October 20, 2023
Top Executives Learning to Play Defense
In recent years, many independent practice executives are “waking up” to the value they can bring their physicians outside of the practice itself. That added value comes from better management of the practice’s facilities, the single greatest expense behind staffing; more specifically, physician-owned real estate. Still, there are those executives who would find a way to pull the last nickel out of a piece of imaging equipment while nonchalantly turning their back on an opportunity to trim a million dollars of excess interest expense – dollars that could have been used to optimize their medical operations or to distribute to their physicians.
To borrow a comparison from the NBA, it’s like having a great offensive player who doesn’t know how to play defense. Paul George and Shareef Abdur-Rahim (now retired) have both played about the same number of games. Abdur-Rahim averaged 20.6 points per game while George averaged 20.5. Pretty comparable, at first glance. However, the opposing teams outscored Abdur-Rahim’s teams by more than 1,600 points while he was on the floor, while George’s team outscored the opposition by more than 3,000 points. The difference? George knows how to play defense, the same way a top administrator should figure out how to get the last nickel out of the physician-owned real estate, as well as their imaging equipment.
This article explores why and how this lack of focus on property profits is occurring and offers some solutions to make your own executive a great “two-way player” by looking at a single item: interest expense.
The 3 Primary Reasons & Their Remedies
Reason 1: It Wasn’t Part of the Curriculum
True. You won’t find Physician-Owned Real Estate 101 in any Healthcare Administration list of courses. Nor will those courses be found in medical schools. However, the opportunity to own the real estate where you practice, and create incremental personal cash flow or equity, is an integral part of today’s independent practices.
The Remedy: Educate yourself or hire an expert to guide you in your real estate dealings. In 2019, the Congress of Physician-Owned Medical Properties (CPOMP) was formed for the specific purpose of providing a platform for doctors and executives to network and to become educated in all aspects of physician ownership in real estate. Attendance at the annual meetings and the resources available through the organization can be of great help. Information on the group is found at www.cpomp.org.
Reason 2: It’s Insidious
Sometimes, big problems start small: plaque in your arteries, a few drops of oil leaking from your car engine … or a few basis points in the rate. Who would mind paying the more familiar bank 5.95% instead of 5.75% on a $20MM loan when the monthly payment difference is only $2,500? It’s no big deal. Actually, it is. That small amount of $2,500 over a 10-year term has a Net Present Value of approximately $260,000.
The Remedy: Understand and apply “Net Present Value,” the current value of a future income stream. If that same bank had offered to match the rate of the competition but charged an origination fee to be paid at closing of $260,000, would your choice still be the same?
Reason 3: Nobody’s Keeping Score
It’s only human nature to focus on what matters. If an executive is being judged solely on how their practice is managed, then the real estate holdings of the doctors will end up as the proverbial stepchild and not get the same attention. Most practices have no real estate performance benchmarks and, therefore, cannot really assess the performance of the administrator in that role.
The Remedy: First, establish performance objectives for the real estate. Next, broaden the responsibilities of the executive. Finally, make the executive accountable by comparing the performance of the real estate against those objectives, just as you would at the practice level. Many practices also take the step of including the executive in the real estate ownership as a way of rewarding the executive and assuring his or her interest in optimizing the outcome.
By applying the remedies outlined here, executives can have the right tools to apply their skills – and the real estate holdings of the physicians will reflect the performance standards of the practice.