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Protecting One of Your Most Valuable Assets – Your Employees

Protecting One of Your Most Valuable Assets – Your Employees

Several studies show that the total cost of losing an employee can range from tens of thousands of dollars to 150 percent of the employee’s annual salary. There are also the “soft costs” of losing an employee, including lost productivity and lower employee morale if the practice incurs high turnover rates. According to a survey by the Medical Group Management Association, 50 percent of respondents reported that clinical support staff positions, such as nurses and clinical assistants, had the most turnover. When these employees leave a medical practice, they may also take with them valuable, confidential information, including patient lists, fee schedules and vendor contracts.

From a legal (and practical) standpoint, it is very difficult to prevent an employee from leaving a medical practice, but you can implement several strategies to limit the adverse impact.

First, for certain “high-level” employees, the practice can require each employee to sign a non-compete agreement. A typical non-compete agreement would prevent the departing employee from working in a competing business for a certain period of time within a designated area. For a non-compete to be enforceable in Alabama it must be reasonable as to geographic scope (e.g., the service area of the medical practice) and as to duration (e.g., up to two years is presumed reasonable). Further, the non-compete must serve to protect the practice’s “protectable interests,” which includes the practice’s confidential information (e.g., pricing and patient lists and vendor information) and specialized training provided by the practice to its employees. A non-compete should only be used for employees that hold a position “uniquely essential” to the management, organization or service of the practice. Accordingly, a properly drafted non-compete for an administrator or other high-level employees should be enforceable, but a non-compete should not be used, for example, with a receptionist. Further, in Alabama non-compete agreements cannot be used with professionals, which have been defined by the courts to include physicians and physical therapists. Other clinicians that exercise independent, clinical judgment may also fall within this “professional exemption.”

Second, each employee (or at least the physicians and other “high-level” employees) of the practice can be asked to sign a non-solicitation agreement restricting the employee from “hiring away” other practice employees upon their departure. Non-solicitation agreements are common in physician employment agreements, but can also be used for other employees. A typical non-solicitation provision would read: “Employee agrees that, during the term of his/her employment with the Medical Practice and for a period of one year following termination of employment, regardless of the cause of such termination, Employee shall not, directly or indirectly, through any individual, person or entity, without the prior written consent of the Medical Practice: (a) solicit, induce or attempt to solicit or induce away, or aid, assist or abet any other party or person in soliciting, inducing or attempting to solicit or induce away any employee of the Medical Practice, or (b) employ, hire or contract for services with any employee of the Medical Practice, or any person who was an employee of the Medical Practice during the six (6) month period immediately prior to termination of the Employee’s employment with the Medical Practice.”

The final option to consider is a confidentiality agreement with employees. This type of agreement prevents a departing employee from retaining or using any of the practice’s confidential information after leaving the practice. Confidential information can be defined broadly to mean any sensitive or proprietary information of the practice, including all business or management studies, patient lists and records, financial information, trade secrets, fee schedules, and employee and operating manuals. A strong confidentiality agreement will become especially important if an employee leaves a medical practice to work for a competitor.

Howard Bogard is an attorney with Burr & Forman LLP and is the Chair of the firm’s Health Care Industry Group. Burr & Forman LLP is an official partner with the Medical Association. 

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When Is It Wise to Offer Patients a Reduced Fee Schedule?

When Is It Wise to Offer Patients a Reduced Fee Schedule?

Some of our practice management roundtable participants are offering certain patients an opportunity to pay fees of less than the standard fee schedule for their care. Below we will discuss how they are reaching that decision and if it could be appropriate for your practice.

Some patients have no insurance coverage but want to pay for their care. For this group, there is logic to support a price which is less than the standard fee schedule, if that fee schedule is already set above the amounts paid by all insurance companies and Medicare. The fee reduction is based on an acknowledgment that billed fees for health care are generally set at higher amounts than the providers expect anyway, so some discounting is within reason. A problem occurs when your group’s fees are set at precisely the amounts paid by your largest payers and any discount reduces your fee to levels below what insurance companies or government payers pay you. This can get you into big trouble because those payers are willing to pay only your UCR or Usual and Customary Rate, and if you are regularly making a lower rate available to others, the large payers could ask for repayments. However, if your fee schedule is sufficiently high, a discount to an individual might still leave you with enough fee to protect against violating any “most favored nation” clause in your contract with an insurance company.

After this logic is used to support fee reductions to uninsured patients, can it also be applied to patients who are underinsured? Most employers have received significant annual increases in medical insurance premiums for coverage of their employees. As a result, the employers are modifying the coverage to increase the deductibles dramatically. In one client practice, the annual deductibles per person were raised from $750 to $5,000 after premiums increased 18 percent, 18 percent and 15 percent over the most recent three years. As a result, patients are presenting at medical offices with personal liability so great that they are not able to pay for care. Some administrators even indicate that patients are postponing needed care because of their inability to pay for it.

