Rx for Medical Practice OperationsRx for Medical Practice Operations

5206 Gateway Centre • Ste. 100 • Flint, MI 48507810-238-4617 • 877-244-1787 • FAX 810-238-5083

www.lewis-knopf.com

2007 Edition

Rx for Medical Practice OperationsDeveloping and maintaining a successful medical practice can be a difficult task. Finding the right tools and advisors to best meet the unique needs of the medical practice is essential, allowing you to focus on the more important tasks at hand. To most healthcare professionals their number one priority is to provide quality care to their patients. Consequently, their training focuses on their profession and not on running a business. The profit motive is a secondary, but necessary concern. We at Lewis & Knopf, CPAs, P.C. can provide invaluable service by utilizing our business knowledge to assist the physician in creating and maintaining a successful and quality healthcare practice. The services we provide are generally divided into two categories – practice services related to your business and personal services related to your business.

Being familiar with the operations of the physician’s office, we can provide valuable consulting services on a number of practice management issues. Lewis & Knopf, CPAs, P.C. in conjunction with CRT Medical Services have created this “Rx for Medical Practice Operations” to assist physicians contemplating entering into a private practice. This guide is in outline form for quick reference to the sections which interest you the most and relate to your individual concerns. You will find very helpful reference material to assist you in determining your exact needs and source references such as websites and vendor listings to fulfill those needs. Your time is very valuable and usually a “hot” commodity. We suggest taking advantage of the checklist at the beginning of the packet to get you started on the right track as soon as possible. Our goal for this guidebook is that your practice “hits the floor running” when you begin seeing patients.

Please feel free to contact Tom Shade, Steve Kidd or Anita Abrol at our office at (810) 238-4617 or toll-free (877) 244-1787 if you need any assistance or have any questions concerning the “Rx for Medical Practice Operations.” These three Partners specialize in the “Healthcare Industry” and have extensive backgrounds in supporting numerous physicians within the Genesee, Shiawassee, Lapeer, and Oakland County areas with their business and personal needs. In addition, our team can introduce you to any number of attorneys, bankers, investment advisors, and/or insurance agents with experience dealing with the medical profession. Please enjoy this packet and do not hesitate to call us at your earliest convenience.

Please note: The material discussed in this publication is meant to provide general information and should not be acted on without obtaining professional advice appropriately tailored to your individual needs. Any tax information contained in the body of this is not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

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Table of Contents

Page

I. Business Startup Checklist 4

II. Services Offered by Lewis & Knopf, CPAs, P.C. & Professional Profiles 6

III. Choice of Entity 8

IV. Billing Services 17

V. Sample Cash Flow Projection 18

VI. Physician Compensation Planning 21

VII. Retirement Plans 22

VIII. Other Fringe Benefits 29

IX. Business & Payroll Taxes 30

X. Buy/Sell Agreements 33

XI. Issues Concerning Setting Up a Practice:

A. Acquiring Medical Office Space 34 B. Office Design and Layout 36 C. Furniture and Equipment 38 D. Computer Systems/Software 43 E. Suggested Approach for Buying Furniture and Equipment 44 F. Equipment Buying vs. Leasing 45

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XII. Websites of Interest for “The Savvy Physician” 46

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I. Business Start-Up Checklist For Healthcare ProfessionalsThis checklist is designed to help and inform you, the healthcare professional, about issues you should be considering in setting up your practice.

A. Select Your Business Advisors Lewis & Knopf, CPAs, P.C. would like to be your quarterback. We will provide you with a list of advisors that

have experience in the healthcare field.

B. Choice of Entity Select an entity that fits your needs. We recommend that you choose to be taxed as an “S corporation.” However,

please refer to Section III to find out more about the different types of entities available and the advantages and disadvantages of each.

C. Select your Billing Service Lewis & Knopf CPAs has formed an alliance with CRT Medical Systems to provide you with access to the finest

billing service in the area. Often new physicians feel they cannot afford a billing service. We believe you cannot afford to not utilize a billing service. The information contained in this guidebook is worthless if you are not able to bill and collect timely from your patients. Please review the information enclosed by CRT Medical Systems Section IV and give them an opportunity to demonstrate to you what they can do for you.

D. Applications It is necessary that you apply to the various governmental entities to obtain identification numbers, licenses, and

PIN numbers for medical billing purposes. We can assist you in this process. Some examples of what is required are:

Articles of Incorporation Subchapter S Election Form (Form 2553) Partnership (LLC) Operating Agreement Federal Identification Number (SS-4) Michigan Sales, Use, Withholding and Unemployment Registration Hospital Privilege Applications Drug Prescription Application Credentialing (Pin Numbers)

E. Your Business Plan It is imperative that you develop a business plan including cash f low projections. The “plan” will be useful when

establishing banking relationships for financing purposes. In addition, we will give you an idea about your potential compensation level. Please refer to Section V for an example of a cash f low projection for the first three years of operations.

F. Physician Compensation Planning In practices with more than one doctor, it will become apparent that some physicians are more efficient than others

and, therefore, may generate more revenue. However, there are basic overhead expenses that occur regardless of how efficiently you can practice. We will help you design a compensation package that will be fair and equitable to all of the members of the practice. Please refer to Section VI.

G. Retirement Plans There are a variety of retirement plans available to our healthcare professionals. We will help you choose the right

plan at the right time. Please refer to Section VII for a detailed discussion on retirement plans.

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H. Other Fringe Benefits As an employer, you will need to consider what kinds of fringe benefits you want to offer/provide to your employees.

Please see Section VIII for a detailed discussion.

I. Business and Payroll Tax Returns Healthcare professionals are concerned with patient care as they should be. As a result, we recommend that

you contract with a payroll service to prepare the payroll. They will deposit all of the taxes with the proper governmental authority, prepare the payroll returns, prepare the W-2’s for employees, etc. for a reasonable fee. However, if you choose to prepare your own payroll, see Section IX that describes the various deposit requirements for the different returns.

J. Buy/Sell Agreements It is important that a mechanism be in place that will resolve disputes that can and do arise in practices comprised

of more than one physician. We work closely with your attorney to design a buy/sell agreement that will work best for you. See Section X.

K. Purchase Adequate Insurance It is essential that you have adequate insurance coverage. You should consider at a minimum the following types

of coverage:

“Malpractice Insurance” We can explain the importance of each one, how it will affect you, and recommend limits. (Don’t forget “tail coverage.”) General, Liability and Umbrella Workmen’s compensation Disability Life Fire Employee dishonesty Other

L. Issues Concerning Setting up a Practice Setting up a new office requires a great deal of time, but it does not have to be a painful experience. With the help

of our L&K Checklist, it will be a straight forward and simple task. Please refer to Section XI for a discussion on acquiring office space, equipment, etc., and a shopping list for your new practice. Congratulations!

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II. Services Offered by Lewis & Knopf, CPAs, P.C.

Managed care and the tenuous financial health of Medicare and Medicaid are changing the nature and business climate of the entire Healthcare industry. As a healthcare professional in the center of an industry driven by mergers of hospitals, physicians, other healthcare providers, and payers, you are experiencing the need to achieve economies to scale and attain cost efficiencies. These forces require professionals like you to clearly define your vision and future strategic direction, to organize and maximize both the financial return and cost effectiveness of your organization.

Considering the challenges and changes you face, you need business advisors experienced in serving professionals like yourself. We at Lewis & Knopf, CPAs, P.C. can assist you with all of your professional accounting, tax, and consulting needs. We have provided business and consulting services to healthcare professionals for nearly 70 years, keeping abreast of business and regulatory changes affecting providers in the medical field. This, combined with our years of experience and healthcare industry knowledge, allows us to help you to achieve your goals.

Our Expert Consulting Capabilities Include:

Annual Business Planning Business Development Business Valuations Estate and Trust Planning Financial Analyses, Budgeting, Projections and Forecasts Individual Income Tax Planning Management Compensation Planning Mergers & Acquisitions New Business/Start-up Planning Organizational Structuring for Management and Corporations Pension and Employee Welfare Benefits Personal Financial Planning Strategic Planning

We welcome the opportunity to serve you. L&K’s professionalism, experience, network of resources, dedication to personal service, and insight are yours to grasp!

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II. Lewis & Knopf, CPAs, P.C.’s Professional Profiles

Their areas of business specialty practice are:

Health Care Professionals Income Tax Planning Business Development and Growth

They provide tax planning and tax return preparation services to individuals and closely held businesses. Their services also include:

Accounting system reviews to improve operating efficiencies and internal controls Researching the tax consequences of alternative business strategies Tax planning for income and estate tax purposes

They are members of the American Institute of Certified Public Accountants and the Michigan Association of Certified Public Accountants.

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Thomas K. Shade, CPA, is the managing principal of the firm. He joined Lewis & Knopf in 1979 and has been a certified public accountant since 1982.

As a member of the firm’s Professional Service Group, Tom specializes in serving professional service providers including physicians, dentists, pharmacists, and attorneys. He also works with a variety of entrepreneurial industries, including auto dealerships, construction, and real estate.

Tom graduated from Alma College in 1979 with a Bachelor of Science degree in business administration with an emphasis in accounting. He is actively involved in both local and national professional organizations and currently serves on the Michigan Association of Certified Public Accountants Midsize Firm Advisory Council.

Stephen L. Kidd, CPA, is a principal with the firm. He joined Lewis & Knopf in 1978 and has been a certified public accountant since 1980

Steve is focused on facilitating growth for his entrepreneurial clients as they become more profitable business owners. He has helped clients return to profitability by restructuring cost accounting systems. Steve has also been intricately involved in the negotiation of various company transitions of ownership.

Steve graduated from Ferris State College with a Bachelor of Science degree in accountancy in 1978.

Anita Abrol, CPA, is a principal with the firm. She joined Lewis & Knopf in 1988 and has been a certified public accountant since 1990.

Anita specializes in healthcare, high net worth individuals, professional services, estates and trusts, and school districts. She has helped numerous physicians set up their professional practices from scratch, including their billing systems, office procedures, and accounting cycle.

Anita is a 1984 graduate of the University of London, England with a Bachelor of Science degree in mathematics. She received a Certificate of Educational Achievement in estate planning from the American Institute of Public Accountants (AICPA) in 1997 and a Certified Specialist in Estate Planning designation from the National Institute for Excellence in Professional Education in 1999.

