By Chad Fleming, OD, FAAO
March 7, 2018
Your practice may have you as its sole leader, which is sufficient in the near-term, and when you are not in challenging times, but what about as you grow, and operations become more complex and demanding?
My five-OD practice has instituted a corporate-organizational structure with a CEO, CFO and board of directors, to keep us on the right track, and prepare for contingencies.
The Bigger, the More Complex
An organizational structure is less important with 1-2 owner/managing doctors. The organizational structure becomes increasingly important as the number of owners/managing doctors increases. When more than two individuals are making decisions for the practice, it becomes more difficult to make sure everyone is a part of the decision making, and all owners feel they have weighed in. The organizational structure allows for decision making to take place without the need for everyone to weigh in on all decisions, and it creates a structure for larger decisions (cost, personnel impact, future and current risk).
The organizational structure also is meant to give the newer owners a piece of weight in ownership where they feel their opinion matters. They need to be given this to not only help create buy-in, but as a majority-owner, you want the next generation to be groomed for when they are the executive team. There is no greater compliment to an owner than when they transition ownership, and the practice continues with great patient care, and no one outside the practice knows there was a transition. If we are truly concerned about what is best for the patient then we as majority owners will work to ensure that the practice is passed to the next generation so that they grow beyond where we have taken it to.
It Takes a Community of Business Minds
We, along with other small, growing practices, are experiencing the evolution of the small independent practice. Due to increasing pressures from our profession, such as quality assurance, HIPAA, pricing pressures on COGS and low reimbursements, it takes a community of business minds to successfully navigate the future. Also, we have many younger ODs who have not given up the dream to own a practice; they just can’t, or don’t want to, borrow money on a new startup rather than an established, successful business. The organizational structure allows younger ODs to buy in as a percentage partner of the practice, and sit on the board to make decisions.
Balance Needs of Majority Owners & New Associates
The first step is to layout the organizational structure in a way that is fair to the majority holders of the company (all those with 25 percent, or greater ownership) and the newer ODs buying in, minority owners. This includes an executive board of CEO and CFO, and may include some or all of the possible executives. Then the board is made up of the shareholders. There should be defined roles for each member of the executive team, along with the responsibility of the board. For example, all purchases, or loans, greater than $2,000 may have to be approved by a two-thirds majority of the board.
Create a Financial Model
The financial structure should include three revenue streams for any doctor within the practice. The first stream would be compensation for working as a doctor in the clinic. This is considered “clinical compensation,” and would be a percentage of net collections of that particular doctor.
The second revenue stream is “executive management,” meaning the roles of chief executive officer, chief financial officer and chief operating officer. These are the upper-most roles of managing the practice. Responsibilities include carrying out the wishes of the board and representing the practice in merger and acquisitions, insurance negotiations, vendor negotiating and large-ticket purchases. This would be weighted at 15 percent of the remaining dollars after the doctors have been paid. The “executive management” would divide the 15 percent as a second revenue stream for those individuals who carry this load.
In other words, 23 percent of revenues would be paid to each doctor according to their individual production, then the remaining dollars for the month would be multiplied by .15, and that would go to pay “executive management,” and then the remaining dollars would be “owner profits” (i.e. – if the “optometric net” is 30 percent then 23 percent would go to pay clinic work of doctors, the remaining 8 percent would be multiplied by .15 (15 percent), which is for “executive management,” and the remaining .85 (85 percent) of the 8 percent would be “owner profits”).
Doctors Participate in Practice Board of Directors
The compensation for board meetings is based on the dollars earned from the third revenue stream of “owner profits.” Each board member has responsibilities within the company for overseeing areas of the office such as clinic, facilities, IT and optical. This should be weighted towards ownership, and transitioned to the lower-percent owners once they are ready to increase ownership in the company. There is an expected weight of running the practice based on ownership and “executive management.”
The board is composed of all owners in the practice, and decisions should be based on ownership. If there is a tie in voting, then the majority owners agreeing together could break the tie. However, the goal is to give everyone an equal vote on the board with the idea of making good decisions as a team. This is dependent on the leadership, and requires an executive team that is astute in leadership and team building, otherwise you have a glorified monarchy.
Practice Managers Debrief, But Aren’t Part of Board
The organizational structure does include practice managers, but they are not be a part of the board. The managers meet with the CEO or board members for direction and management meetings, and then the CEO, or board member, brings a summary of those meetings to the board for decision making when necessary.
Define Roles of Executives
The CEO is tasked to carry out the direction of the board while managing the practice at the highest level. They are the big thinkers, and see all parts of the system working together. They are responsible for identifying the areas of the practice that are “lagging” behind and need more attention. The CEO is also going to manage the practice’s relationships with vendors, referrals and partnerships. This includes meetings with referring doctors and doctors that our practice refers to. This also includes coaching the doctors and managers to lead them. There are many other expectations of the position. Basically, the CEO navigates the direction of the ship.
The CFO is making sure the ship doesn’t sink by proposing budgets, following and reporting budgets, verifying expenses and monitoring the accounting. In other words, the CFO has oversight of all financial matters.
The COO is operations-related, and monitors all systems and processes to verify all is running efficiently. This includes day-to-day operations.
Balance Corporate & Practice Responsibilities
We recommend that a minority holder of the company plan a half day for administrative duties, while a majority owner is going to schedule at least one day of the week for administrative duties. If a doctor does not want to cut back their production during the week then the remaining doctors are relieved of the “guilt” felt when the doctor, who does not want to take time away from clinic to do administrative duties, is working into the weekend.
There is a balance that we would like to see our owner/doctors take as to not be maximizing clinic time and pushing administrative time into the weekend. What we find is that if you spend time working on the practice instead of in it, the practice becomes more efficient, and you don’t have to see as many patients to make the same amount of money.