If a practice has made a decision to reduce fees for patients without coverage, and since many patients are facing large deductibles, those physician offices are extending discounts to insured patients who wish to personally pay a lower fee in full at the time of service. Under HIPAA, patients do have the right to pay for care and request that you not file a claim with their insurance company, but there are forms the patient must sign to correctly document this handling.

The danger associated with any discounting is the possibility that all the discounted dollars serve to reduce physician bonuses at year end. The practice overhead will not be reduced by reason of discounting. If these discounts are thought of as the last dollars collected, then they would have been available for MD payment at bonus time. However, if by discounting you are collecting patient payment monies that would otherwise have become a bad debt not collected, then the amounts you receive are incremental money for distribution to doctors at year end. Which of these situations applies to you will depend on whether your group is writing off uncollected patient balances that could have been obtained, in part, at the time of service.

So what is the take away relative to this trend? First, have a practice which is so well known for excellence in care that you may pick the patients you want and avoid discounting fees to anyone. Next, make sure your standard fee schedule is set higher than the reimbursement you receive from your practice’s highest payer. Finally, reach an agreement among all of your physicians on the discounting process you want to consistently apply and implement that process by training all staff. Times are changing in health care and one major change is the shifting of cost risks to the patients from their insurance carriers. Be sure your practice is adapting to this area of change.

Article contributed by Sae Evans, Maddox Casey and Jim Stroud, Members, Warren Averett Healthcare Consulting Group. Warren Averett is an official Gold Partner with the Medical Association.

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Paying More Money Is Not the Best Way to Retain Great Staff

Paying More Money Is Not the Best Way to Retain Great Staff

Medical practices are painfully in need of keeping their top employees. The time, costs and dangers of recruiting replacement personnel are just part of the issue. Loss of key team members negatively impacts patient care, practice profitability, and staff morale. All administrators agree the retention of a trained, well-performing and mutually cooperative staff is a key to success in medicine. How do you increase your prospects of keeping your “keepers” so that you lose only the ones who needed to go anyway? There are three secrets to success in this area and none require pay raises or bonuses.

Most important is to show them that you respect them. Make them feel valued by your praise of their efforts and character. Try to “catch” them doing something good. Take an employee to the office of another physician in the group and praise some special thing they did recently. Prompt the physicians about special employee efforts and send them off to find and praise the staff member. Write key staff notes of thanks for their sacrificial efforts. Set aside time each week to praise one to three members of your team. Conduct “stay interviews” with select team members. Also, the physicians and practice leadership should be aware of the circumstances in their life. Do they have a child excelling at academics or athletics, are they planning a special vacation, are they approaching empty nest status, are they caregivers to parents or other family members, do they have a special hobby they enjoy discussing, are they saving for a major purchase like a vehicle, boat, or home?

Caring about the lives of your team affirms their value to you. Giving them a $500 bonus deposited into their joint checking account is a currency over which they may have limited control and when it is spent, it is forgotten. Giving them a handwritten note or sincere verbal praise is a “currency” they can keep for their very own and use again and again as they replay the message in their minds. The praise costs your practice a little of your time and a modicum of empathy.

After a culture of merited praise is established, it is easier to correct or discipline them when necessary. Ignoring mistakes or poor conduct is a sign of not caring about the person. Think of the influential family members, teachers and coaches in your life. Weren’t they candid with you about times when your efforts were not your best? If the staff rest in the certainty of your gratefulness for them, they can handle the truth about poor performance from you better. Always praise their character and criticize their actions. In other words, speak to the actions, but don’t attack their character. Avoid a “compliment sandwich” where you say something nice, slip in the problem, and then end with another positive. Be brief, be clear, be firm, but be nice.

New employees need some corrective discussion as early in their employment as possible. Not only is there usually an area for enhancement, but it establishes that you will exercise the right to address them when you deem necessary. For the millennials in your office, this discipline may come as a great shock. They were raised in an era when every child received a participation trophy just for showing up, and as children, they were assured they could be anything they wanted to be. If there were problems at school, their parents went to the school and took care of it for them. Now you are telling them they are special but not in a good way, and their only trophy may be dismissal if the behavior continues. This might be a difficult message to absorb, but you owe it to the great staff to communicate it in a timely manner.

At a recent practice management roundtable, we discussed the fact that some medical staff members underperform until the leadership assigns part of their duties to the better performing staff, so that things get done. Permitting this transfer of work, is unfair to all staff and must be remedied.

With a balance of praise and discipline in place, have some fun at work! Every holiday is a good time to have fun. At Christmas, let them have a contest to decorate a door. For Thanksgiving let them write something about each member of their work area for which they are thankful. Compile the results and share with the staff in a lunch meeting. Halloween, the start of football season, Groundhog Day and anything else is a reason to celebrate. Have each bring a baby photo of themselves, and let the team guess which baby is the staff member, let them send in photos of what they did this summer and have a collage review in the fall of the pictures with narrative by each staff to share the joy, take them bowling, have a new baby “pool” where all can guess the delivery details of an expectant mother on the team, and select secret pals among the staff with a low limit on any expenditures. The point is to permit them to have fun at work. You do not have to entertain them, just give them permission to entertain themselves.