III. Choice of Entity

A. S Corporations (Recommended by Lewis & Knopf, CPAs, P.C.) S corporations are hybrid corporations that combine some of the tax advantages of a partnership with the liability

protection of a corporation. Start-up businesses often consider S corporation status because profits and losses are passed through to the shareholders with no corporate tax imposed.

1. Advantages include:

a. The double taxation affecting most C corporations is avoided because income is passed through to the shareholders for tax purposes, increasing stock basis.

b. Owners have limited liability.

c. The tax rate on S corporation earnings, when passed through to the shareholder, may be lower than the applicable corporate tax rate. (In fact the top individual rate is currently equal to the top corporate rate of 35%).

d. Distributions from S corporations are exempt from the payroll tax system, assuming the corporation issues adequate compensation to those shareholders performing services for the corporation.

2. Disadvantages include:

a. The number of shareholders is limited to no more than 100.

b. They can have only one class of stock.

c. They cannot have corporate, partnership, certain trusts, or nonresident alien shareholders (other than a limited exception for one S corporation owning 100% of another S corporation).

d. They must choose a calendar year rather than a fiscal year (or prepay the tax that shareholders defer if electing to report on a fiscal year).

e. Shareholders owning more than 2% of the company must pay taxes on a wide range of employee fringe benefits that would be tax free to an employee of a C corporation.

f. The tax rate on S corporation earnings, when passed through to the shareholder, may be higher than the applicable corporate tax rate.

B. Corporations Corporations are business entities created under state law. They are characterized as artificial persons created for

the purpose of conducting business. As such, they can hire employees, enter into contracts, acquire assets, and incur liabilities. An important feature is that they generally enable their owners (shareholders) to limit their liability to the extent of their investment in the corporation.

1. Advantages include:

a. There is a practical method to raise capital (through the sale of capital stock).

b. Owners have limited liability.

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c. Corporations have unlimited lives. d. It is relatively easy to transfer ownership interests.

e. They generally have more management resources.

f. When formed as S corporations, they have certain tax advantages because income is generally passed through to the owners and taxed at the individual level.

g. When formed as C corporations, owner-employees generally may receive the full array of employer-provided tax free fringe benefits.

2. Disadvantages include:

a. C corporations are subject to double taxation. Pretax income is taxed at the corporate level. Dividends are then taxed to the owners creating double tax on such distributions.

b. They have more administrative burdens.

c. They are more difficult to form, and dissolution can trigger taxable gains. d. Borrowing may be difficult without stockholder guarantees, which negates part of the advantage of

limited liability.

C. Proprietorships Proprietorships are the most basic and usually the simplest form of business organization. In a proprietorship, the

owner holds title to property, conducts business for profit, and is directly and personally liable for all obligations of the business. In most cases, the owner’s personal assets can be seized to satisfy proprietorship debts.

1. Advantages include:

a. They are easy to form. For example, they have few filings, elections, and registrations.

b. They are simple to operate. For example, the owner manages the business and reports to no one.

c. It is easy to sell the assets of the business.

d. There are few administrative burdens.

e. For tax purposes, income is generally passed through to the owner and taxed only at the personal level.

2. Disadvantages include:

a. They may have limited sources of capital.

b. There is no limited liability, as can be achieved with a corporation or limited liability company.

c. There is no structured continuity beyond the proprietor.

d. All business net income is subject to self-employment tax.

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D. Limited Liability Companies

Limited liability companies (LLCs) are business entities created under state law that can be used in all states.

Limited liability companies are owned by members and combine the tax advantages of a partnership with the

liability protection of a corporation. As a result, the LLC structure is often compared to an S corporation. In

many cases, LLCs are more flexible than S corporations. The major drawbacks of LLCs are that laws are new and

relatively untested in nontax matters, and members of LLCs that conduct an active business will generally be subject

to self-employment tax. Each state establishes its own LLC rules and characteristics.

1. Advantages include:

a. Members have limited liability.

b. The number of members is not limited.

c. Members may be individuals, corporations, trusts, partnerships, other LLCs, and other entities.

d. The double taxation affecting most C corporations is avoided. Income is passed through to the members for tax purposes under partnership principles.

e. Members can participate in managing the LLC.

f. Members generally are not personally liable for the LLC’s debt (although lenders often require personal guarantees of owners).

g. Distributions to members do not have to be directly proportional to the members’ ownership percentages as they do for S corporations.

h. They can have different classes of ownership.

2. Disadvantages include:

a. They may have limited life, often by termination on the death or bankruptcy of a member.

b. Transfer of interests is difficult. Although a member may transfer an equity interest in the LLC, the new owner does not necessarily possess all of the rights and attributes of a member.

c. Some industries or professions may not be permitted to use LLC status, and there is still one state, Massachusetts, that requires at least two members.

d. All states have enacted LLC laws, but the laws that have been enacted vary from state to state. Therefore, the LLC must determine how it will be treated for both tax and liability purposes in other states.

e. The various LLC laws are new and relatively untested in non-tax matters, such as their actual ability to limit member liability.

f. For tax purposes, the complex partnership rules generally apply.

g. Members will often be subject to self-employment tax.

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E. General PartnershipsGeneral partnerships are associations of two or more persons as co-owners to carry on a business for profit. The co-owners personally share the risks and rewards of all phases of the business. Because of tax rules and regulations, partnerships are increasingly complex entities. Each partner is jointly and severally liable for the partnership’s obligations. Like proprietorships, a partner’s personal assets can be seized to satisfy partnership debts.

1. Advantages include.

a. They have more sources of initial capital than proprietorships.

b. There generally are more management resources available than for proprietorships.

c. They have less administrative burdens than corporations.

d. For tax purposes, income is generally passed through to the partners and taxed only at the personal level. Income and loss allocations can be flexible (i.e., other than in proportion to partner capital accounts), and termination can generally occur without taxation.

2. Disadvantages include.

a. The transfer of interests is difficult.

b. Each partner is personally liable for all partnership obligations. There is no liability limitation unless the partnership is a limited liability partnership.

c. Generally, all business net income of a partnership is subject to self-employment tax, even if the partner is not personally active in the partnership.

d. Partnership income tax and basis adjustment rules can be very complex, particularly with respect to transactions between a partner and partnership.

e. Partners are entitled to very few of the tax deductible fringe benefits that are generally available to employees.

F. Limited Liability Partnerships

Limited liability partnerships (LLPs) are a special type of partnership that exists under applicable state law. Relatively new,

they were enacted in response to the concern that a partner of a professional firm can be held liable for the malpractice of

another partner in the same firm. LLPs are an alternative available in some states that do not allow professional firms to

organize as LLCs.

In some states, LLP partners remain personally liable for the commercial and other obligations of the entity, their own

acts and omissions, and for the acts and omissions of persons under their supervision. However, LLP partners are generally

not liable for acts and omissions by the other LLP partners and non-supervised employees (often referred to as “vicarious”

liabilities). In states with this type of statute, LLPs provide less liability protection than LLCs, but more than general

partnerships. In most states, the LLP statutes provide that LLP partners are not personally liable for the LLP’s contract

liabilities unless the partners have personally guaranteed the debt. In such states, LLPs are similar to LLCs with regard to

the issue of owner exposure to the entity’s liabilities.

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1. Advantages include:

a. As partnerships, they have favorable pass-through taxation status.

b. They have flexibility to structure ownership interests.

2. Disadvantages. The main disadvantage of LLPs (in some states) is that the partners are liable for the debts and other obligations of the LLP (exclusive of liability for professional acts and omissions of others).

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Comparison of Corporate and Non-corporate Attributes

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Attribute S Corporation C Corporation Proprietorship Partnership LLCa

Continuity of life Indefinite Indefinite Ceases on death of proprietor

Terminates if 50% or more of total interest in capital and profits is sold or exchanged within a 12-month

period

Generally no

Transferability of interests

Generally freely transferable; Can be

restricted through buy/sell agreements

Generally freely transferable; Can be restricted through

buy/sell agreements

Freely transferable

Generally subject to partners’ approval

Generally subject to members approval

ManagementCentralized; Board of Directors; Corporate

officers

Centralized; Board of Directors;

Corporate officersCentralized

General partnership: not centralized;

Limited partnership: generally centralized

Can be either centralized or not centralized

Liability of owners Generally limited to assets in corporation

Generally limited to assets in corporation Unlimited

General partnership: unlimited; Limited partnership: general partner unlimited,

limited partner limited to investment

in partnership

Limited

Contribution of property

Nontaxable only if transaction meets IRC Sec. 351 requirements

Nontaxable only if transaction meets

IRC Sec. 351 requirements

Nontaxable transaction

Generally a non-taxable transaction;

Assumption of liabilities by

partnership may trigger gain recognition

Generally a nontaxable transaction;

Assumption of liabilities by

LLC may trigger gain recognition

Taxability of income

Generally taxable to shareholder

Taxable to corporation

Taxable to proprietor Taxable to partner Taxable to

member

Deductibility of losses

Generally deductible by shareholder;

Liabilities do not increase basis for deducting losses

except for direct loans from shareholder

Deductible by corporation

Deductible by proprietor

Generally deductible by partner to extent of basis; Liabilities may increase basis for deducting losses

Generally deductible by

member to extent of basis; Liabilities may increase basis for deducting

losses

Special allocation of income/loss Not permitted Not applicable Not permitted

Permitted as long as there is substantial

economic effect

Permitted as long as there is substantial

economic effect

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Passive lossesMay not offset active or portfolio income

(limits apply at shareholder level)

May offset active income but not

portfolio income of closely held

corporation; May not offset active or portfolio income

of personal service corporation

May not offset active or

portfolio income

Cannot offset active or portfolio income

(limits apply at partner level)

Cannot offset active or

portfolio income (limits apply at member level);

Unclear if members treated

as limited partners

Tax yearGenerally must use

calendar year or make Sec. 444 election

May select any fiscal year if not a personal service corporation

Must use tax year of proprietor

Generally must use fiscal year of majority interest partners or make Sec. 444 election

