Private Practice - Income and Expenses

By Martin Murray

There is no doubt that the structure of private practice will change over the next 5 years.
The NHS reforms coupled with new contracts for Consultants and GPs’ will see new players coming into both primary and secondary care. Foreign companies have been invited to established Treatment Centres for elective surgery and the Government has lifted the ban on the sale of goodwill for certain ‘Additional Services’ normally provided by General Practitioners.

How will these changes affect the private practices of Consultants? To answer this one needs to look at existing private practices and how they are established and maintained.

The traditional private practice life cycle of a Consultant

Normally after appointment as a Consultant within the NHS a Consultant will seek admitting rights to a number of private hospitals. The hospitals often provide facilities at reduced rates to begin with and assist in promoting the new Consultant.

The Consultant would for the first few months suffer a lag period before referrals build up. This lag period is longer for a Consultant taking up a brand new post as opposed to replacing a retired Consultant.

Over the next three to five years the Consultant will see a substantial rise in private income with only slight blip say in the fourth year (the author has experience of about 20% of Consultants suffering this blip). Under the old NHS contract and depending on the NHS Trust the 10% rule would be applied in say the third year.

Thereafter, most consultants have a relatively stable private practice for the next couple of decades. Many are fearful that the arrival of a new consultant on the scene will affect their practice but this is a perceived rather than an actual threat and rarely materialises.

Retirement from the NHS will eventually come around and in most circumstances the private practice is all but gone within a couple of years. All that is left is medico-legal reports but it is important even here that the consultant retains professional credibility.

The future private practice life cycle of a Consultant

The life cycle will change and for many reasons.

Firstly, more and more NHS Trusts are seeking to provide private facilities. Foundation Hospitals will be the leaders and will exert their power. However, they may be limited to the current level of private practice that they perform. Private hospitals will see margins decrease but volume increase. Contracting with the NHS will increase.

Second, the change in Consultant contract may make it harder for new Consultants to establish themselves in private practice. The financial penalty of the 10% rule will be replaced by a greater contractual commitment to the NHS coupled with an increased salary. Just how tough the management will be about private practice time for its consultants remains an unanswered question.

Finally, the traditional private practice structure will encompass not only the traditional self employed practitioner but also more practitioners employed by commercial entities and combinations of formal and informal group structures, ‘chambers’.

Changes in primary care have resulted in most new GPs’ becoming employed as opposed to the traditional self-employed practitioner within a partnership.

How should Consultants react to the above changes? Let us review income and expenditure streams.

Income

To begin with it must be remembered that there are simply not enough Consultants. Demand exceeds supply. Changes may occur in Consultant numbers and new breeds of generalists may eventually be spawned by the changes in post-graduate education but these will take some years to come to fruition.

Existing Consultants should review their different income streams. Traditionally this will be made up of the NHS salary, insured patients, uninsured patients and medical reports. The stability of the streams is important with the NHS salary being the most stable.

Pressure on fees for insured and uninsured patients are dictated by the insurers and these will be squeezed further. However, one are which is often ignored but provides flexibility in charging is consultation charges. These need to be reviewed at least annually. Most Consultants charge woefully low amounts for follow-ups.

The fees for medical reports are, as for follow-up consultations, inappropriately charged. Love or hate them reports, next to the NHS salary, are a stable source of income that can continue unabated after retirement from the NHS. In fact after retirement there is greater opportunity to increase income from report writing.

The amount earned from the above streams can vary. An increase in the NHS salary may be due to Waiting List Initiatives. These having a corresponding knock on downward effect on private income. Thus, overall earnings may be the same if not greater and this is often not appreciated.

The level of income earned by a Consultant is also dependent on his/her needs. In the early years these will be greater as the mortgage has to be paid and the children educated. Older Consultants may have a tendency to turn down sources of work that more junior colleagues are willing to undertake. This will have a detrimental effect on private income earned but acceptable in respect of the Consultant’s financial needs and priorities.

In the future the mix of income streams may alter and as such a Consultant needs to retain flexibility. The formation of group structures may provide a continued source of income long after retirement from the NHS as referrals are made to the group as opposed to the individual.

Expenditure

Expenditure can be categorised as either being variable or non-variable. Examples of the former would include self-employed secretary, defence union premiums, session charges at private hospitals and consumables. Non-variable expenses include amongst others premises cost (where property is owned or leased), certain equipment and employed secretary.

Irrespective of level of income non-variable costs need to be met. The loan repayment or lease premium on the property has to be paid no matter what income has been generated that month.

Variable expenses increase as income increases but not necessarily at the same percentage rate. Normally, the percentage rise is lower than that for income otherwise it would not be financially viable to take on additional work.

The type of specialty is important with, for example, anaesthetists and physicians’ variable and non-variable costs lower than for surgical specialties. In addition, location can also have a large bearing on costs. This is probably most noticeable for plastic surgeons in London compared to their colleagues in the rest of UK regional cities. The non-variable costs are much greater in London.

The most important factor for a Consultant to consider in respect of costs is that unlike other professions his/her private practice is wholly dependent on the skills possessed and as such expenditure is much lower than for other professions. Accountants and solicitors would incur salary costs of anything between 40 to 50 % of gross income, which coupled with other costs such as premises, leave much smaller margins compared to Consultants.

Certain tax benefits may also determine a Consultant cost base. Salary and pension to a spouse is attractive from a tax point of view. The acquisition of a property for private practice also carries with it certain tax advantages.

Consultants who practice from home or from private ‘Rooms’ will generally have higher costs than their colleague who use private hospital facilities. New Consultants generally prefer private hospital facilities.

Even though non-variable costs can be high for certain Consultants they can be extinguished relatively fast by say the sale of a property. Staffing issues are not normally an issue as this cost is a much smaller percentage of gross income compared to other professions.

Summary

The income streams of a Consultant will change over the next 5 years. There will be downward pressures on Consultants earnings. However, as demand exceeds supply and will for the foreseeable future, overall earnings should remain the same if not greater.

The overall cost base for Consultants is lower than for most other professions and more importantly flexible. This will be vital in the changing private practice market.

_______________________________________________________

Martin Murray of Sandison Easson can be contacted on 01625 527 351.
Their web site is www.sandisoneasson.com