It is essential medical practices provide a fair salary and benefit structure to their staff. Underpaying your people is not compensated by the provision of a good work environment. However, remember people accept a job for the initial pay and benefits, but they remain in a position because they feel appreciated, know their best efforts are expected, and they are encouraged to have fun at their work. Make your practice a place where these three things are true, and you will have a stable, patient-caring and happy staff. It will make everything else you have to do so much more enjoyable.

Article contributed by Sae Evans, Maddox Casey and Jim Stroud, Members, Warren Averett Healthcare Consulting Group. Warren Averett is an official Gold Partner with the Medical Association.

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Don’t Get Caught in a Copay Conundrum

Don’t Get Caught in a Copay Conundrum

In the current environment of increasing patient deductibles and copays, the billing and collection of the patient portion of the services you provide is top of mind. In the Department of Health and Human Service’s report dated May 23, 2017, Alabama’s average monthly health insurance premium amounts increased 223 percent from 2013 to 2017, versus the national average increase of 105 percent. In real dollars, average monthly premiums jumped from $178 to $575.

With deductibles and copay amounts increasing as well, it’s becoming more difficult to collect the patient’s portion of the bill. As a provider, you are more than aware of these financial hardships your patients are facing, especially your sicker patients who absolutely need care. You might routinely waive the patient portion of your services because you sense a financial issue. Maybe you treat other physicians or colleagues and write off their portion of the bill as a professional courtesy. You might even provide care to your team of employees at a reduced rate as a perk of their job. But did you know all three of these scenarios can land you in hot water?

These practices, while intended to be a gesture of goodwill, professional courtesy, or “it’s just the way we’ve always done things,” could put you and your practice at risk of violating federal anti-kickback statutes and violating contracts with insurance carriers – not to mention impacting your practice’s financial bottom line.

According to the Office of Inspector General, the federal Anti-Kickback Statute (AKS) is “a criminal law that prohibits the knowing and willful payment of ‘remuneration’ to induce or reward patient referrals or the generation of business involving any item or service payable by the federal health care programs.” Violating the federal Anti-Kickback Statute can lead to criminal penalties and administrative sanctions. The penalties for physicians who pay or accept kickbacks can be up to $50,000 per kickback plus three times the amount of the remuneration in question as well as imprisonment and exclusion from future participation in federal health care programs. The HHS’s A Roadmap for New Physicians: Avoiding Medicare and Medicaid Fraud & Abuse states the following:

“…Where the Medicare and Medicaid programs require patients to pay copays for services, you are generally required to collect that money from your patients. Routinely waiving these copays could implicate the AKS, and you may not advertise that you will forgive copayments.” In this case, the HHS would determine a practice is violating the AKS if their standard practice is to waive copays. Patients would become the referral source and would be receiving the benefit of a waived copay.

From a commercial insurance carrier’s point of view, if you routinely write off patient’s copays and deductibles, you are in essence decreasing the total charge for the service you are providing. A $100 visit with a $20 copay that is routinely waived has now become an $80 visit.

Commercial insurance carriers can view this as a breach of contract, and they have recently been cracking down on enforcement of collections. Commercial carriers can stipulate that copay portion is required to be paid in order to reimburse the practice its portion. If they find out you have been waiving the patient portion for services, they can come back and seek repayment of funds they’ve already paid for those patients.

Profit margins for services are getting smaller and smaller, and as a medical practice in today’s post-ACA world, your bottom line can’t afford the consistent waiver, or poor collection of these copays and deductibles.

To navigate this issue, we recommend you review/update or implement policies and procedures guided by these best practices:

  1. Immediately stop any current practices of routinely waiving or reducing copays and deductibles.
  2. Where financial need is an issue, develop a policy with outlined procedures to document a patient’s financial hardship. Having a patient merely sign a document stating they have a financial hardship is not enough to substantiate the patient’s inability to pay. Have a designated staff person/financial counselor document the patient’s financial need. You need to perform due diligence with the patient to prove they are unable to pay. The HHS’s Roadmap for New Physicians states, “… you are free to waive a copayment if you make an individual determination that the patient cannot afford to pay or if your reasonable collection efforts fail.” Train front desk and billing staff on these policies and procedures to ensure consistent enforcement.
  3. Bill copays and deductibles and make adequate attempts to collect from the patient. We recommend at least three statements and a phone call as a best practice. Document all communication and collection efforts in the patient’s file to provide an adequate audit trail, should you need such information in the case of an audit.
  4. If these three practices bear no fruit, you can write off the patient’s copay or deductible.

As you can see, justifiable circumstances of financial hardship or need are situations where you can discount or waive patient copays. Use these best practices to implement consistent and reasonable policies and procedures. Steer clear of routine waivers and discounts of copays, and you shouldn’t find yourself in a copay conundrum.