Generally must use fiscal year

of majority interest partners or make Section

444 election

Qualified retirement plans for employee-

owner

Payments are deductible if plan is nondiscriminatory

Payments are deductible if plan is nondiscriminatory

Payments to a Keogh Plan

or SEP are deductible

Payments to a Keogh Plan or SEP are

deductible

Payments to a Keogh Plan

or SEP are deductible

Life insurance for employee-owner

Statute unclear; Assume deductible as

compensationb

Premiums for first $50,000 group-term life are deductible and not taxable to

employee

Premiums are not deductible

Premiums are not deductible

Premiums are not deductible

Health insurance premium for

employee-owner

Deductible by corporation as

compensation; 100%

deductible by more-than-2% shareholder

without regard to 7.5% floor

Payments are deductible

100% deductible without regard to 7.5% floor

Deductible by partnership as

guaranteed payment; Reported as income by partners; 100%

deductible by partner without regard to

7.5% floor

Deductible by partnership

as guaranteed payment;

Reported as income by

partners; 100% deductible by

partner without regard to 7.5 %

floor

Distribution to owner

Nontaxable to extent of basis in stock; Distribution of

appreciated property results in gain

recognition

Not deductible by corporation;

Generally ordinary income to shareholder; distribution of

appreciated property results in gain recognition by

corporation

Nontaxable

Nontaxable to extent of basis in partnership;

Disproportionate distribution of

Section 751 assets may trigger gain

Nontaxable to extent of basis in partnership

Attribute S Corporation C Corporation Proprietorship Partnership LLCa

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Gain on sale of interest

Capital (unless collapsible corporation

rules apply)

Capital (unless collapsible

corporation rules apply); Up to 50% of gain from qualified small business stock

may be excluded

Capital and/or ordinary

Capital (unless collapsible

partnership rules apply)

Capital (unless collapsible

partnership rules apply)

Loss on sale of interest

Ordinary to extent of Section 1244 stock; Otherwise, loss is

capital

Ordinary to extent of Section 1244 stock; Otherwise, loss is

capital

Capital and/or ordinary Generally capital Capital

Liquidating distribution

At corporate level treated as sale of

property; Gain passes through and increases

shareholder basis; Could trigger built-in

gains tax

At corporation level treated as sale of property; Gain to

shareholder if FMV exceeds stock basis

Nontaxable

Generally, nontaxable; Cash

distribution in excess of basis

will trigger gain; Disproportionate

distribution of Section 751 assets may trigger gain

Generally, nontaxable; Cash

distribution in excess of basis

will trigger gain; Disproportionate

distribution of Section 751 assets may trigger gain

Accumulation of earnings No restrictions

Corporation could be subject to accumulated earnings tax on unreasonable accumulation

No restrictions No restrictions No restrictions

Maximum tax rate

Generally taxed at individual shareholder

level; If corporate-level tax applies, it will generally be at

35% rate

35%, with 3% increase for taxable

income between $15 million and $18.33 million

Taxed at individual

member levelTaxed at individual

partner levelTaxed at

individual member level

Use of tax creditsPassed through to shareholders to be

applied against their tax

Used to offset corporate tax

Used to offset tax of the individual

Passed through to partners to be applied

against their tax

Passed through to members to be applied

against their tax

Use of NOLsPassed through to

shareholder; Limits apply at shareholder

level

Used to offset corporate income subject to certain

limits

Used to offset individual’s

income subject to certain limits

Passed through to partner; Limits apply

at partner level

Passed through to members;

Limits apply at member level

At-risk rules Limits apply at shareholder level

Only applicable to certain closely held

corporationsLimits apply at proprietor level

Limits apply at partner level

Limits apply at member level

Charitable contributions

Passed through to shareholder; Limits apply at shareholder

level

Deductible by corporation subject

to certain percentage limits

Deductible by individual

subject to certain percentage

limits

Passed through to partner; Limits apply

at partner level

Passed through to members;

Limits apply at member level

Self-employment income to owners No No Yes Yes, general partners;

No, limited partners Unclear

Accounting method Unrestricted Restricted Unrestricted Unrestricted Unrestricted

Attribute S Corporation C Corporation Proprietorship Partnership LLCa

Assumes the LLC is treated as a partnership for tax purposes and not as an association taxable as a corporation.Reg. 301.7701-3(b)(1)(ii) disregards single-member LLC as a separate entity.

Notesa

b

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Classes of stock/ownership

interestsRestricted Unrestricted N/A Unrestricted Unrestricted

No. of investors Limited to 100 Unlimited N/A Unlimited Unlimitedb

Eligible investors Restricted Unrestricted N/A Unrestricted Unrestricted

Attribute S Corporation C Corporation Proprietorship Partnership LLCa

IV. Billing Services

Billing can be a difficult and draining process for a medical practice. At Lewis & Knopf, we’ve partnered with CRT Medical Systems, Inc. to offer state of the art, technically sound, regulation-compliant outsourced billing efficiency. CRT has over 23 years experience in medical billing.

In assessing the necessity of outsourcing your office’s billing department, ask yourself if you or your internal billers can answer these questions: • How much do you re-bill each week? Does it exceed what you receive in rejections? • How many weeks of A/R do you have outstanding? • How many dollars were written off last month and why? • What does your billing department cost?

If not, or if the answers point to in efficiencies, it may be time to consider outsourcing your billing department.

Our partner provider, CRT, offers three types of services: Time Sharing/ASP, Outsourcing Full Management, and Outsourcing Hybrid.

In each of the engagements under their management, CRT focuses on a number of key issues critical to increasing billing collections, including: • Closely measuring and monitoring the volume of re-billing for the account • Challenging write-off amounts, aging and types of rejections • Making sure that there is a billing submission each week • Watching, questioning and challenging accounts over 90 days old • Implementing monthly meetings to review outstanding problems and issues • Tracking commercial carriers to deal with on a par or non-par basis • Alerting the front desk about patients who are delinquent so pro-active action can be taken • Managing HIPAA and OIG compliance issues

For more information about CRT Medical Services, please contact Anita Abrol at Lewis & Knopf at 810-238-4617.

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V. Sample Cash Flow Projection

DATE

John Doe M.D., PC

We have compiled the accompanying statement of projected cash flows for the first three years of operations of John Doe M.D., PC in accordance with attestation standards established by the American Institute of Certified Public Accountants. The accompanying projection was prepared for financial institutions to use in negotiating financing of the corporation’s start-up costs.

A compilation is limited to presenting in the form of projection information that is the representation of the owner and does not include evaluation of the support for the assumptions underlying the projection. We have not examined the projection and, accordingly, do not express an opinion or any other form of assurance on the accompanying statement or assumptions. Furthermore, even if the projected volume of billings is attained, the financing is obtained on the projected terms, and the physician compensation are as projected, there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. We have no responsibility to update this report for events and circumstances occurring after the date of this report.

The accompanying projection and this report are intended solely for the information and use of John Doe M.D., PC and XYZ Bank and are not intended to be and should not be used by anyone other than these specified parties.

LEWIS & KNOPF, CPAs, P.C. CERTIFIED PUBLIC ACCOUNTANTS

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JOHN DOE M.D., PCSummary Of Significant Projection Assumptions and Accounting Policies

Note A—Nature and Limitations of the ProjectionThe accompanying projection is based on hypothetical assumptions for billings, financing, and physician compensation. The hypothetical assumptions for billings and financing are described in Notes C and D, respectively. Physician compensation is projected at the physician’s expected monthly personal cash requirements. The projection presents, to the best of the physician’s knowledge and belief, the corporation’s expected cash flows for the projection period if the hypothetical assumptions occur. Accordingly, the projection reflects his judgment as of October 15, 200X, the date of the projection, of the expected conditions and his expected course of action if the hypothetical assumptions occur.

The presentation is designed for financing institutions to use in negotiating the financing of the corporation’s start-up costs and should not be considered to be a presentation of expected future results. Accordingly, the projection may not be useful for other purposes. The assumptions disclosed herein are those that the proprietor believes are significant to the projection. Furthermore, even if the hypothetical assumptions occur, there will usually be differences between the projected and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material.

Note B—Nature of OperationsDr. John Doe has formed a professional corporation practicing a surgical specialty. The accompanying financial projection reflects the projected cash flows for its first three years of operations. It does not include any assets, liabilities, income, and expenses that Dr. Doe may have outside of the corporation.

Note C—BillingsDr. Doe has projected cases and average billings based on his experience with his specialty and established referral base. It is anticipated that Dr. Doe will see approximately 320 patients per month. It is estimated that there will be 18 deliveries per month, 8 major surgeries per month, 10 minor surgeries per month plus normal visits, annual exams, etc. He anticipates generating $75,000 of billings per month with a collection rate of 65%. Collections are dependent upon third party insurance companies, i.e. Blue Cross, Medicare, etc. paying the physician which is usually a 30–60 day waiting period. It is estimated that collections will be approximately 25% of normal the first month, 50% the second month and 75% the third month until it stabilizes.

Note D—DebtThe projection is based on Dr. Doe borrowing $150,000 at 6% interest at the beginning of the period. The assumed terms are that payments will consist of interest only for 6 months and then the note will be amortized over the following 60 months.

These projections assume that office facilities are leased under a five-year lease with monthly rental payments of $4,750, including CAM charges.

Note E—Income TaxesThe corporation has elected to be an “S” corporation. As a result, all income or loss generated by the corporation will be includable in the personal tax return of Dr. Doe. Accordingly, no provision has been made for income taxes in the accompanying financial statement.

Note F—Nature and Limitations of the ProjectionDepreciation is computed using the five-year MACRS table (double declining balance method with a switch to the straight-line method) assuming Section 179 and 30% additional depreciation during the first year of operation.

Payroll taxes have been computed based upon FICA rates of 7.65% of $97,500 plus 2.7% of the first $9,000 for state unemployment and .8% for the first $7,000 of FUTA wages. Billing fees are assumed to be 6% of collections.

19

John Doe, M.D., P.C.Statement of Projected Cash Flows Under Hypothetical Assumptions In Note A

First Years of Operations

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VI. Physician Compensation Planning

In practices consisting of more than one physician, disputes often arise. It is important that the group has a “meeting of the minds” as to how the profits are going to be split. Ideally, this would occur at inception so the players know the “rules of the game.” As human beings, we each have different interests. For instance, one doctor may enjoy belonging to a country club while the other enjoys driving a lavish car. These differences must be planned for to keep everyone happy.

We view these types of discretionary expenses as part of the physician’s compensation package. Thus, all of these additional expenses should be considered when the profits are allocated at the end of the year. We have helped hundreds of healthcare professionals design a compensation plan that will fit their specific wants and needs.

