GP Practice Finance

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• GP Practice Finance Tax
• Neil Morrison
• Director of Medical Services
• 3rd February 2009

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Neil Morrison

• Director of Business Services at Tenon
• Currently acting for 27 GP Practices in Tayside
  and Fife and many GP locums
• Working with GPs for 16 years
• Member of AISMA
• Contributor to Medical Press and Financial
  Seminars

3
Agenda

• The basics of accounts
• Tax
• Capital accounts
• Superannuation Seniority
• Improving practice profits
• GP Finances now the future

4
Accounting in General Practice

• Medical Practices typically keep their books in
  one of the following ways
• Computer package
• Iris (McLean McNicoll)
• SAGE
• Quickbooks
• Quicken
• Manual Cashbooks

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Accounting in General Practice

• Each has its own features
• Manual Cashbooks simple to keep hard to get
  reports
• Iris software electronic cashbook
• Quicken Software if you must Quickbooks is
  better
• Quickbooks software easy data entry and
  reporting
• SAGE Software better than Quickbooks for VAT
  reporting

6
Profit and Loss accounts and Balance Sheets

• The two terms are not synonymous, each has its
  own features
• A Profit and Loss account is prepared for a
  period, e.g.
• the year ended 31/3/09 (i.e. 1/4/08 to 31/3/09)
• A Balance Sheet is prepared as at a specific
  date, e.g.
• as at 31 March 2009
• A Balance Sheet drawn up on one day can look
  quite different to one drawn up a day later

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Accruals Basis
If accounts are to accurately reflect the profits
earned by a practice they must reflect Income
earned and Costs incurred for the period in
question, not merely amounts received and
paid. Accounts prepared from purely Amounts
Received and Amounts Paid are said to to prepared
on the Cash Basis. Accounts which reflect
amounts owed to and by the practice are prepared
on the Accruals Basis. GPs accounts should
always be prepared on the accruals basis
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Accruals Basis

• There are several common adjustments that always
  need to be made to reflect the accruals basis of
  accounting
• Amounts owed by the Practice
• Creditors - amounts invoiced but not yet paid
• Accruals - liability incurred but no invoice yet
  raised
• Amounts owed to the Practice
• Debtors amounts owed to the practice for work
  done
• Prepayments amounts paid by the practice which
  relate to future accounting periods

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Accruals Basis

• There are a couple of other adjustments that need
  to be made to reflect the accruals basis of
  accounting
• Depreciation
• Writes fixed assets off over their expected
  useful life
• Stock valuation adjustments

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Depreciation

• Tangible Assets reduce in value (Depreciate)
  over their expected useful life. The rate at
  which they reduce is dependent on the nature of
  the asset. The main factors affecting
  depreciation are
• Usage
• Technical Obsolescence
• Age
• Assets would normally be grouped by type and
  depreciated as a class e.g Motor vehicles,
  Computer equipment, Buildings, Fixtures and
  Fittings, Equipment

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Depreciation
The calculation of depreciation seeks to reduce
an asset in value over its life such that at the
end of its expected useful life it is written
down to its expected residual value. There are
two common ways of calculating depreciation
Straight Line and Reducing Balance
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Depreciation

• Depreciation is calculated on the cost to the
  Practice of the asset. Any contributions from
  third parties, need to be deducted from the
  purchase price to arrive at a true cost.
• Improvement grants
• Drug incentive payments
• Computer reimbursements
• Donations from patients etc

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Depreciation
Straight Line depreciation will write an asset
off to a zero value. A reducing balance basis
will never write an asset off totally. Typical
rates are Computers 33 straight
line Cars 25 reducing balance Fixtures and
fittings 15 straight line Buildings not
usually depreciated
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Book-keeping to Final Accounts
The process that takes a Practices records and
ends up with a final set of accounts is, in
essence, fairly straightforward. The first step
is to ensure that all the income and expenditure
is complete and has been correctly analysed.
(sounds simple but can take a tremendous amount
of work!) The reconciliation of the various Bank
accounts is of paramount importance. If they
have been reconciled then at least the income and
expenditure is complete (it might not be analysed
correctly, but at least it is in there somewhere!)
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Book-keeping to Final Accounts

• Once all the transactions are in the right place
  it is time to make the necessary adjustments to
  move from the Cash Basis to the Accruals Basis
• Depreciation
• Debtors
• Prepayments
• Creditors
• Accruals
• Stock adjustments
• These transactions would be entered dated the
  last day of the financial year.

