Is your practice ready to give up profits?

There are benefits for some in nonprofit groups

Imagine a world where profit isn't important. It's not a dream world, but the reality for nonprofit medical foundations and practices. And according to consultant Gerry Benedict, CPA, of Denver-based Medimetrix Consulting, there are some sound reasons why some practices - in California and other states - might want to consider becoming a nonprofit entity.

Key among them is living in a state where there is strict corporate practice of medicine laws, he says. "In California, health systems and hospitals cannot directly employ physicians, so several foundations were set up," says Benedict, who served as founding president of one of the most successful of those foundations, Gould Medical of Modesto, from 1985 to 1993. But even in other states, practices that have built up a lot of equity in their business and seen a substantial increase in their assets can use the nonprofit formula as an alternative to selling out to a practice management company.

Gould is a good example of using this strategy. Founded in 1957 and run out of facilities bought for $35,000, the practice had some $13 million in value in the mid-1980s. "The senior doctors were getting ready to retire, and the only way for an independent medical group to fund the buyout was for the new docs to pay the old ones," Benedict says. "That's expensive."

Instead, Gould looked for a creative - and legal - way to fund the change: It went nonprofit. "We got the IRS to essentially fund this. We set up the nonprofit, donated the physical assets to the new entity, and got both the assets and a tax write-off."

Sure, says Benedict, they could have borrowed money to fund the takeover, "but that would have meant higher debt service. For a mature practice with a buyout problem, this is a great way to go."

According to Benedict, the nonprofit status can even act as a lure for new physician talent, simply because they won't have to come up with large sums of cash to buy into an established, reputable practice.

But don't think that going nonprofit is all sweetness and light. Mike Wilson, MBA, CMPE, is president and chief executive officer of San Francisco-based Catholic Healthcare West Medical Foundation (CHW), a nonprofit organization with about 400 physicians in multispecialty and primary care settings. He says that one weakness which nonprofits have had is that there is little emphasis on financial accountability with the physicians. "Physicians were given salaries with little criteria attached," he says.

Practices are faced with a dizzying array of potential partners, says Wilson, from venture capitalists and pharmaceutical companies, to practice management companies and not-for-profit hospitals. "That is more diversity than 10 years ago. To be candid, I think there have been some dumb financial deals done - practices bought for strategy and market share, without looking at the financial underpinnings. Practices were overvalued. Now, they are unsustainable. On a go-forward basis, the menu is still diverse, but we will find that no matter who you choose, there will be a tougher financial regimen."

And Wilson is putting his money where his mouth is. CHW is currently looking at a change in structure that will make it look a lot more like a management services organization (MSO). Already, physicians are attending meetings on financial issues, from the realities of the managed care market, to income and the number of support personnel. "We are facing the same issues as for-profit entities, and we have to deal with them the same way," says Wilson.

But he has not soured on nonprofits. Even as he looks to a change in structure, Wilson says he leans toward making this MSO nonprofit. "Yes, it is clearly possible that we will become for-profit. But we think we can do it as a nonprofit. Then, we just try to cover costs. There is an emphasis on the longer view, the local view, not getting rich quick," he says.

Benedict agrees that going nonprofit isn't an answer for everyone. Immature practices certainly don't reap any benefits. And for practices that don't like the number of hoops they have to jump through for payers, the requirements to achieve nonprofit status can seem daunting.

"It can be difficult to get the local IRS office to believe you are nonprofit," Benedict says. "We had to set up an educational library, fund charity care; we had to do research, and we had to be very careful about the mix of patients we saw."

For a group that has been structured for profit, this can be a real culture shock, he says. If you have a physician staff more committed to the latest model Mercedes than caring for indigent patients, then it might be too hard a change.

Another drawback is physicians who might want to call all the shots have to abdicate some authority to a more corporate structure, Benedict says, with a board that is made up of mostly outsiders. "If you have a group without walls with no corporate infrastructure, it won't work."

But if you can hurdle the obstacles and stomach the changes, there are rewards - some unanticipated. Gould refinanced its debt with tax-exempt bonds. That reduced debt service costs, says Benedict - although it also required the practice to have reserves enough set aside to pay the bonds. "That is actually a good thing, but hard. You had to put cash away for a rainy day - not spend it or pay bonuses with it."Another benefit in California was a property tax exemption, he adds.

True, says Benedict, it is a more effective strategy when tax rates are high, but there are certain elements of the deals which can appeal to physicians. Local control is always an easier sell than management based in Nashville, TN, he says. And Gould even found a positive impact on physician income - although some physicians found that hard to believe, given the number of Medicaid patients they had to see.

Wilson believes that much of the choice on whether to become a nonprofit will rest with the attitudes of two merging organizations or of the physicians aiming to go nonprofit. "If they share a vision of service, then it can be a good thing," he says. "But in the future, even a nonprofit practice will look a lot more like a for-profit one."