The profitability of the practice can be divided up several different ways. Factors that should at least be considered by the physicians are the following:

Stock Ownership Seniority Night and Holiday Shift Work Production of Each Physician

Below are some commonly used methods to divide profits. These examples are illustrated here to give you a starting point upon which you might consider when designing your own compensation plan.

A. Per Capita Basis In some practices the compensation is split up equally. This method is most common in hospital-based practices

such as those of anesthesiologists, pathologists, and radiologists. A slight variation to this method might take into account holiday and shift work performed.

B. Incentive Compensation Arrangements These types of arrangements are designed to reward based on attributes the group deems important. Often groups

recognize that a portion of the profits should be split on the per capita basis. Physicians then split the remaining profits based on net collections by physicians. This division recognizes that a core part of the profitability of the practice is attributable to each of the physicians equally just as they equally bear call and night shift duties while also recognizing that some physicians work harder or are more efficient. A slight variation to this method includes a “seniority portion” using a “points system.”

C. Remember A poor compensation plan, both real and/or perceived, destroys more physician relationships than any other issue

in the group. It is imperative that a method of splitting profits be devised that is fair to all concerned.

21

VII. Retirement Plans

A. What Is a Defined Contribution Plan?

A defined contribution plan provides each participant with an individual account to which annual contributions are credited. The retirement benefit equals the amount contributed to the account, adjusted by any income, expenses, forfeitures, gains, and losses allocated to the account. The individual account feature makes these plans popular with employees because they can “see” what they are getting.

Depending on the plan type, the employer’s annual contributions can be either “fixed” (the amount determined by a plan formula) or “flexible” (the employer can annually determine the amount, if any, contributed). Plan earnings, gains, and losses are allocated to individual participant accounts, usually in proportion to participant account balances. Special allocation methods such as permitted disparity or an age-weighted formula can be used to maximize benefits to highly compensated employees.

Commonly used types of defined contribution plans are:

• Profit-sharing plans.

• 401(k) plans which are cash or deferral arrangement that are part of a profit sharing plan.

These plans are described in the following paragraphs:

1. What is a Profit-sharing Plan?A profit sharing plan is a plan in which the employer agrees to make discretionary contributions. The contributions may be keyed to the company’s profits, although current or accumulated profits are not required for the company to make a contribution. However, the plan document governs, employers wanting flexibility in making contributions will also find a profit-sharing plan to be appealing. A profit-sharing plan that allows discretionary contributions enables an employer to decide on a year-to-year basis whether or not to contribute to the plan and, if so, what amount. That is, if the plan document states the contributions are dependent on profits, this is the rule for that particular plan. A contribution formula based on profits may be used by employers to encourage productivity. These plans must define profits to be used for contributions.

Contributions to profit-sharing plans must be “recurring and substantial.” This does not mean that contributions must be made each year, but it may preclude long periods without contributions particularly when the company has shown profits during those years. If the IRS determines that the contributions have not been recurring or substantial, it will generally rule that the plan terminated in the year following the last significant contribution.

Once made, plan contributions are allocated to separate participant accounts the plan maintains for each employee. This allocation is made under the method as prescribed by the plan, usually based on the employee’s compensation relative to the compensation of all plan participants. Under IRS regulations, basing the allocation of plan contributions on factors that combine the participant’s age and compensation may be possible.

Because profit-sharing contributions can be flexible, these plans are suitable for start-up companies, companies in cyclical industries, or companies simply wanting flexibility and discretion in determining plan costs.

2. What is a Cash or Deferred Arrangement Plan [401(k) Plan]?A cash or deferred arrangement plan (CODA), usually known as a 401(k) plan, is a profit-sharing or stock bonus plan that also allows before-tax employee contributions. These 401(k) plans may also permit after-tax employee contributions in addition to before-tax amounts. Employee contributions, both before-tax and after-tax, and employer matching contributions are subject to limits the Internal Revenue Code imposes.

22

Although it is possible for 401(k) plans to be funded strictly from employee contributions, this is usually not the case because:

• The maximum percentage highly compensated employees (HCEs) (including owners) can contribute is limited by the average percentage contributed by non-highly compensated employees (NHCEs). Accordingly, to encourage plan participation among these employees, businesses generally match at least a portion of each employee’s contributions to the plan.

• If the plan is top-heavy, which many small plans are, a minimum employer contribution is required.

From a business’s perspective, the advantage of a 401(k) plan is that the employees share at least a portion of the annual contribution burden. This shared burden helps businesses with tight cash flow that could not establish a plan if they had to make the entire contribution on their own. Except for reasons of hardship, distributions of an employee’s pretax contributions cannot be made before retirement, death, disability, separation from service, or attainment of age 59 ½.

In addition to the regular 401(k) plans that have been around for many years, there are two additional types of 401(k) plans that should be considered for small employers. They are the safe harbor 401(k) plans, safe harbor Roth 401(k) plans, and SIMPLE 401(k) plans.

a. Safe Harbor Rules Provide Alternative to Nondiscrimination Testing. The first is actually “safe harbor” provisions that if complied with and elected by the employer may be

used to pass the nondiscrimination requirements for the plan. There are notice requirements and employer contributions required to satisfy these provisions.

Safe harbor 401(k) plans allow an employer to make certain contributions to a 401(k) plan as an alternate method of meeting the nondiscrimination requirements. Under this safe harbor, a plan passes the discrimination test if certain notice and vesting requirements are met (all safe harbor contributions and match amounts must be fully vested), the plan document specifies that the ADP safe harbor testing method is being used, and the employer provides any of the following:

1) A non-elective contribution of:

+ At least 3% for each eligible NHCE.

2) A basic matching formula of:

+ 100% of the employee’s elective contributions up to 3% of compensation, and

+ 50% of the employee’s elective contributions in excess of 3% but no greater than 5% of compensation, where the matching contribution rate for HCEs does not exceed that for the NHCEs.

3) An enhanced matching formula such that:

+ The rate of the employer’s matching contribution does not increase as an employee’s rate of elective contribution increases, and

+ The aggregate amount of matching contributions at any elective contribution rate is at least as much as the aggregate amount of matching contributions required under the basic matching formula (e.g., 100% of contributions up to 3% of compensation and 50% of contributions from 3% to 5% of compensation).

23

EGTRRA provides that matching or non-elective contributions under a safe harbor 401(k) plan may be taken into account in satisfying the top-heavy minimum contribution for plan years beginning after 2001.

b. SIMPLE 401(k) Plans Have Limited Appeal. SIMPLE 401(k) plans offer few advantages to employers. They are qualified plans and therefore must

comply with the reporting requirements and several of the other requirements for qualified plans. They are not subject to the nondiscrimination requirements.

c. Comparability Plans As with age-weighted plans, comparability plans are based on equivalent future benefits, rather than

equivalent contributions. Comparability or cross-tested plans are age-weighted by groups of employees, not by individuals.

New comparability and other defined contribution plans (such as age-weighted plans) that attempt to pass the nondiscrimination rules by cross-testing, work best when the average age of the employees the company wants to favor (normally the owners) is greater than the average age of the other employees.

d. Comparability Plans That Include a 401(k) Feature. The final regulations clarify some provisions related to comparability profit-sharing plans that include a

Section 401(k) feature. Any non-elective contributions, such as the 3% safe harbor employer contribution [for a safe-harbor 401(k) or a top heavy plan], will count toward the minimum allocation requirement needed to pass the gateway test. This allows (a) HCEs to make elective deferrals, without increasing the minimum required allocation and (b) any non-elective employer contributions to be included in satisfying the gateway minimum allocation requirement. These provisions, coupled with the EGTTRA changes that exclude 401(k) deferrals from being counted as part of the employer contribution and increase the deferral, contribution, and annual addition limits will significantly increase the possibilities for new comparability plans.

1) If there are a few younger owner-employees that are causing difficulty with the discrimination testing for a new comparability plan, consider adding 401(k) features to the plan and have only the younger owner-employees make deferrals along with the rank-and-file employees. This will help reduce their need for higher profit-sharing contributions.

2) If there are multiple owners who desire different contribution levels, a new comparability plan can be used to provide differing levels of contributions. For example, in the case of a group of physicians where the physicians cannot agree on the level for the profit-sharing contribution, consider establishing two groups for the physicians and one for the office staff. Allow the older physicians to have a $45,000 maximum contribution and the younger physicians (who have cash needs to buy out the older physicians, send children to college, etc.) to have a lower level of contribution. The contribution for the office staff will be calculated as the amount necessary to meet discrimination-testing requirements.

B. What is a Simplified Employee Pension Plan (SEP)?

A simplified employee pension plan (SEP) is a written arrangement that allows an employer to make contributions to individual retirement arrangements (referred to as SEP-IRAs) established by (or on the behalf of) each qualifying employee.

24

Although designed for small businesses, any employer (sole proprietorship, partnership, limited liability company, or corporation) regardless of its size or number of employees may generally establish and maintain an SEP. SEPs are established at the employer level, rather than the employee level. SEPs are relatively easy to establish and administer. They are not subject to the complex vesting, participation, nondiscrimination, reporting, and other rules applying to qualified plans. Furthermore, unlike a qualified plan, a SEP can be established after the employer’s year-end. However, to receive favorable tax benefits, SEPs must meet the following special requirements:

• Special participation requirements must be met.

• Contributions must not discriminate in favor of highly compensated employees (HCEs).

• Contributions must be made under a written allocation formula.

• Contributions must be fully vested when made and withdrawals must be permitted.

What are the Participation Requirements? Employer contributions to a SEP are discretionary, and thus, may be made on a year-to-year basis. However, if employer

contributions are made for a year, they must be made on behalf of all eligible employees. Any employee who satisfies the requirements at any time during the year must be eligible to participate in the plan, including those who die or terminate employment during the year. An eligible employee is one who meets all of the following participation requirements:

• The Age Requirement. An employee who has attained age 21 has met this requirement.

• The Service Requirement. An employee who has performed any services for the employer during at least three of the preceding five years has met this requirement.

• The Compensation Requirement. An employee who has received compensation as defined on an annual basis by the IRS has met this requirement.

Leased employees, employees of commonly controlled businesses, owner-employees, and employees who have attained age 70½ must be considered when determining eligible employees.