The Do’s and Don’ts of Deductibles and Copays

What you should do…

  • Always bill the full amount.
  • Make a reasonable effort to collect from the patient.
  • When a patient states an inability to pay, establish policies and procedures to determine financial need and keep adequate documentation.
  • Work out a payment plan with a patient, or agreement for paying a certain amount each visit.
  • Collect up front rather than later. Each statement sent costs you time and money.

What you should not do…

  • Routinely or systematically write off copays or deductibles.
  • Advertise that you will forgive copays.
  • Accept the “in-network” copays if you are an “out-of-network” provider.
  • Devalue your services by waiving or reducing the copay and deductibles due.

The information in this article is not intended as tax or legal advice. Please contact your lawyer or CPA for specific information regarding your individual situation.

Article contributed by Jenna Roton, CPA, with Jackson Thornton CPAs and Consultants, an official partner with the Medical Association.

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Front Office Transformation – First Impressions

Front Office Transformation – First Impressions

I recently visited a specialty practice at a major health system. As I approached the registration desk, a posted sign directed me to a standing kiosk to sign in. The family member I accompanied to the appointment was unable to stand at the kiosk, so I provided the needed information and signed her in. Although it was a quick and seamless process, I was concerned because if I needed assistance, there were no employees to ask.

Many practices have implemented kiosk sign-ins and have someone to assist a patient with the process if needed. Practice administrators have made the decision to implement a kiosk to assure verification of the current insurance policy and to prompt the patient to pay any out-of-pocket expense before they see the doctor. Many of the kiosk solutions allow a pre-registration via email permitting the patient to populate data and upload information from their own device at their convenience.

Benefits of Kiosk Sign-in include:

  • reduction in the staffing at the front desk
  • decrease in patient wait time
  • and most impressively, the increase of time of service collections.

You may not be ready for a kiosk at your registration desk, but you should review key areas for process improvements to assure you are preparing your practice for success at the front line. The MGMA Connection magazine reported an increase in the patient out-of-pocket expense by 30 percent in the last two years. Previous reports had already noted significant increases in patient deductibles and co-pays outside of the office co-pay. Failure to educate your front office staff, evaluate workflows, review software for accurate verification of benefits, and the lack of consistent financial policies could cost you at the end of the revenue cycle, and hurt your practice in the long-run.

All this to say, first impressions are vital to a practice. A second experience I had is when I walked into a practice, the first thing I saw was each of the front desk staff members was on the phone and did not acknowledge the patients walking in until they hung up. They were scheduling tests, getting pre-certifications and poorly collecting information and money. The staff had so many tasks that they were unable to perform any of them well and with intention.

Focus your front office staff on key functions: greet the patient, collect data, verify data, and collect money. Setting goals and seeing improvement will engage your staff in the big picture and train your patients to expect quality and consistent service and furthermore, be willing to pay for it.

The changes in health care have caused us to focus on efficiency and high-quality services at a reduced cost. As administrators, physicians, and/or staff members, you rarely enter the office from the front door so you may fail to see your operations from the patient’s perspective. Understanding how patients view your practice can put your practice at the next level.

Paper registration is a hassle to update and likely skipped if the phones are ringing off the hook. Patient satisfaction is vital in any medical practice and patients are learning technology can enhance their experience. The primary goal of the front desk should always be to provide great customer service because it is easier to collect from a happy patient.

Once you assure education, define processes, and establish best practices for the front office, it is time to set goals. Track performance (such as co-pay collection rate), reward success, monitor compliance, and watch your practice grow!

 

Article contributed by Tammie Lunceford, Healthcare and Dental Consultant, Warren Averett Healthcare Consulting Group. Warren Averett is an official Gold Partner with the Medical Association.

 

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Do You Qualify for Tax Amnesty?

Do You Qualify for Tax Amnesty?

The Alabama Legislature has enacted the Alabama Tax Delinquency Amnesty Act of 2018 to allow qualifying taxpayers to receive a waiver of penalties and interest on eligible tax types. The application period is now open through Sept. 30, 2018.

The Alabama Department of Revenue (ADOR) launched alabamataxamnesty.com, a website dedicated to the Alabama Tax Delinquency Amnesty Program of 2018, created by Act 2018-153.

The amnesty application period runs July 1 – Sept. 30, 2018, and applies to eligible taxes due before, or for tax periods that began before, Jan. 1, 2017. All applications must be submitted electronically through the Alabama tax amnesty website, where taxpayers can sign up to receive notifications about the program. The website also provides all the information taxpayers may need on the program and answers to frequently asked questions.

The amnesty program will be available to eligible taxpayers who have not been contacted by the department within the last two years and are not a party to a criminal investigation or litigation in any court of the United States or Alabama pending as of March 6, 2018, for nonpayment, delinquency, or fraud in relation to any Alabama taxes administered by the Department.

