenging, turning off software access for nonpayment can happen instantaneously.
Carefully Examine How Personal Finances and Those of the Practice are Intertwined
It’s always smart to consider how the finances of a business and its owner are connected, but this becomes critical if the business is struggling. Are there personal guarantees of practice obligations? If the owner is on the hook personally for the lease or mortgage, bank loans or lines of credit, equipment notes or lease, or personal credit cards used for business expenses, then addressing the financial challenges of the practice can’t happen in a vacuum. Furthermore, if profits from the practice fund personal expenses (as is usually the case), then belt-tightening across the board may be necessary until the difficulties are resolved.
Seek Advice from a Restructuring Professional
Just as there are specialties in healthcare, dealing with business financial distress is a specialized legal area. Attorneys who focus on reducing debt, restructuring obligations, and maximizing cash flow have the tools and expertise to help restore a struggling medical practice to financial health.
Robert Gonzales guides businesses, including healthcare enterprises, through financial restructurings.