C. What is a Savings Incentive Match Plan for Employees (SIMPLE) IRA Plan?

A SIMPLE IRA plan is a written salary reduction arrangement under which eligible employees can elect to have the employer make contributions to a SIMPLE IRA rather than receiving that amount in cash. Under such a plan, employees can elect to defer up to $10,500 ($13,000 if age 50 or older) of their compensation for 2007. Employers are required to either match this deferral (up to 3% of the employee’s compensation), or make a 2% contribution on behalf of all eligible employees (regardless of whether the employees elect to defer any of their own money). The SIMPLE IRA plan must be the only employer-sponsored retirement plan for the year and is only available to a small business (one with 100 or fewer employees when considering only those employees who earned at least $5,000 of compensation during the preceding year).

An employer can generally establish a SIMPLE IRA plan effective on any date between January 1 and October 1 of the year. However, if an employer (or predecessor employer) previously maintained a SIMPLE IRA plan, a new SIMPLE IRA plan can be established effective only on January 1. Also, a new employer that comes into existence after October 1 can establish a SIMPLE IRA plan effective between October 1 (keep on same line) and December 31 if the plan is established as soon as administratively feasible after the employer comes into existence.

25

2004 2005 2007

To Be Indexed in

increments of

a205,000 a 210,000 a 225,000 a 5,00013,000 14,000 15,500 50013,000 14,000 15,500 5009,000 10,000 10,500 1,000

165,000 a 170,000 a 180,000 a 5,00041,000 a 42,000 a 45,000 a 1,000

3,000 4,000 5,0001,500 2,000 2,500

450 450 450 500

87,900 90,0006.20% 6.20% 6.20%

12.40% 12.40% 12.40%

Unlimited Unlimited Unlimited1.45% 1.45% 1.45%2.90% 2.90% 2.90%

2006

220,000 a

15,00015,00010,000

175,000 a

44,000 a

5,0002,500

94,200 97,5006.20%

12.40%

Unlimited1.45%2.90%

Notes:

a Indexed for inflation after 2006.b TBA-This amount has not yet been announced.e For participants who have attained at least age 50 by the end of the year, this limit is increased by $500.f No minimum compensation amount.

VIII. Retirement Plans (Continued)

Annual Compensation Limit for Determining Benefits and ContributionsAnnual Elective Deferral Limit c,d

457 Annual Elective Deferral LimitSIMPLE Plan Annual Elective Deferral Limit c,d

Annual Benefit Limit for Defined Benefit PlanAnnual Contribution Limit for Defined Contribution Plan

Maximum Earnings

Catch up ElectionsAll Plans Except Simple PlansSimple,Sarsep, IRA

FICA Tax Rate (Employee)SE Tax Rate

Qualified Plan Data Sheet 2002–2005

FICA Tax Rate (Employee)SE Tax RateMedicare ComponentMaximum Earnings

SEP Compensation ThresholdFICA/SE Tax InformationSocial Security Component

Employer Contributions Once a SIMPLE IRA plan is established, employers are required to make contributions using one of the following two

contribution formulas:

1) Matching Contribution Formula. Under this formula, the employer must generally match employee contributions on a dollar-for-dollar basis, up to 3% of the employee’s compensation for the calendar year. However, in two out of every five years, the employer has the option of electing a matching percentage as low as 1% of each eligible employee’s compensation. For purposes of the matching contribution, compensation is not limited. Therefore, an employee who earns $300,000 could receive a $9,000 ($300,000 × 3%) match.

2) Non-elective Contribution Formula. In lieu of making matching contributions for a year, an employer may make a non-elective contribution of 2% of compensation for each eligible employee (regardless of whether the employees put any of their own money in the plan). The employer may, but is not required to, limit non-elective contributions to eligible employees who have at least $5,000 (or some lower amount selected by the employer) of compensation for the year. For this purpose, compensation of each eligible participant is limited to $225,000 for 2007, thus limiting the contribution to $4,500 per employee ($225,000 × 2%).

Qualified Plan Data Sheet 2004–2007

Indexed for inflation.TBA-This amount has not yet been announced.For participants who have attained at least age 50 by the end of the year, this limit is increased by $500.No minimum compensation amount.

Notesabcd

Employer Plans Get a Boost

401(k),403(b) 457,SAR-SEP 50+Catch-Up TotalPossible DeferralLimit Contribution Contribution50+

2002 $11,000.00 $1,000.00 $12,000.002003 $12,000.00 $2,000.00 $14,000.002004 $13,000.00 $3,000.00 $16,000.002005 $14,000.00 $4,000.00 $18,000.002006 $15,000.00 $5,000.00 $20,000.002007 $15,500.00 $5,000.00 $20,500.00

Regulardeferralsandcatch-upcontributionlimitsareadjustedforinflationafterbeingfullyphasedin.

Catch Up on Your IRA

Regular 50+Catch-Up TotalPossible Contribution Contribution Contribution50+

2002-2004 $3,000.00 $500.00 $3,500.002005 $4,000.00 $500.00 $4,500.002006-2007 $4,000.00 $1,000.00 $5,000.002008 & after $5,000.00 $1,000.00 $6,000.00

Regularcontributionlimitsareadjustedforinflationafterbeingfullyphasedin.

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Comparison of Requirements for Various Retirement Plan Types for 2006

Feature Money Purchase Profit-sharing 401(k) SIMPLE IRA SEP

Restrictions on adopting? Generally, none. Generally, none. Generally, none. Same as SIMPLE

401(k). Generally, none.

Can employer maintain other qualified plans?

Yes. Yes. Yes. No.Yes, unless Form 5305-SEP is used to adopt the plan.

Minimum age/service

requirement?

Age 21, up to two years service may

be imposed.

Age 21, up to two years service may

be imposed.

Age 21. No more than one year of service

may be required for employee

deferrals.

All employees earning $5,000 in any two prior

years and expected to receive $5,000 or more in current

year.

Age 21, any service in last three out of

five years, and compensation

over determined amount.

Vesting?Yes. Graduated or cliff vesting

allowed.

Yes. Graduated or cliff vesting

allowed.

Yes. Employer contributions; graduated or cliff vesting

allowed. Employee contributions are

100% vested.

100% immediate vesting.

100% immediate vesting.

Annual contributions

required?Yes. Mandatory as set forth in plan.

No. Discretionary, unless set forth in

plan.

No. Discretionary, unless set forth in

plan.

Yes, but can limit to matching

contributions.No. Discretionary.

Limit on deductible employer

contributions?

Generally, maximum is 25% of compensation,

subject to minimum funding

rules.

Maximum 25% of all eligible employees’

compensation.

Generally, same as profit-sharing plan.

Limited to required matching

or nonelective contributions.

Maximum 25% of all eligible employees’

compensation.

Limit on contributions per

participant (415 limit).

Maximum 100% of compensation, up to $45,000 per

participant.

Same as money purchase plan.

Same as money purchase plan. None.

Maximum 25% of compensation up to $45,000 per

participant.

Top-heavy rules apply? Yes. Yes. Yes. No. Yes.

Nondiscrimination rules apply? Yes. Yes.

Yes. Special rules apply to employee

deferrals.No. No.

Employee deferrals allowed? No. No.

Yes. Employee deferrals limited to $15,500 ($20,500

if over age 50).

Yes. Employee deferrals limited to lesser of 100%

of compensation or $10,500 ($13,000 if

over age 50).

Yes. Employee deferrals under

SARSEPs (adopted prior to 1997)

limited to $15,500 ($20,500 if over

age 50).a

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Permitted disparity allowed? Yes. Yes. Yes. No. Yes, but only with

nonmodel SEP.

Minimum coverage rules

apply?Yes. Yes. Yes.

No, but all eligible employees must be allowed to participate.

No, but all eligible employees must be allowed to participate.

Annual additional limit of IRC Sec.

415 apply?Yes. Yes. Yes. No. Yes.

Participant loans allowed?

Yes, if specified in plan document.

Subject to IRS limitations.

Yes, if specified in plan document.

Subject to IRS limitations.

Yes, if specified in plan document.

Subject to IRS limitations.

No. No.

Rollovers to other plans allowed?

Yes, to another eligible retirement

plan.

Yes, to another eligible retirement

plan.

Yes, to another eligible retirement

plan.

Yes, to SIMPLE IRAs or, after two years, to eligible retirement plan.

Yes, eligible retirement plan.

Annual report (Form 5500)

required?

Yes, unless one-participant/

$100,000 exception is met.b

Yes, unless one-participant/

$100,000 exception is met.b

Yes. No. No.

SARSEPs cannot be adopted after 1996. SARSEPs adopted prior to 1997 may continue to operate under previous laws, and new employees hired after 1997 may participate in such existing plans.

Form 5500-EZ does not need to be filed for a one-participant plan that has $100,000 or less in assets at the end of each plan year beginning after 1993. An employer that has multiple plans that, in the aggregate, have $100,000 or less in assets at the end of each plan year beginning after 1993 also does not need to file Form 5500-EZ.

Notesa

b

Feature Money Purchase Profit-sharing 401(k) SIMPLE IRA SEP

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VIII. Other Fringe Benefits There are a variety of fringe benefits available to the healthcare professional. You will hear all sorts of stories from fellow physicians in the lunchroom discussing all of the things they deduct through their corporation. Although it may be true, that does not necessarily mean its right. At Lewis & Knopf CPAs, we believe that you should run all expenses related to your business through your corporation. It is important that you remember that these business expenses must be documented. Below we have attempted to list a few of the items you should consider.

A. Health Insurance Health insurance costs are rising at an ever-increasing rate. We suggest that you contact an insurance broker to help

you find the plan that meets your needs at a reasonable cost. On a limited basis, you can discriminate in favor of the employer with respect to health insurance coverage.

B. Disability Insurance We at Lewis & Knopf CPAs believe that young physicians should buy as much disability coverage as the insurance

carrier will write. Statistically, the risk of disability is greater during the physician’s working lifetime than the risk of death. Once your financial responsibilities to your family decline later in life, you can decrease your coverage. There are several schools of thought on who should pay the premiums, the corporation or the individual. We believe that the individual should pay the premiums personally. If you become disabled, the disability benefits you collect will be tax-free.