Most taxes administered by ADOR, with the exception of motor fuel, motor vehicle, and property taxes, are eligible for the 2018 Amnesty Program. This includes, but is not limited to, corporate and individual income, business privilege, financial institution excise, consumers use, sellers use, withholding, and sales taxes.

All penalties and interest will be waived for approved amnesty applications.

Taxpayers who believe they may have delinquent tax liabilities in Alabama should consult with their tax advisers regarding their eligibility for the tax amnesty program.

For more information on taxpayer eligibility, eligible tax types, leniency terms, the application process, and more, visit alabamataxamnesty.com or email amnesty@revenue.alabama.gov.

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Tips for Preserving Tax Deductions in 2018

Tips for Preserving Tax Deductions in 2018

Starting this year, the Tax Cuts and Jobs Act limits an individual’s or a couple’s federal tax deduction for state and local taxes (SALT) to $10,000. SALT deductions include deductions on state and local income, sales and property taxes. High-income earners, such as physicians, frequently have a SALT deduction far exceeding the new $10,000 cap and will, therefore, be negatively impacted by this change.

To illustrate, if you paid $9,000 in property tax and $22,000 in State of Alabama income taxes in 2017, you would have received a $31,000 deduction on your Federal return. In 2018, that deduction would be capped at $10,000. Consequently, the taxpayer will lose $21,000 of deductions. Fortunately for Alabamians, there is a way to help mitigate this adverse tax change in 2018.

The Alabama Accountability Act (AAA) provides an opportunity to preserve your state tax deduction through donations to a Scholarship Granting Organization (SGO). This Act, passed by the Alabama Legislature in 2015, enables Alabama residents to use up to half of their state income tax burden (limited to $50,000) to support approved schools in our state which serve an economically disadvantaged student population. The AAA donation provides state income tax credits (a dollar for dollar reduction in Alabama tax liability) to donors who contribute to a state-approved SGO operating within Alabama. This payment is treated as if you paid Alabama taxes, but for federal purposes, your donation will be reported as a charitable contribution. Otherwise, as described above, the state tax payment would be reported on your federal return as a SALT deduction subject to the $10,000 cap and provide no tax benefit to you.

Let’s update the illustration above to demonstrate the AAA donation benefit. You pay one half of the $22,000 state of Alabama income tax directly to the state as usual. You pay the remaining half of the $22,000 state of Alabama tax liability with an AAA donation ($11,000). The $11,000 AAA donation counts as a state tax payment on the Alabama tax return. However, on the federal tax return, the $11,000 AAA donation is deducted as a charitable contribution and escapes the $10,000 SALT deduction cap. The AAA donation preserves an $11,000 tax deduction which, at top federal tax brackets, is roughly $4,000 in federal income tax dollars.

It is important to emphasize the state allocates $30,000,000 annually for the AAA tax credit program. We expect the 2018 allotment to be reserved quickly, given the significant tax benefit the AAA provides. Therefore, we encourage you to act quickly, if interested, before the opportunity is gone. Based on the current AAA usage rate, we anticipate the $30,000,000 allotment for 2018 could be exhausted by the end of April or earlier.

If you wish to take advantage of this program, there is a two-step process:

1) Reserve your credit on the Alabama Department of Revenue web portal, My Alabama Taxes (MAT); and

2) Write your check for that amount and send it to the Scholarship Granting Organization (SGO) as noted below.

  • Have your 2016 Alabama 1040 with you since you will need your state adjusted gross income to set up your account with the Alabama Department of Revenue.
  • Follow the steps on this website https://myalabamataxes.alabama.gov to create your MAT account, if you do not already have an account.
  • Once that is completed, follow the steps online to reserve your tax credit with the state by clicking on “Report a donation to an SGO” on the right side of the web page.
  • Fill in your personal information and make a selection of an “SGO.”
  • Once you have filled in your personal information, you will then write a check for the amount you reserved to the SGO you selected.

This SGO contribution benefits deserving schools, counts as a payment of your Alabama personal income tax and enables you to gain federal tax deduction for a cost that will be otherwise non-deductible. We encourage immediate action on this mutually beneficial step. If you need help, contact one of our Warren Averett Healthcare Consulting team members.

Article contributed by Sae Evans, Maddox Casey and Jim Stroud, Members, Warren Averett Healthcare Consulting Group. Warren Averett is an official Gold Partner with the Medical Association.

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The Tax Cuts and Jobs Act: How Will It Affect YOU?

The Tax Cuts and Jobs Act: How Will It Affect YOU?

The new tax reform law — commonly referred to as the “Tax Cuts and Jobs Act” (TCJA) — is the most significant tax legislation in decades. Although the law was passed only a few weeks ago, the impact on the economy and business outlook seems undeniable as the stock market rally continues and both individuals and businesses appear the most optimistic in quite some time.

Tax reform was originally sold to us as simplification. In fact, you would be able to file your taxes on a postcard, right? Although some aspects of tax law have been simplified, other new provisions such as the 20 percent Qualified Business Income Deduction are very complex, despite appearing straightforward at first glance.

