In my last piece we looked at how a GP practice makes its money and we saw they are much like any other business and run on the the golden formula.
Profit = Income – Expenses.
The main difference is most GP practices are run as a partnership which is a particular UK company structure that has benefits and disadvantages. Of course what you are probably interested in is what are the incomes and expenses for a GP practice?
Well “expenses” is perhaps the easier topic so let’s cover that first.
The main cost for a GP practice, as for most businesses is Staff i.e. everyone but the partners. This includes salaried doctors, nurses, health care assistants, administrators, reception staff, cleaners etc.
Now over the years the GP contract has changed – back in the “old days” a practice was reimbursed a percentage of its staff costs to a limit. This encouraged practices to have a certain amount of staff but not more. Now you can spend as much or as little as you want as practice income isn’t related to staff numbers.
Some practices have lots of partners and relatively few staff, some have a couple of partners and lots of staff doing the work. The cynics would say by passing the work to “cheaper” employees the partners maximize their income, others would say that’s only true if the partners retain all the freed up money as profit – some would reinvest it in new services and/or support staff to improve the patient experience or improve their working life.
Clinical staff tend to be paid national rates whereas admin and reception staff tend to be paid rates compatible with the area and other employers.
Practices have to pay all the usual bills such as heating, lighting, water, telephone etc. This is why I wander around my practice turning the lights off.
The cheaper my electricity bills the more money I take home – it’s that simple.
This is where we start the theme of “what’s the difference between a high earning practice and a low one” sometimes its effort and attention to detail. Just like at home, shopping around can save you money. We use a broker and try and get the best electricity deal we can. We try to do this often enough to save money yet not spend out entire life changing; if a practice can’t be bothered it’s going to pay more than it needs to and the partners will take home less.
Does that matter? Well I guess it depends on how much a practice is willing to invest the savings in new services, also does the practice that is sharper at this, run a tighter ship on other things including its clinical services?
It’s always really puzzled me why practices don’t get together more and negotiate bulk deals. Would a supplier be more wiling to give a discount to 50 practices acting together? Is there a role for someone to provide this service?
In my consultancy business I’ve recently helped setup 2 GP federations. One of the things we have told them is banding together for procurement is a potential win they should investigate. To be fair some buying coops do exist already but I don’t think they are as wide spread as they could be.
For most business rent is a big issue. Do you rent the expensive high street store or the cheap industrial unit out of town? Well this is where things are a little funny. I could write a whole article about this but essentially there are several different schemes where effectively the whole of the rent that a practice pays is reimbursed.
If the health authority appointed “district valuer” agrees with the price the landlord is charging, its paid in full, through the practice accounts though usually in arrears. This payment in full comes with some rules on what the practice can and cant do with the building and as one of the commentators on my previous piece alluded to there is a provision for GPs to be their own landlords.
In the good old days a lot of practices were owned by the GPs in the partnership. For example they bought a house in a housing estate, borrowed money to adapt and equip it and a fair rent was agreed with the DV. This was usually more than the mortgage on the property though there was no guarantee of that. After 30-40 years of service the retiring GP who had effectively had his or her mortgage paid for that time, sold his or her share of the building to the incoming partner (actually its slightly more complicated than this and I’ll possibly discuss parity deals in another article).
The retiring GP usually made a nice sum of money. Some think this is dreadful. However I would say and I’ve never had this opportunity, there were reasons for it. 1) It encouraged GPs to stay in an area for their whole working lives. This has become a lot less prevalent and it’s interesting that GPs now move around a lot more. 2) The powers that be knew of this and it was included in the calculations of how much a practice was paid and therefore how much profit they could make 3) Why shouldn’t a GP benefit from this? My building is owned by a private landlord. They own the building they rent it to the government through my practice. They make a profit on that. Why shouldn’t a GP be allowed the same opportunity? 4) It was risky, it wasn’t guaranteed, there are building in many parts of the country that have negative equity, that aren’t worth more than have been paid and retiring partners can’t find new doctors to join and to take them over leaving them in debt till they die.
As stated more and more premises are leased, there is at least one large pension fund that specializes in medical property.
Now while leasing sounds nice as the rent is reimbursed, as many lawyers know, landlords don’t like risking their profits. Most won’t accept assignment of a lease to a partnership and certainly not to a LLP or LTD. They want the partners named individually on the lease so they are personally liable. This means they can come at my estate.
When GPs get a bit uppity at being told we are paid too much, how many consultants or nurses houses, pensions, savings, investments are at risk if the lease isn’t paid? Mine is. A piece of advice I was given when I signed our lease was if it ever came to it and we were being chased for the money, start divorce proceeding against my wife, which freezes my assets and give her a generous settlement so we might keep some money.