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Partnership Profit Shares

• While it is not uncommon for partners profit
  shares to remain unchanged for a number of years,
  changes do happen from time to time (eg new
  partner moving to parity).
• The arrangements for sharing income can vary
  between practices
• Share absolutely everything
• Partners keep their Seniority and share the rest
• Keep Seniority, Private income and share the rest

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Partnership Profit Shares

• There is no right or wrong method.
• The most important points are
• There must be a clear understanding of how
  profits are shared
• Partners must avoid double counting (or failing
  to count!) income such as Private income or Out
  of Hours income

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Taxation
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Tax Reserves

• Again there is no right or wrong method.
• There are two basic options
• Partners make drawings gross and pay their own
  tax bills (otherwise often known as the lets
  panic and scramble around for the money when the
  tax bill arrives method)
• The Practice holds back a percentage of the
  partners income and pays the tax bill when it
  arrives (otherwise known as the trust a partner
  with their tax money you must be joking method)

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Tax Reserves
If the practice holds on to the partners tax
money it is probably easiest to open up a
separate bank or building society for each
partner and hold their money separately it
makes it much easier to keep track of how much
each one has set aside. The problem comes if
partners have private work which does not go
through the practice. The tax still has to be
paid on that although the practice will probably
not have made an adequate deduction from the
partners drawings. Paying the tax from the
practice in these circumstances will result in
the partner drawing more than they are entitled
to.
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Tax Payments
Tax liabilities are calculated by reference to
tax years years ended 5th April. The tax
liability for any tax year is paid in two or
three parts 1st payment on the 31st January IN
the tax year 2nd payment on the 31st July in the
FOLLOWING tax year 3rd and final payment 31st
January the FOLLOWING tax year Tax year ended
31st March 2008 1st Payment made 31st January
2008 2nd Payment made 31st July 2008 3rd and
final payment 31st January 2009
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Tax Payments
Tax liability for year to 5th April 2008 will not
be quantified until accounts are completed and
then partners Tax Returns are completed and
submitted probably Autumn 2008 or
thereabouts The first two tax payments (Payments
on Account) are therefore each 50 of the
partners previous years tax liability. The third
payment (Balancing Payment) is therefore for any
additional tax due usually as a result of
profits increasing
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Tax Payments
New partner 1 April 2003, previously a registrar,
first year below parity. Partners profits and
tax liabilities Profit Tax YE 31/3/04
75,000 23,000 YE 31/3/05 115,000 38,000 YE
31/3/06 120,000 40,000 Payments
POA Balancing Payment For 2003/04 31/1/04
nil 31/7/04 nil
31/1/05 23,000 For 2004/5 31/1/05 11
,500 31/7/05 11,500 31/1/06 15,0
00
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Tax Payments
New partner 1 April 2003, previously a registrar,
first year below parity. Partners profits and tax
liabilities Profit Tax YE 31/3/04
75,000 23,000 YE 31/3/05 115,000 38,000 YE
31/3/06 120,000 40,000 Payments
POA Balancing Payment For 2005/06 31/1/06 19,
000 31/7/06 19,000 31/1/07
2,000
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Tax Payments
The overall tax payment profile is
therefore 31/1/04 nil
31/7/04 nil 31/1/05 34,500
31/7/05 11,500 31/1/06 34,000
31/7/06 19,000 31/1/07 22,000

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Tax Payments
In times of increasing profits the 31st January
payment will normally be higher than the previous
31st July payment. This is a particular problem
for partners working their way up to parity.
Their income will increase as their profit share
increases, but the corresponding increase in
their tax bill will follow on a year or so later!
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Capital accounts
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Capital Accounts

• These cause more confusion than anything else in
  GPs accounts!
• First thing to remember --- its real money!