The law significantly impacts both individuals and businesses. Let’s start with a basic overview of what’s covered in the new law. (Except where noted, these changes are effective for tax years beginning after Dec. 31, 2017.)

INDIVIDUAL PROVISIONS

The new law makes small reductions to income tax rates for most individual tax brackets, and it significantly increases individual AMT and estate tax exemptions. But there’s also some bad news for individuals: the TCJA eliminates or limits many tax breaks. In addition, much of the tax relief for individual taxpayers will be available only temporarily.

Here are some of the key changes. Except where noted, these changes will sunset after 2025:

Individual Tax Rates

The majority of physicians will notice tax savings due to an overall reduction in tax rates. Please see the summary comparing tax rates and income brackets pre- and post-TCJA later in this section.

Physicians will notice not only have the tax rates been reduced, but the upper thresholds of most income brackets have also increased, resulting in more of your income being taxed at lesser rates.

For instance, under the new brackets, the 24 percent bracket extends all the way up to taxable income of $315,000, whereas under the old law, the 25 percent bracket only went up to taxable income of $156,150. For a married filing joint taxpayer with taxable income of $315,000, this results in tax savings of almost $15,000.

Standard vs. Itemized Deductions / Personal Exemptions / Limitations

Every taxpayer has the choice whether to itemize deductions on Schedule A of their 1040 (mortgage interest, charitable contributions, property taxes, state and local taxes, etc.) or take the allowable standard deduction.

Under the new law, the standard deduction nearly doubles as follows:

  • $24,000 for married individuals filing a joint return
  • $18,000 for head-of-household
  • $12,000 for all other individuals

Even with the increased standard deduction, I anticipate it will still be advantageous for most physicians to continue itemizing their deductions as most will exceed the increased thresholds above.

Prior limitations on itemized deductions, known as the Pease limitation (named after Rep. Donald Pease), have now been repealed. Under the Pease limitation, many physicians found their itemized deductions limited because their taxable income exceeded the amount allowed for full deductions. As a result of tax reform, these limitations no longer apply.

Although the benefits noted above are positive, there are some “take-aways” that should be noted, such as:

  • Personal exemptions of $4,050 have been eliminated;
  • Elimination of the deduction for interest on home equity debt;
  • Mortgage interest deduction limited to interest on debt up to $750,000 for new loans (previously $1,000,000). Taxpayers can continue to deduct interest on primary and secondary/vacation home;
  • New $10,000 limit ($5,000 if single) on the deduction for state and local income/property taxes; and
  • Elimination of moving expense deduction.

Since passage of the law, I have had several phone calls and emails from individuals worried that they are losing the ability to deduct charitable contributions. Please note that charitable deductions remain fully deductible under the new law. In fact, taxpayers are able to contribute more under the new law – up to 60 percent of their adjusted gross income as opposed to 50 percent previously. There is one exception, an admittedly BIG exception. Donors are no longer able to deduct 80 percent of the amount paid for the right to purchase tickets for athletic events (i.e. Tide Pride, Tigers Unlimited).

Estate Tax

Although the Estate Tax was not repealed under the TCJA, its impact was significantly reduced through increased gift and estate exemption amounts. Previously, the estate and gift tax exclusion was $5,490,000 in 2017, but under the new law will double to $11,200,000 in 2018 (including inflation). The increased exemption amounts are set to expire Jan. 1, 2026. This creates significant planning opportunities for physicians to transfer wealth using the increased exemption.

Alternative Minimum Tax (AMT)

AMT is a “supplemental” tax that hits many physicians. It essentially taxes those whom the IRS believes are taking too many deductions under the standard income tax system. For instance, under AMT, no deductions are allowed for state and local taxes, real estate and personal taxes, etc.

Many were hopeful AMT would be repealed in its entirety, but that did not happen. Instead, the exemption amount was raised significantly, thereby subjecting fewer individuals to AMT. It’s very likely that if you were subject to AMT tax in the past, you may not be going forward in 2018.

Affordable Care Act

During the final days of the bill’s negotiation process between the House and the Senate, a provision was added for the repeal of the individual mandate called for under the healthcare reform bill. Many took this to mean that the Patient Protection and Affordable Care Act was gone; however, that is not the case. The tax reform bill merely removed the penalty associated with the mandate for individuals to obtain health insurance. PPACA is still very much in play.

There was no change to the 3.8 percent net investment income nor the additional .9 percent payroll tax on high-wage earners. In addition, large employers (generally those with 50 or more FTE’s) are still required to provide affordable minimum essential health care coverage to full-time employees. Those employers are also still required to complete Form’s 1094 and 1095 annually to report the details of healthcare coverage provided to employees.

Alimony

Under the TCJA, individuals will no longer be allowed to deduct payments for alimony or separate maintenance payments. Likewise, the recipient of those payments will no longer include payments in their income. This is generally effective for divorce or separation agreements executed after Dec. 31, 2018. Current rules (i.e. alimony deduction) continue to apply to already-existing divorces and separations, as well as divorces and separations that are executed before 2019.