C. Life Insurance There are many types of life insurance you can choose from. They include, but are not limited to, term life insurance,

whole life, universal life, and variable life. Term can provide the most coverage at the cheapest cost, however, the cost increases as the insured gets older. Discussion of other life insurance policies is beyond the scope of this book. Please see our list of recommended insurance agents who will work as part of the team to protect your future.

D. Automobiles Your automobile used for your business must be charged through the corporation. There are several record keeping

requirements that we would be glad to discuss with you. Believe it or not, a vehicle costing more than approximately $15,000 is considered to be a luxury automobile by the IRS! Consequently, your write-offs are limited. However, vehicles weighing more than 6,000 pounds, i.e. Chevy Tahoe/Suburban, GMC Yukon, Ford Expedition, etc., are not considered to be luxury automobiles. The write-offs of these vehicles are significantly greater. Leasing is also an option that you should consider (especially those vehicles weighing less than 6,000 pounds). REMEMBER—the personal use portion, (commuting from home to work and back to home is personal use), must be included in your annual compensation (W-2).

E. Country Club Memberships and Entertainment Expenses Dues for country clubs, health clubs, etc. are not deductible for tax purposes. However, they can still be paid

through the business. Entertainment expenses related to the business are deductible with some limitations. We would be happy to explain these rules to you.

F . Cafeteria Plans If you are interested in your employees sharing in the cost of providing fringe benefits to them, you should consider

a Section 125 plan otherwise known as a cafeteria plan. Employees can select from a menu of fringe benefits they want to have withheld from their paycheck. If you choose to be an “S corporation,” the owner physician will not be able to participate in this plan.

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IX. Business and Payroll Taxes A. Payroll Taxes (Federal, State, and Local)

1. Federal Employment Taxes a. Form 941 This form used to report the total wages paid and taxes withheld from your employees on a quarterly basis. The returns are due to the IRS as follows:

Quarter Ending Due DateJan.-Mar. Mar. 31 Apr. 30Apr.-June June 30 July 31July-Sept. Sept. 30 Oct. 31Oct.-Dec. Dec. 31 Jan. 31

b. Deposits Requirements for 941 As an employer, you are required to withhold social security, Medicare and federal taxes from your employees. In addition, you are required to match the social security and Medicare withheld from your employees. Annually, the IRS determines a cap on the wages subject to social security while there is no cap on Medicare wages. The social security cap for 2007 is $97,500 and is indexed each year. Consequently, as an employer, you must withhold social security of 6.2% of the employee’s first $97,500 of wages plus match the 6.2%. You are also required to withhold Medicare at 1.45% of all wages plus match the 1.45%. The total contributed will total 15.30%. REMEMBER: As the employer you can be held personally liable if these taxes are not paid timely. The following summarizes the deposit requirements for the Form 941:

Monthly Depositor. If it is determined that your total withholding will be less than $50,000, you are a monthly depositor. Your tax deposit is due by the 15th day of the month following the month of withholding. For example, taxes withheld through January 31 are due by February 15.

Semi-Weekly Depositor. If it is determined that your total withholding will be greater than $50,000, you are a semi-weekly depositor. If your payroll is paid on Saturday, Sunday, Monday, or Tuesday, your deposit is due on or before the following Friday. If your payroll is paid on Wednesday, Thursday, or Friday, your deposit is due on the following Wednesday.

$100,000 Rule. Once total accumulated taxes $100,000 is reached, the taxes must be deposited by the next banking day.

c. Form 940 This form is the Employer’s Annual Federal Unemployment Tax Return (FUTA). The form itself is due annually by January 31 although quarterly deposits are required if the liability exceeds $500. Assuming you pay your state unemployment taxes timely, the tax is .8% of the employees first $7,000 of wages or $56. The deposits are the same as shown in “a” above.

d. Form W-4 This form is the Employee Withholding Allowance Certificate. (The purpose of this form is so the employer can withhold the correct federal income tax from the employees’ paycheck.) There is also a Form MI-W-4 for the State of Michigan and Flint W-4 as well.

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e. Form I-9 This is an Employment Eligibility Verification form issued by the U.S. Dept. of Immigration and

Naturalization service. This form must be obtained within three days of an employment.

f. Form 1099’s These are information returns required to be filed by the employer for a variety of reasons. They are

due to the recipients by January 31.

g. Form W-2 This form is used to report wages and the various taxes withheld from the employee as well as to the

IRS. These are due to the recipients by January 31.

B. Michigan and City Taxes

1. Sales, Use and Withholding Taxes The State of Michigan requires that certain taxes be remitted to them as well. Generally, physicians are

usually only liable for withholding taxes. However, if goods are bought from out of state and consumed in your business, the business is required to compute use tax at 6% of the goods purchased (if no other state sales taxes are paid) and remit it to the State of Michigan. Sales tax would also be due if you sold goods and collected sales tax from the customer. Generally, this form is due by the 15th day of the month following month it applies to i.e. January 31 is due by February 15.

2. Michigan Employment Security Tax (MESC) Form 1020 The State of Michigan requires that the employer pay MESC tax on the first $9,000 of wages paid to the

employee. Generally, as a new employer, your tax rate will be 2.7%. If you acquire substantially all the assets of another business, you will have to assume their tax rate that can range from less than 1% up to 10% depending on their history with the State of Michigan.

3. Multistate Employer Notification Form for New Hire Reporting The federal government requires employers to notify their state when they hire a new employee. This form

is due within 20 days of employment.

4. City Withholding Taxes Form F-941 If your office is located within the City of Flint, the employer is required to withhold taxes. The withholding

rate varies depending on whether the employee is a resident (1%) or non-resident (.5%). As a courtesy, companies generally withhold taxes for their employees if they are residents. (If the office is located outside the city limits, and the physician’s home is outside the city as well, we highly recommend that the physician still pay Flint taxes on a portion of their income if the physician visits patients in the hospitals located within the City of Flint).

C. Business Taxes

1. Federal Tax Returns

a. S Corporation Form 1120-S This form provides information regarding the return sent to the IRS. It is due within 2 ½ months of

corporation’s year-end. For physicians, it is due by March 15 unless an extension is applied for, which extends the due date to September 15.

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b. Regular C Corporation Form 1120 Since a regular corporation is a tax paying entity, taxes and estimates may be required. For healthcare

professionals, the tax rate is a flat 35%. The due date is same as for S corporations. The extension extends the filing deadline but the taxes are still due March 15.

c. Partnerships and LLC’s Form 1065 This form is an information return sent to the IRS. It is due within 3½ months of corporation’s year-

end. For physicians, it is due by April 15 unless an extension is applied for which extends the due date to October 15.

d. Single member LLC’s and Sole Proprietorships Form 1040-Schedule C These entities are included on your personal tax return (Form 1040) and are reported on Form Schedule

C which is due by April 15th or October 15th with an extension.

2. Michigan Tax Returns

a. Michigan Single Business Tax Form C-8000 This is a business activity tax and quite unusual. Fortunately, the tax will expire in Year 2007. The

tax rate presently is 1.9% of your adjusted business income. This return is due the last day of the 4th month following your year-end. For physicians, it is due by April 30 unless an extension is applied for which extends the due date to December 31. The extension extends the filing deadline but the taxes are still due April 30. Estimates are required on a quarterly basis and are due April 30, July 31, October 31, and January 31.

b. Michigan Annual Report Form MAR This an information form required annually by the State of Michigan. The fee is $25 and is due by

May 15.

3. City Tax Returns

a. Corporate Income Tax Return Form F-1120 This return is due on last day of the 4th month following the year-end. Generally, this tax is minor

at best since healthcare practices pay out most of the profits to the doctor anyway. Estimates can be required and are due April 30, June 30, September 30, and January 31.

b. Partnership Tax Return Form F-1065 This return is due the last day of the 4th month following the year-end or April 30. Generally, it is an

information return although it can elect to pay the partner’s city tax on their behalf.

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X. Buy/Sell Agreements

There are many choices that must be made concerning the financial aspects of a physician entering or leaving a multi-

physician practice. The agreement should be written and should be as detailed and specific as possible. Using a buy/sell

agreement means there is a ready market for the exiting physician’s ownership interest since the buyers are already known

or easy to find. In most cases, the advantages of having a buy/sell agreement in place far outweigh the costs associated

with setting up and administering such an agreement. Other non-financial factors must be considered as well, including

notifying employees, patients, referring physicians, etc. Lewis & Knopf CPAs can assist you in and during the process of

administering your buy/sell agreement. Below we have enumerated some things you should be thinking about considering

in your buy/sell agreement.

A. Entry of a Physician

1. Beginning status. Consideration should be given as to whether the new physician will be an employee at the

beginning, or have an immediate ownership. As in most relationships, we believe it is important to get to know

the person. It will not take long to decide if the new physician will fit into the dynamics of your practice.

2. Future status. Consideration must be given to how the new physician will achieve ownership status in

the practice.

3. Buy-In. Consideration must be given as to how the physician will buy into the practice. For example, existing

receivables may continue to be allocated for compensation purposes to the current owners, thus allowing a lower

buy-in cost by the new physician.

B. Exiting Physician

1. Valuation of receivables. Some of the factors to be considered in determining the net collectible receivables

on the effective date of the exit are bad debts, collection costs, and the time period over which collections

will occur.

2. Allocation of receivables to exiting physician. The allocation of receivables to the exiting physician must be

considered i.e. specific identification, production, per capita, etc.

3. Valuation of other assets. Consideration must be made whether to determine the fair market value of assets

based on book value or some estimated fair market value. Consideration should be considered with respect to

the goodwill of the practice, if any.

4. Method of settlement. The settlement can consist of compensation, ownership redemption, or a combination

of the two. Consideration must be given to whether the payout is to be made immediately upon exit or over a

period of time.

5. Causes for Exiting. Considerations should include definition of disability, retirement, act discreditable to the

profession, etc.

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XI. Issues Concerning Setting up a Practice A. Acquiring Medical Office Space – A Key Element In Prosperity!!!

1. Factors to Consider In Choosing A Location As it is for most small businesses, location is important for the medical practice. Factors to consider when

choosing a site for the office include proximity to the hospitals, patients, referring physicians, traffic flow and ease of access. Also, there must be adequate parking space available for physicians, employees, patients and guests.

Selection of a physician office site should also include an assessment of its neighbors. For example, the nature of a neighbor’s business could influence the physician’s insurance rates. Most importantly, consider the impact a business neighbor may have on a patient’s perception of the physician’s office. Many patients have an uneasy feeling about visiting the doctor and any additional stress could result in their not returning.