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Capital Accounts

• Partners capital is required to fund the
  business
• Fixtures, fittings and equipment need paying for
• You need cash in the bank to pay the bills
• The NHS dont pay you everything they owe
  immediately
• Achievement payment
• Target payments
• Drug reimbursements

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Capital Accounts

• Partners capital should be provided in line with
  number of sessions
• Even if a partner does not buy into the property
  they still need to provide working capital
• Capital accounts will move up and down as
  partners profit sharing ratios change
• Most practices will use the balance of QOF money
  to even out any imbalances in the capital
  accounts of the most recently completed accounts

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Superannuation

• New system from 1 April 2004
• GPs now responsible for 5 - 8.5 (previously 6)
  employees contributions AND 14 employers
  contributions
• Payments on account deducted monthly by HB
• Annual certificates to be submitted in February
  each year
• Balancing payment of superannuation liability
  deducted in March each year (for previous year
  and current year)

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New Employee Superannuation rates

• Pre 1st April 2008
• Up to 19,682
• 19,683 to 65,002
• 65,003 to 102,499
• Above 102,500
• Calculated on a FTE equivalent
• Rate applies to whole amount

• Pre 1st April 2008/Post 1st April
• 6 5
• 6 6.5
• 6 7.5
• 6 8.5

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Seniority payments

• No longer based on working commitment
• Now governed by level of income compared with the
  National Average
• Less than 1/3rd average income, no Seniority
• Between 1/3rd and 2/3rds , 60 of Seniority
• Over 2/3rds of average income then full Seniority
• For year to 31 March 2006 they worked on an
  average of 72,000, so
• Less than 24,000, no Seniority
• 24,000 to 48,000, 60 of Seniority
• Over 48,000, then full Seniority

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Seniority payments

• If when the actual figures are eventually known a
  GPs income is less than 2/3rds of the true
  average but they have been paid full seniority
  then the PCT will claw back the excess.
  Conversely any underpayment will be paid to the
  GP.

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Improving practice profits
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NHS Workload

• Only do work that you are paid to do, and YOU are
  the best person to do.
• Can patients be seen by less expensive members of
  your team?
• Are you being firm enough when it comes to
  visiting patients?
• Are you maximising the use of your premises?
• Are you charging appropriate rates for medical
  reports?

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NHS Premises

• How efficiently do you use your premises?
• Are consulting rooms used for anything apart from
  seeing patients?
• What are the actual consultation hours?
• 9.00 to 11.00 then 4.00 to 6.00?
• Maybe a longer period might be possible?
• Doctors can use office areas for paperwork and
  other admin tasks
• Make sure you maximise the use of the premises.

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Patient list size

• Average list proportions
• Under 65 81.4
• 65 to 74 9.5
• 75 and over 9.1
• Optimum list size per FTE
• Young patient population 2,300
• Middle aged population 2,100
• Slightly elderly population 1,850
• Very elderly population 1,700

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Patient list size

• An aggressive approach to skill mixing can allow
  a practice to cope with much higher lists per FTE
• Over 2/3rds of your income is effectively based
  on patient numbers

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Income - areas to watch

• NHS
• Global Sum/PMS Baseline list size changes
• Superannuation correct deductions
• Enhanced Services correct recording
• Childhood Imms Pre School boosters -
  appointments
• Reimbursements formal record
• Salaried appointments last increase ?
• Seniority length of service correct?

• Wont the Health Board get these payments
  right?