BUSINESS PROVISIONS

In addition to the individual provisions noted above, the TCJA also has many provisions which will impact businesses both large and small. In general, the law significantly reduces the income tax rate for corporations and eliminates the corporate alternative minimum tax (AMT). It also provides a large new tax deduction for owners of pass-through entities and makes major changes related to the taxation of foreign income. But it also reduces or eliminates many business tax breaks.

Following are some of the key business-related changes:

Corporate Tax Rate Reduction

Under the old law, corporations were subject to graduated tax rates that topped out at 35 percent. Personal service corporations, which include physician practices, were taxed at a flat 35 percent. The TCJA reduced the corporate tax rate to a flat 21 percent rate. Although the tax rate reduction is a positive, most physician practices organized as C Corporations bonus out income at year-end to avoid paying corporate tax at all, making this somewhat irrelevant.

20 Percent Qualified Business Income Pass-Through Deduction

But what if your practice isn’t organized as a C Corporation? It doesn’t seem fair that one entity type receives a reduction in tax rates while others do not. To compensate for this, Congress created an entirely new 20 percent qualified business income (QBI) deduction for owners of flow-through entities (such as partnerships, LLCs and S corporations) and sole proprietorships through 2025. This new deduction is commonly referred to as the “pass-through deduction,” as income from these entities passes through to owners and is included on the individual 1040 income tax return.

Qualified business income is essentially the net income of the practice after physician salaries. It excludes any investment-related items, such as interest, dividends, or capital gains or losses from the sale of property. The deduction is 20 percent of the QBI and is a reduction in taxable income on Form 1040.

What appears rather straightforward at first, quickly becomes complex and illogical with a strict or literal reading of the law. In some cases, the amount calculated for the 20 percent deduction varies among entity types with all else being equal, which doesn’t appear the outcome Congress intended. These ambiguities will most likely be addressed in later regulations and technical corrections that will provide further details on interpretation and application of the law. This will be a key area to monitor for the remainder of 2018.

In addition, the 20 percent deduction is subject to a tangled web of limitations and phase-outs. Service-related entities (i.e. physician practices) are also subject to even more limitations that, depending on income level, quickly eliminate the 20 percent deduction.

Let’s first examine the limits applicable to both service and non-service businesses alike. The 20 percent qualified business income deduction is limited by the greater of:

  • 50 percent of W2 wages paid by the qualifying business, or
  • 25 percent of W2 wages paid plus 2.5 percent of unadjusted basis of all qualified property.

The 20 percent deduction is reduced if an individual’s taxable income as shown on their 1040 exceeds $157,500 if filing single or $315,000 if filing jointly. For service-related businesses such as a physician practice, the 20 percent deduction is completely lost once the physician’s individual taxable income exceeds $207,500 if filing single or $415,000 if filing jointly. Phase out begins at $157,500 filing single and $315,000 filing jointly.

To illustrate, assume Dr. A is a solo practitioner who files a joint return. Her practice is organized as a single-member LLC. The qualified business income as reported on Schedule C of Dr. A’s 1040 is $240,000 after $195,000 in wages paid to her staff. Dr. A and her husband’s taxable income for the year is $295,000.

In this example, Dr. A’s tentative 20 percent deduction is $48,000 ($240,000 QBI * 20 percent). Since this amount is less than 50 percent of wages ($195,000 * 50 percent = $97,500), the deduction is not reduced. Also, since Dr. A’s overall taxable income is less than $315,000, she is able to take the full deduction of $48,000.

This is perhaps the most complex area of the tax reform law. This is an area which will merit monitoring in the coming months as the IRS provides additional guidance on the implementation of this provision of the law.

Depreciation Deductions

For physician practices, several favorable changes were made to the existing rules regarding depreciation. Most notably, equipment purchased after Sept. 27, 2017, and before Jan. 1, 2023 (in most cases) can by fully expensed or deducted in the year of purchase rather than depreciating over the equipment’s useful life. Previously, this “bonus” depreciation was limited to 50 percent of the asset’s cost, but has now been increased to 100 percent. In addition, the equipment no longer has to be original use or new property — used property also qualifies for the deduction.

In addition to bonus depreciation, the provisions of Code Section 179 were also modified to allow for more property types to qualify for immediate write-off, including subsequent improvements to commercial property such as roofs, heating and A/C systems, fire protection, alarm and security systems.

Other Business Impacts

In addition to the major overhauls noted above, there were several other impacts to businesses, including but not limited to:

  • Repeal of the 20 percent corporate Alternative Minimum Tax
  • New limits on net operating loss deductions
  • Elimination of the Section 199 deduction
  • Like-kind exchanges now limited to real estate only
  • New tax credit for employer-paid family and medical leave — only through 2019
  • New limitations on excessive employee compensation
  • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Summary

The TCJA will have a significant impact on business and individuals. These items highlight the major provisions of the law that are most impactful to physicians. The new tax law is certainly broad-reaching and complicated.