The office should be large enough to accommodate the requirements of employees and equipment. Keep in mind that leasing more office space than is needed is a costly mistake. For example, renting just 100 square feet of excess space at $18 per square foot will cost the physician $1,800, funds that could have been better spent elsewhere. Although the amount of space needed varies widely among specialties, one rule of thumb is that a single physician requires approximately 2,000 square feet.

The physician’s specialty will typically dictate where the office is located. Surgeons may want to be near the hospital. Pediatricians may want an office closer to their patients. Physicians will generally have a good idea where their office should be, but those new to an area may need assistance.

2. Hospital Owned Office Buildings – Is It To Your Advantage? Generally, hospital-owned office buildings offer the most favorable leasing terms. Eager to obtain physicians,

hospitals in some areas will offer as much as one year of free rent on a three-year lease. A word of caution – all leasing proposals should be reviewed carefully to make sure they do not violate Medicare’s regulations on suspect incentive arrangements. The safe harbor regulations under the fraud and abuse statute require that leases between two health care providers be in writing, have a term of not less than one year and the rent charged must be set in advance at fair market value.

3. Commercial Real Estate Leases – Know This Before You Sign! A commercial real estate lease is one of the largest legal and financial commitments that the practice

will have to make. Because they are familiar with the nature of the medical practice, certified public accountants can play an important role in the leasing transaction. The following aspects of leases should be reviewed and considered:

a. Term The length of the lease should be consistent with the plans and objectives of the new practice, including

anticipated growth plans. A shorter lease term gives the physician greater flexibility, although the space will probably cost more per square foot. The lease should set move-in dates and rental commencement dates so that there is ample time to make appropriate improvements before the office opens and rental payments begin.

b. Description of Lease Premises The lease should provide a description of the space and indicate the net rentable area of the premises.

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c. Cost In addition to the cost per square foot of lease space, the type of lease, gross or net, is important.

A gross lease means that the lessee is responsible only for the rental quoted in the lease.

A net lease allows many costs such as insurance, repairs and taxes, electricity, water, etc., to be passed on to the lessee, or paid directly by the lessee. (If water and electricity are paid directly by the lessee, it will be necessary to install meters to measure the office’s usage.) If escalation clauses are in the lease, the physician should understand how increases are calculated. Also, the lease should specify whether the landlord or the tenant is responsible for improvements and to whom the improvements belong. Finally, the lease should state the amount of any deposits required of the tenant.

d. Beware of Hidden Costs The lease should specify whether rent is based on usable or rentable square feet. Tenants are interested

primarily in a building’s usable square footage. In other words, they do not want to pay for a building’s common areas (halls and lobbies). Landlords tend to think of lease space in terms of rentable square footage, which includes both usable and common areas. Rentable square footage can be as much as 20% greater than usable square footage. Also, the physician should be sure all charges and services are clearly defined in the lease agreement. (For example, what is included in “janitorial services”, who is responsible for maintenance of heating and cooling systems, elevators, ceiling tiles and other structure-related items.)

e. Flexibility Does the lease contain expansion options? Such options guarantee that the lessee will have more space

available if needed. If additional space is not available when needed and relocation is necessary, can the tenant sublease? If so, are there any restrictions on the types of tenants? What about renewal options? Renewal options allow lessees to lock in the ability to continue use of the leased premises. In periods of inflation, lessees are protected if the option is to renew at the rate in effect during the original term (rather than at the higher market rate).

f. Compliance with American with Disabilities Act (ADA) The building owner should represent in the lease that the premises complies with ADA specifications.

For example, parking spaces, wheelchair ramps, and handicapped-accessible must be available to accommodate patients and employees.

g. Compliance with Occupation Safety and Health Act Standards The lease should require that the building’s ventilation system meet the Occupational Safety and

Health Act standards for clean and recirculated air. Older buildings are more susceptible to ventilation problems and may require more analysis.

h. Hazardous Medical Waste Disposal If the physician is required to contract with an outside janitorial service, the lease should provide

acceptable guidelines for disposal of biomedical waste. Disputes over lease terms often arise between physician partners. To minimize this possibility, we

recommend that lease agreements be thoroughly discussed by all physician partners prior to being signed.

We at Lewis & Knopf, CPAs, P.C. suggest that the services of a competent attorney be sought.

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B. Office Design and Layout – Tailored To Your Medical Specialty

1. Considerations That Will Influence Needs of Your Office The design and layout of the office are based on the needs of the office, which can be classified as follows:

a. Low or high volume practice? The number of patients affects everything from the size of the waiting room to the number of examination rooms.

b. What is the physician’s style? Does the physician prefer to work quickly, or at a more relaxed pace? A fast-working physician may need three or four examination rooms, while two exam rooms might be enough for a slower-paced physician. Generally, a physician’s work pace tends to fluctuate over his or her career. Residents are accustomed to working quickly. But upon opening a private practice, their pace slows as they spend more time marketing themselves to patients, and more time practicing “bedside” manner. Later, as they gain experience and learn to work more efficiently, the physician’s work pace increases back to prior levels.

c. Does the physician perform “medical procedures” in the office, i.e., surgery or other procedures that go beyond an examination of a patient? If so, consideration should be given to whether a separate procedure room is needed, or whether a combination examination/procedure room can be used.

2. Rooms That Are Absolutely Necessary In a Medical Office There are nine rooms that are commonly found in a medical office that are listed below. The remainder of

this section discusses aspects of this list in greater detail.

* Waiting Room * Examination Room * Nurses’ Workstation * Laboratory (and/or X-Ray) * Business Office * Storage Area * Physician’s Office * Restrooms * Break Room

a. Waiting Room The size of the waiting room depends primarily on the number of patients who come into the office.

A family physician who sees 50 patients a day will need a large waiting room, whereas a neurosurgeon who sees only 10 patients a day can have a smaller waiting room. The physician’s specialty must be considered, since the waiting room of an orthopedist, for example, must be spacious enough to accommodate patients wearing casts or in wheelchairs, or an allergist will need an area for patients to sit while recovering from their allergy shots.

b. Examination/Procedure Rooms Generally, an individual physician will need between two and four examinations rooms. An internal

medicine specialist who sees 10 patients a day can get by with one or two examination rooms, while the general practitioner who sees 50 patients a day might require four. If the physician likes to work at a relaxed pace, taking extra time to chat with patients, he or she might be able to get by with fewer examination rooms than a faster working physician. Another factor to consider is whether the patients have to undress for the physician’s examination. Additional or larger examination rooms may be required.

36

If medical procedures are performed in the office, consideration should be given to whether a separate procedure room is needed, or whether a combination examination/procedure room can be used. Generally, minor surgery performed in the office can be done in a room that doubles as an examination room.

c. Nurses’ Workstation Nurses should be provided a work area, away from the office traffic f low but accessible to the

patient care area, for completing paperwork, weighing patients, scheduling and answering patients’ questions. In some practices, the nurses’ workstation will have storage space for lab reports and reference manuals.

d. Laboratory and X-Ray The nature of the physician’s practice (e.g. specialty, practice size, extent and volume of testing) will

dictate the need for an “in-house” laboratory. Installing and operating a lab in the office can be expensive. Lab equipment must be obtained and a lab technician must be hired. Also, there is some regulatory burden that comes with operating a lab. Because of the expense and increased regulatory burden, many physicians are choosing to use independent lab services. Lewis & Knopf, CPAs, P.C. can assist the physician in analyzing the costs and related benefits of putting a lab in the office. If this analysis shows that the volume of testing is large enough to support an in-house lab, the physician should consider establishing one. X-rays, a good source of revenue in many practices, should be subjected to similar cost/benefit analysis.

e. Business Office The business office should have enough space for at least two employees to work comfortably. However,

if the physician employs a transcriptionist for dictation, additional space is needed for dictation/transcription equipment. The layout of the business office generally provides for the following:

1. Reception area 2. Records storage 3. Bookkeeping, billing and insurance area 4. Patient checkout/financial counseling area 5. Office furniture and equipment

f. Storage Area Medications, generally not kept in large supply in physicians’ offices, should be stored in a secure,

dry and cool place. A separate storage area is needed for office supplies – stationery, insurance claims forms, etc.

g. Physician’s Office The physician uses the office for reading reference materials, taking phone calls, and making

dictation. Some physicians use the office to counsel patients, but others prefer to use an examination room instead.

h. Restrooms At least two restrooms are needed – one for employees and one for patients. The patient restroom should

be located near the waiting room, accessible to wheelchairs and equipped for urinalysis testing.

i. Floor Covering Carpet should be installed in the waiting room and hallways. It is comfortable to walk on and muffles

sound in the office. Carpet should not be installed in a procedure room. Carpeting picks up dirt and can harbor bacteria.

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C. Furniture And Equipment – The “Must Have” List and Why

1. The “Mandatory Rooms” Furniture Quick List For Success

a. Waiting Room * Chairs (total number depending on type of practice) * Coffee table * End tables * Magazine rack * Display stand for brochures, pamphlets, maps to hospital, etc. * Telephone (local calls only)

b. Examination/Procedure Room * Exam table (usually one per room) * Stool * X-ray view box (procedure room only otherwise view box in hallway) * Equipment necessary to perform any exam that applies to physician’s practice

c. Business Office * Telephone system * Telephone answering machine * Photocopier * Typewriter/word processor * Dictation equipment (if not outsourced to dictating service) * Calculators * Fax machine * Computer system (includes software and terminals for office needs) * Printer (if shared by numerous persons, suggest at least two) * Shelving for medical records (file cabinets or built in shelves) * Secretaries’ chairs * Desks * Lockable filing cabinet (for storing petty cash and deposits)

d. Physician’s Office * Desk * Physician’s chair * Visitors’ chairs * Shelving (filing cabinets or built in shelves) * Credenza * Telephone * Computer (if preferred by physician for personal use) * Printer (if preferred by physician for personal use)

e. Nurses’ Workstation * Computer * Telephone * Chair * Table or desk (preferred by physician or dictated by office layout) * Shelving for reference manuals and lab reports

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f. Break Room * Table * Chairs * Coffeemaker

* Refrigerator (small size to accommodate for space) * Microwave oven (if desired for staff)

2. Room By Room Furniture/Equipment Detail – Why’s and How’s

a. Waiting Room Chairs and sofas should be durable, comfortable and designed so that patients can get in and out of

their seats with minimal effort. Racks for magazines, brochures, pamphlets, maps to the hospital, etc. should be provided. Also, patients appreciate having a telephone in the waiting room (for local calls).