Now you might be saying with a guaranteed rent what’s the risk? Well the month our rent didn’t come into our bank account, we had to stop all drawings and borrow some money to cover it. We still paid all our staff but the partners took nothing home. It worked out in the end but felt quite real to us. Also the rent is only guaranteed while the practice is viable and running the lease has a term. There is a huge workforce crisis at the moment with practices struggling to recruit. Several are becoming unsustainable. Some have closed. If they close the reimbursement will end but the lease liability wont. Unsurprisingly this risk can put off younger doctors joining a practice with an uncertain future.
An increasing expense certainly for my practice is Subscriptions by which I mean things like medical indemnity insurance, GMC fees, memberships of professional organizations etc. It’s worth noting that while hospital doctors are covered by something called NHS indemnity – GPs aren’t. We have to pay from our income to have this insurance in case we are sued. Consultants pay this to cover their private work and some pay to have a higher level of cover on their NHS work but this is voluntary for them. These fees are £6000-10000 a year per whole timer.
There are a range of Sundry costs every practice faces just like another business. E.g. Stamps, paper, printer ink, adverts for staff, tea and coffee, pens, couch rolls, projector lamps you name it. An interesting example of an innovative service setup in the last couple of years to help practices is online mailing. Instead of printing, folding, inserting letters into envelopes and franking them yourselves, there are now a couple of companies that will do this for you remotely – securely – at a saving. We need more things like this!
These include things like accountancy fees, solicitors fees for anything the defense union doesn’t cover. Some people use HR companies to help them with CQC, H&S, etc
Assets and equipment
Equipment can be a major cost, things like medical lights, screens, desks, chairs. Some of these are written off or depreciated in the accounts over time as with any other business. Practices can vary in their attitude to equipment. Some like nice new shiny furniture and the latest kit. Some are still using stuff from the 60s as buying new costs money. This is no different to any business or shop – a refit costs money – in a shops case there is a question – will a refit make it more attractive?, bring in new customers who spend more?
In GP terms buying new chairs for the waiting room doesn’t bring in more income directly, but might make the surgery more attractive increasing number of people registering thus bringing in new income. Looking good might make people feel better. If you want to make money from things like medicals/travel clinics and treat patients that aren’t registered with you having nice facilities often helps. Also staff like working in nice environments. Having problems recruiting? Is it that your building looks like the set of tinker tailor?
Staff training costs but is obviously important – I’ve no doubt however spend varies from practice to practice and while short term gains can be made by scrimping on this long term investing in your staff is important.
Drug stocks and medical/nursing equipment are bought by the practice, though some are reimbursed. So things like speculum, ring pessaries, stitches, scalpels, dressing kits, scissors, needles, syringes and plasters, basically everything in the cupboards or drawers is bought by the practice with the exception of prescription paper which comes free from the specialty printers.
Drugs and the like given to patients in the surgery e.g. vaccines, local anesthetics etc. are bought by us but are reimbursed as personally administered items when given. The claim usually gives a small profit per item. For example we might buy Zoladex injection for X pounds and its reimbursed at X+15. Incidentally this is how chemists make some of their money, though their volumes are much much higher.
The trick is to buy cheaper than the reimbursed price and not to keep massive stocks. We had a vaccine fridge fail on us a few months ago. It had several thousand pounds of stock in it. Luckily we were insured and had met all the requirements of that policy. Although these areas are perhaps where a difference can be made in practice profits, they are small in value compared to other income sources – see next article.
IT is another special case. When I started as a GP we were given an IT budget which we were free to top up from our own money or not. In their infinite wisdom the powers that be decided to have all essential GP IT 100% reimbursed. Now this sounds like a luxury all your IT bought for you – how many companies would love that? Presumably it was done to try and make sure all practices had the same and also presumably it was felt bulk would save money. However the problem the budget is small and it goes no where. The kit on the desktop is ancient (though to be fair locally we have just had a minor refresh the first in years – there was a special fund the CSU bid for) and it only covers the absolute basics – 1 machine and printer per consulting room, no smartphones tablets, no fancy equipment.
When we had a budget we took out a loan and bought top of the line kit as we thought it would last longer and work better, now its meant to be 100% reimbursed very few practices spend any money investing in their IT, or have any expertise about IT which I think is a big mistake.
Also without insulting some good colleagues in our CSU, this has meant the people running the business aren’t the ones making the decisions on what IT is used. The CSUs serve their masters who are often politically driven not us their clients. This leads to bizarre scenarios where what might make a practice more efficient, and therefore able to deliver more health care, doesn’t get funded, but what the government wants to try despite no evidence does get implemented at great expense.
