Practical Advice on Practice Money Management
While a practice’s focus is on the patient, significant attention also has to be given to financial considerations like working capital, planned growth, and investment in new equipment. After all, practices that neglect their own financial health often find they aren’t around too long to care for their patients’ physical well-being.
Nashville’s prominence in the healthcare industry has fostered a number of financial institutions with specific industry knowledge. Recently, Steve Jaynes, director of Medical and Professional Private Banking for Avenue Bank, and Blake Wilson, head of TMA Medical Banking – a division of INSBANK, shared their insight and expertise regarding money issues facing practices.
Working Capital
While ‘working capital’ is a broad category, Jaynes and Wilson both quickly honed in on ICD-10 and its potential impact on practices. Jaynes said a key concern over the implementation delay is that it might cause practices to hit the pause button. “ICD-10 has such a potentially huge cash flow impact. I think resting or stepping back is a mistake,” he said.
He and Wilson both expressed a hope that practices would use the next 16 months to train and test the new coding system to minimize disruptions to reimbursements. However, as Wilson pointed out, “Everybody has to be on board for the process to work … everybody in the channel from vendors to payers.” Given the complexity and room for error, he continued, “Some experts are recommending up to six months of working capital either on hand or with access to borrow.”
He added access to debt might be a better business option than stockpiling cash … but included the caveat that practices vary so any decision would ultimately depend on a specific practice’s capital structure. “With interest rates as low as they are today, having access without necessarily putting your capital on the sidelines makes a lot of sense. That covers the risk component but doesn’t necessarily sacrifice the primary line of business … taking care of patients.”
Jaynes noted, “Where (practices) have a working capital line of credit with their financial institution, it’s probably not a bad idea to have a backup plan in place.” He suggested requesting a temporary increase for 60-120 days to guard against cash flow interruptions. He added the better prepared a practice is for ICD-10, the less disruption to cash flow. However, he continued, it’s almost inevitable that there will be some disruption. “We’re advising out clients to be prepared for that.”
Expansion & Changing Practice Structures
Jaynes said there has been recent movement in terms of practice consolidations, mergers, expansions and purchases of capital equipment. “The combination of the recession and the implementation of ACA had, I think, sort of a dampening effect with many practices taking a ‘wait and see’ attitude,” he said. However, Jaynes continued, “You can only delay so long. I think the gates are starting to open.”
He added it’s a two-way street with funding becoming more readily available. “We do look at things with an eye to a brighter economic future,” he said. “I think the financial services industry is much more open to helping clients access capital as compared to what it was when things were really tight in the recession five years ago.”
Among their client base, Jaynes said, “We’re seeing activity around consolidation as practices start to try to get bigger for the benefits of scale.”
As for physicians purchasing into a practice, Wilson noted, “Our main goal is to line up the cash flow streams with a prudent … but not overly conservative … repayment stream.” He added that traditionally a practice might have floated the cost of the new physician’s share while the amount was paid back over time. “But that’s again putting capital on the sidelines,” he pointed out. In general, he said, debt is cheaper than equity in today’s markets.
Both Jaynes and Wilson said they are also seeing clients diversify to add new revenue streams by investing in ambulatory surgery centers, medical office buildings, and new service lines.
As for purchasing or refinancing property, Wilson remarked, “With commercial rates near historic lows, we’ve seen good activity on refinancing, and that mirrors the residential market.”
In Praise of Proactivity
Today in America, healthcare delivery is undergoing sea change. A number of factors … at least in the short-term … have combined to squeeze working capital. “Be proactive in your planning,” counseled Wilson. He said to not only consider where your practice is going but where the industry as a whole is moving. “Put pencil to paper to look at stress tests … different scenarios … and how you would or could react to those financially.” Wilson said the best option is to take a proactive stance to both creating a savings cushion and garnering access to debt. “With those two criteria, you should be able to weather storms in this volatile and changing healthcare climate,” he said.
Being proactive applies to bankers, as well. Both Jaynes and Wilson said their institutions make it a priority to keep up with healthcare issues impacting their clients’ practices. “We’re never going to be an expert in the practice of medicine,” noted Wilson, “but we want to be as knowledgeable and in tune as possible with the trends, challenges and opportunities in the business of healthcare.” Jaynes echoed that sentiment, adding medical bankers try to anticipate issues that could impact the financial health of client practices and look for viable solutions across a range of services.
Jaynes, who is credited with creating the medical private banking department at SunTrust 20 years ago, came out of retirement in 2013 to launch Avenue Bank’s targeted medical practice. He said one of the key attractions for him to return to work was the opportunity to join a bank with local decision-making. “Not only does it effect the quality of the decision … but equally important, it’s a much faster process. It doesn’t take two weeks to get a decision made. Many times, it’s in a matter of hours.”
Both Avenue Bank and INSBANK are headquartered in Nashville. Avenue assists clients with business and personal banking throughout Middle Tennessee and has five physical locations in Nashville and Cool Springs. INSBANK focuses more specifically on the commercial side of medical banking and covers practices and healthcare businesses across the state through their partnership with the Tennessee Medical Association.
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