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Income - areas to watch

• Private and Non Core NHS
• Salaried appointments commercial rate ?
• Teaching
• Room Rental, Nursing home fees etc.
• Insurance and Solicitors requests payment pre
  release of information ?
• Certificate fees review charges regularly

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Regularly review your income

• Review where you are financially on a monthly
  basis
• Compare totals for income by type with the
  previous year
• For the month and the year to date
• Whats gone up, whats gone down?
• Can you do anything to improve the situation?
• How will your cash flow be affected?
• What is happening to the bank balance?
• How will drawings be affected?

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Minimising Expenses

• Typically over 50 of your practice expenditure
  is on staff
• Salaried doctors
• Flexible career scheme doctors
• Retainer/Returner scheme doctors
• Health care assistants
• Nurse practitioners
• Nurses
• Management and admin staff
• THIS is the area where most of your management
  time and effort needs to be focused as the
  potential for savings are greatest.

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Staff costs

• The practice needs a DETAILED staff budget
  prepared at the start of the year
• Group costs by staff type
• Plan number of hours and rates of pay
• Calculate expected cost for each month of the
  coming year
• Compare actual costs with the plan each month
  update the budget if necessary

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Medical expenses

• These comprise around 20 of a typical
  practices costs
• Locum costs
• Out of Hours Opt-out costs
• Professional subs and MDU/MPS
• LMC levies
• Instruments and consumables

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Medical expenses

• Locum costs vary tremendously from practice to
  practice
• Unless you are
• A single handed GP
• Covering for maternity or sickness
• Operating from more than one surgery
• Locum costs are to some extent a quality of life
  choice. Many practices from 4 partners upwards,
  in both rural and urban areas, only incur a small
  locum cost, if one at all.

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Premises costs

• Probably amounts to 10 or so of your costs
• Rent
• Rates and water
• Insurance obtain comparable quotes
• Repairs Maintenance
• Cleaning own or contract in?

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Admin costs

• Telephone
• Regularly review suppliers prices, attempt to
  minimise cost for calls to mobiles
• Printing, postage, stationery
• Look hard at postage costs and consider alternate
  ways of communicating with patients
• Email?

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Admin costs

• Accountancy
• Are you getting the right, proactive, advice?
• Use a specialist medical accountant
• Minimise your costs by ensuring that your records
  are well maintained.
• Consider using a higher level accounting package
  which provides you with more management
  information, and reduces the accountants work
• Make sure you compare your performance with
  appropriate regional averages
• Where are you doing well, and where is there room
  for improvement?

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Finance charges

• Is your overall borrowing structured in the best
  way?
• Do you have equity in the practice which could be
  refinanced?
• Result would be reducing domestic borrowing where
  no tax relief is available on the interest and
  replacing it with practice borrowing where the
  interest paid is tax deductible at your top rate
  (40)
• Great care needs to be taken when doing this!

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Maximising Income, minimising costs in your GP
practice

• Make the best use of your time its your most
  valuable resource
• Focus on controlling your major costs first
• Make sure you actually get paid for everything
  you do

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GP Finances Now and the future
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NHS Profits

• No uplifts in 2007/08 nor 2008/09.
• Current proposal for 2009/10 of future increases
  in GPs pay based on mix of the main funding
  streams
• Global Sum 7
• Correction Factor 2
• QOF 5
• Enhanced Services 5
• Thus, future increases will be dished out in
  nineteenths.
• As long as the award is not zero, all practices
  will get a pay rise.
• Negotiators are working with NHS Employers to see
  how to cut practices reliance on MPIG over a
  number of years without reducing practice funding
• QOF remaining at 1,000 points but prevalence
  arrangements being phased out over 2 financial
  years
• Seniority pay talks are continuing

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Prognosis for NHS Profits

• Practice profits are likely to at best remain at
  same level, but more likely, decrease again in
  current year.
• Practices need to look very hard at how they
  deliver services
• Changes to skill mix have been talked about for
  years, and in many practices changes have already
  been introduced. In order to improve profits,
  further changes may be necessary.

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Neil Morrison, CA Director of Medical Services,
Tenon 5 King Place, Perth, PH2 8AA Tel 01738
636069 Email neil.morrison_at_tenongroup.com,