Article contributed by Mark Baker, Principal, Jackson Thornton CPAs and Consultants. Jackson Thornton is a Preferred Partner of the Medical Association.

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Amazon, Berkshire Hathaway and JPMorgan Venture into Health Care Industry

Amazon, Berkshire Hathaway and JPMorgan Venture into Health Care Industry

Three of the world’s leading companies — Amazon, Berkshire Hathaway and JPMorgan — are teaming up to take on the health care industry.

Amazon announced on Tuesday, Jan. 30, that it would be partnering with Berkshire Hathaway and JPMorgan on an initiative to create an independent health care company for its employees with the hopes of improving employee satisfaction and reducing costs, according to a release from Berkshire Hathaway.

The new independent company is said to be “free from profit-making incentives and constraints,” according to Berkshire Hathaway. “The initial focus of the new company will be on technology solutions that will provide U.S. employees and their families with simplified, high-quality and transparent health care at a reasonable cost.”

The alliance was established as a result of the nation’s current health care system and the increasing costs of medical treatment. “The health care system is complex, and we enter into this challenge open-eyed about the degree of difficulty,” said Jeff Bezos, Amazon’s founder and chief executive. “Hard as it might be, reducing health care’s burden on the economy while improving outcomes for employees and their families would be worth the effort.”

While the companies have not explicitly detailed their plans, they have stated that they will be using technology to bring down health care costs for employees.

Even before Tuesday’s announcement, there have been signs that Amazon is preparing to enter the health care market. Earlier this month, the company posted a job for an “experienced HIPAA professional.” The company is also said to be exploring plans of entering into the pharmacy supply chain market as a drug distributor.

According to Mickey Chadna, vice president of Moody’s Investor Service, the new venture could create “further competitive pressure” for pharmacy giants like Walgreens and CVS. “In light of the announcement,” Chadna said, “the potential merger of CVS and Aetna is even more compelling as a more coordinated approach to medical care is necessary to lower the overall health care costs for consumers.”

Health care professionals and strategists are still inquiring about the potential of this plan. “Whether and how this initiative will benefit employees directly,” said Benjamin Gomes-Casseres, a professor of strategy at Brandeis University International Business School, “and whether solutions the company develops will scale and be a model that could be used by other employers remains uncertain.”

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Three Common Mistakes in Transferring Ownership of a Medical Practice

Three Common Mistakes in Transferring Ownership of a Medical Practice

Physicians spend their careers building top-quality practices, but many devote too little attention to the architecture and terms by which the practices will be transferred at their retirement, death or disability. In our experience, there are three areas, which if neglected, will lead to problems at the crucial point when the ownership of this valuable asset changes hands.

Determining Value

Our clients are most concerned with the value of their practice. While some practitioners underestimate the value of their practice, many overestimate the amount which can be captured in the sale of the practice interest they own. A common mistake is to use a value that was read or heard about from a transaction elsewhere. That transaction price might have been determined by a purchaser who was limited in the amount they could pay, such as a hospital. The transaction might have occurred in a state with a higher managed care payer mix than your practice, or in a state with different non-compete laws regarding health care professionals. Practice valuations vary widely and for many reasons. Two practices in the same city and same specialty could have much different values. The terms of the transaction are another powerful force on sales prices and are rarely publicized. Even if you get the value accurately determined, there are still ways to create problems in the monetization of your practice value.

Clear Conversations

The documents relative to the transfer of a group practice ownership percentage should reflect the plan to sell at a future date, and the design of the manner by which the price will be determined. Even for valuable practice interests absent a clear design, potential buyers may feel tricked by a plan to transfer your share of the practice if it is developed late in your career. The time for this understanding is when younger doctors are brought in to the ownership. Buy-sell agreements and cross-purchase agreements serve to clarify expectations at the time of their drafting but should be reviewed every few years for relevance to the current situation, and any needed changes made. The greater the price desired for a practice, the more the need for clear design, pricing and terms. With a good legal architecture and a fairly determined price, your practice liquidation is almost ready for your time to sell, except for one additional issue.

The Fine Print

The legal obligation to pay the fairly determined price is often accomplished by the purchase of life and/or disability insurance on the selling practitioner. That can become a problem if the policies are never obtained, or the premiums payments are halted. In this situation, the buyer has a responsibility to pay a price agreed but with no funds to pay it. No one will be pleased with the outcome of this situation. Compound this problem with the common mistake of letting the practice price be set by the amount of life insurance proceeds, which could be afforded when the transfer architecture was designed, and you have a purchaser obligated to pay too much and with nothing but after-tax dollars from their future earnings. The CEO, chief emotional officer, at home will not respond well to this deal.

If you have a valuable practice, and you negotiate a fair price and terms for its sale, this can be a valuable way to exit your professional career and move to your next endeavor of success. It takes a little planning and periodic monitoring to gain top value.

Article contributed by Warren Averett CPAs and Advisors, official Gold Partner with the Medical Association.

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