Would any large company let another company that didn’t really understand its business make all the IT decisions for it? Would it run its business on software that someone else had designed for it but hadn’t really asked it if it was how they wanted it to be? This is a downside to being 8000 independent practices. One organization wouldn’t do it this way. Again I’m hoping that my federation of 20+practices will start having more say over what it does with IT.
I write about this in my ehi articles so I won’t go into it further but you can probably tell it’s a subject I’m passionate about.
Difference between practices
Unfortunately to complicate matters and to make comparing practices difficult, practices often handle their expenses in a different way. For example some practices consider some expenses to be personal expenses and some consider them to be practice expenses. Take GMC registration. All doctors have to hold a current license to practice which costs. Some practices pay this centrally. Some make each partner pay it from their drawings. Some pay it centrally but account for it personally. Ultimately its always tax deductible and the partners end up with the same money in their pocket but if paid by the practice it can make the profits look lower than if its paid to the practitioner. There are quite a lot of things like this, mainly the subscriptions but it can add up. So when huddled in a dark corner, two GPs compare profit, they need to know what’s in the practice and what isn’t. This can impede mergers and acquisitions. When my practice merged with another our incomes weren’t as far apart as they first appeared when you took this into account.
I must also mention superann. GPs have always been allowed to be in the NHS pension scheme, though in a separate career averaged earnings scheme unlike other employees on a final salary – interestingly everyone else is moving to a GP type scheme this year.
A few years ago GPs appeared to get a big income rise and there was no doubt the way the contract was restructured meant that the total income available to a practice went up thought the new contract included doing new work for that and achieving quality markers e.g. QOF. However there was also an accounting change that made it appear much bigger that it really was. Prior to the change the employers’ part of a GPs pension (14%) was paid by the health authority direct and it never went through the GP books. This was changed so that the employers’ contribution was moved into the practice and was paid from the practice. In reality there was no change however, it allowed newspapers and politicians to claim the GP income rise was much higher than it was.
It’s probably also worth commenting that although some would say there was little evidence the GP pension scheme was having funding difficulties the employee contribution rates have gone up to a maximum of 14.5% recently. This means that when you hear a GP earns £100K, 1) this isn’t the same as an employee who thinks they earn £100K who never hears/sees the employers on costs 2) they immediately pay 27.5% of it to their pension.
And in case you think the NHS pension is amazing, we are all feeling hard done too (ok it’s still better than some – but we do pay a lot into it!) as this new scheme is a lot worse than the old one, not only are contribution rates higher, you now have to work an extra 7 years at least to get anything like the benefits you would have done under the old scheme – one of the reasons why I’ve never known so many GPs retiring and why so many younger GPs are fed up with the GPs leaders ‘in charge’ who’ve managed to secure protections for their pensions while we suffer.
Others don’t get it
It’s amazing how many people don’t understand GP finances. I’ve heard of hospitals who are trying to take over general practices struggling to get their heads around the fact the income is largely fixed and there is no limit to the demand – see next article.
I was asked in a seminar that I put on for a pharma company, why a practice had said no to switching 500 of its patients to their new drug, that they claimed was (marginally) better for the patient. They couldn’t understand why the practice didn’t leap at the opportunity to improve the care of its patients. I pointed out they were probably thinking about the cost of contacting 500 patients, bringing them in for 500 appointments, then seeing half of them again when they wanted to discuss it a second time or when the new drug caused side effects they didn’t like. And they were comparing this cost with the marginal benefit the drug would bring and that they not the NHS would be paying for it.
I suggested there are ways of getting it done. 1. Prove the difference is so big that they would feel professionally bound to change the drug as they could be criticised for not doing so – sometimes in these cases (such as when safety alerts come out) the CCG might pay for or help do the switch 2. Encourage a slow burn approach rather than a big bang where they switch people as there are seen normally rather than invite them in to minimize the extra cost. 3. Pay for an independent company to come in and do the work – assuming the regulatory people agree – this later certainly has previously been deemed ethical unlike the pharma company paying the practice direct which is considered unethical though I believe new ABPI rules are changing this.
So we have now covered most of the expenses a practice pays and got some understanding of the issues. You can see that anything that might reduce practice expenses will be attractive to a practice just like any other business. For example as stated recently there have been a couple of companies doing online franking and postage at a discount that a lot of practices have taken advantage of. Bulk buying coops are taking off and as practices work together more and more in federations this is likely to happen more. Anyone with a good idea to save practices money stands to make money.
Hopefully it’s now clear why a practice sometimes objects to doing extra unpaid work, especially work dumped on them by other NHS organizations who are trying to cut their costs. Any extra work it has to do costs money and this reduces the partner’s income.
Next time practice income.
© Dr Neil Paul 2014.
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