The décor must fit the physician’s specialty. For example, the waiting room of a pediatrician would have small chairs, laminated furniture and toys. A plastic surgeon that wants to project a “high profile” image would opt for plush carpeting, high quality furniture and artwork. Remember, this is an opportunity for the physician to impress his/her patients with the décor of the waiting room. Therefore, choose wisely and let your best image of yourself shine through.

b. Examination Room In offices where the staff frequently opens the door to speak with the physician, putting the exam table

away from the door gives patients more privacy. Another way to ensure privacy is simply to instruct the staff not to interrupt the physician during an examination. Also, the exam table should be placed away from the door in offices where the patients must undress for examinations.

c. Business Office The physician should see what types of phone systems other physicians in the community are using.

This is your best source for advice on purchasing a quality phone system that will meet your needs. At a minimum, four phones are needed – two for the business office, one for the nurse and one for the physician’s office. The office should obtain at least three telephone lines. A voice intercom for communicating within the office can be incorporated into the phone system, if desired.

Equipment within the business office may vary based on the needs of the physician. Copying requirements are not heavy in most medical offices. The staff will seldom need to make copies of more than one or two documents at a time. Thus, a high-speed copier is not essential. The copier should be able to produce copies in several sizes and should have copy reduction and enlargement capabilities. A typewriter is often useful for typing file labels, some letters, notes and entries to the medical records. A microcomputer with word processing software should be used for most typing requirements. Offices that employ a transcriptionist to type medical records will need dictation equipment. Two calculators that are capable of both printing and displaying numbers are needed in the business office.

Computer systems and software are a must in any business office. Most physician offices use a microcomputer or a network of computers to process bills, maintain appointment schedules and patient data, and for word processing applications. One of the most important steps in finding the right computer is determining what specific tasks the system will be asked to perform. An inadequate system will not operate efficiently and a system that is too powerful is a waste of money. Lewis & Knopf, CPAs, P.C. recommend that a budget first be developed for the computer system, including both the equipment and the software. Then, the practice can focus on products that fit the budget. As a word of caution, look for a computer system that meets the needs of the practice today and for the next three to five years.

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Choosing a medical practice software package and vendor is difficult, primarily due to the fragmented nature of the medical practice software industry. The best source of information on choosing software may be to poll your peer physicians to see what software they are currently using in their offices. The medical software industry has over 1,000 vendors with specialized product applications. Software applications for medical practices range from basic applications, such as billing and patient scheduling to complex applications. Complex applications software includes electronic medical records, CPT coding and billing, managed care contract profitability analysis and electronic data interchange.

Obviously, the needs of the practice and cost are the most significant considerations in selecting a software vendor. Lewis & Knopf, CPAs, P.C. would like to provide the physician a summarized list of questions that should be considered when selecting medical practice software and software vendors. We are confident this questionnaire will aid you in determining the needs of your practice and assist in you in choosing the right computer hardware and software for the new office. Please refer to Section D-1 for the list of questions to consider when choosing your computer hardware and software.

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Waiting Room

Chairs

Coffee table

End tables

Magazine rack

Display stand for brochures

Telephone

Other: (list)

Exam/Procedure Room

Exam table

Stool

X-ray view box

Specialty equipment: (describe)

Other: (list)

Qty Features Desired Brand Name Preference Total Price

3. Checklist – Physician’s “Shopping List”

Physician’s Office

Desk

Physician’s chair

Visitors’ chairs (2)

Shelving or file cabinets

Credenza

Telephone

Computer (if desired)

Printer (if desired)

Other: (list)

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Nurses’ Workstation

Computer

Telephone

Chair

Table or desk

Shelving or filing cabinet

Break Room

Table w/chairs

Refrigerator (small size)

Microwave oven

Other: (list)

Qty Features Desired Brand Name Preference Total Price

Business Office

Telephone system

Telephone answering machine

Photocopier/fax machine

Typewriter

Dictation equipment

Calculator

Computer system

Printer (if shared consider two)

Shelving (file cabinets)

Secretaries chairs

Desks

Lockable fire safe/cabinet

Other: (list)

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4. Vendor List for Equipment and Supplies

a. Medical Instruments Life-Tech Medical Instruments (800) 231-9841 Olympus Medical Instruments (800) 548-5515 Karl Storz (800) 421-0837

b. Office Equipment and Furniture Space, Inc. (810) 235-5151

c. Office Supplies Medical Arts Press (800) 328-2179

d. Medical Equipment and Supplies Saginaw Medical Supplies (800) 292-3669

D. Computer Systems/Software – Choosing What is Right For YOU

1. Checklist – Questions To Consider When Choosing A System

a. Have all potential users been solicited for input on software needs?

b. What are the physician’s expectations of the computer systems?

c. Has a software budget been developed?

d. Which of the following operations are going to be done on a computer within the medical office:

* Billing? * Coding insurance claims? * Electronic claims submissions? * Collections? * Patient scheduling? * Analysis of practice financial for marketing purposes? * Medical records? * Managed care contract compliance? * Patient information such as dictation of medical records? * General ledger maintained in medical office with financial reporting? * Payroll processing done in office or outsourced to payroll processing company (Paycheck)?

e. What are the most important software needs of the practice?

f. Have other physicians been contacted about their software and vendor experience? Have software and vendor recommendations been recorded for future reference?

g. Will the software allow the practice to accept inpatient referrals and set up outpatient referrals in connection with managed care contracts?

h. Is a substantial up-front vendor deposit required before installation of the software?

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i. What are the vendor requirements for supporting the software? Is training a part of the price? Are prepaid support contracts required? If yes, what is the cost and length of the required contract?

j. Is the vendor financially capable of supporting the software?

k. Is the vendor a new company or does it have an established track record?

l. Will the software create journal entries that can be used to maintain an accounting system and general ledger? Would it be more cost effective to have a separate software for accounting purposes only?

m. Can new modules or enhancements be added to the existing software package?

n. Is the software user-friendly? Easy to learn with a lot of computer experience necessary?

o. Will the vendor train the practice’s staff as part of the initial software cost? What is the length of the training provided by the vendor? What is the charge for additional training beyond the contract time?

p. Is the software only compatible with certain printers, fax machines or copiers? Can it communicate with fax machines or copiers?

q. Does the software provide standard forms (invoices, medical sheets, statements, etc) that can be printed or sent via e-mail, printer or fax machine?

E. Suggested Approach For Buying Furniture and Equipment

Lewis & Knopf, CPAs, P.C. suggests that the physician compile a “shopping list” of furniture and equipment needs. The list should include the specific features desired such as function and color. Also, in the case of equipment, the list should indicate whether the equipment will be mounted on a wall or placed on the floor. If the physician desires a specific brand name, this should be indicated on the shopping list. Lewis & Knopf, CPAs, P.C. has provided a form to assist the physician to compile a list of furniture and equipment needs please see section C-3 for the checklist. This is not the kind of list that can be completed in one sitting. In fact, it may take a few weeks or even months for the physician to thoroughly consider which items best meet the needs of the practice.

After completing the list, present the physician’s list of furniture and equipment needs to several suppliers. Please see section C-4 for a sample list of suppliers. Give the list to a sales representative and ask for a proposal, but don’t ask for a “bottom line” price immediately. Ask the sales rep to price each item individually in the proposal. Review the proposal and then ask for a total “bottom line” price for all items (including delivery and installation).

If at all possible, make one large purchase rather than several smaller purchases. Suppliers usually will offer discounts on large purchases. Also, shipping costs per item are lower on large purchases.

Remember that price is not everything. Check to see if the vendor has a history of providing good service to its customers. As a reference source, ask fellow physicians who are in private practice for name of the vendors they deal with and what kind of services these vendors provide their office. It is important to find a supplier who can consistently fill orders on a timely basis. In the case of equipment, find out if the vendor, or someone else, should be contacted when equipment needs repair.

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F. Equipment Buying Versus Leasing – Lewis & Knopf, CPAs, P.C. Can Help You Decide

As a general rule, buying equipment is better than leasing. Most equipment leases today are, in substance, financing arrangements that provide the lessee with a purchase option. Consequently, a physician with adequate credit might as well purchase and own the property. The physician can finance the equipment through a conventional lending source at a lower cost. Financial projections performed by Lewis & Knopf, CPAs, P.C. are often useful when making a lease/buy decision. The projections can be used to assess the cash flows, including the tax consequences, of each alternative.

Of course, physicians with serious cash flow deficiencies might prefer to lease rather than purchase. Also, if the equipment is likely to become obsolete very quickly, renting is preferable to buying. However, the lessor of the equipment will probably be just as aware of the obsolescence as the lessee. Therefore, the lessor will set the rent at a higher rate to compensate. Leasing may also be best for physicians who are unsure if the equipment is right for them. They may prefer to use the equipment on a “trial basis” until they are certain of its utility. If the physician does not want to lease equipment on a trial basis, the lease should be structured appropriately. Although the lease payments may be higher for a cancelable or month-to-month lease, this cost may outweigh the risk of being stuck with equipment that is not useful. However, keep in mind that equipment vendors often allow trial periods.

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XII.Websites of Interest – For The Savvy Physician Keeping up with the laws and regulations that have an effect on medical office operations is essential. One source of

information is the Medical Group Management Association’s website at www.mgma.com, which publishes updates on legislative and regulatory developments. In addition, the physician and office staff that work with insurance claims should read Medicare carrier’s newsletter to stay abreast of Medicare developments. Other sources of information on current developments include the American Medical Association and state medical associations, which regularly sponsor conferences on practice management topics. HIPAA information can be obtained from the Department of Health and Human Services at www.hhs.gov/ocr/hipaa.

The following are selected organizations providing health care information:

American Medical Group Association – www.amga.org

American Medical Association – www.ama-assn.org

Centers for Medicare & Medicaid Services – www.hcfa.gov

Department of Health and Human Services– www.dhhs.gov

Healthcare Financial Management Association – www.hfma.org

Medical Group Management Association – www.mgma.com

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