Serving Specialized Small Business Markets – Medical Practices

By Charles B. Wendel and Kamil Atta

As banks strive to develop a targeted approach to the SME market, one segment that appears most attractive involves serving medical practices. While the financial services requirements of medical practices and their owners differ, both components offer banks significant profit opportunities.

Banks wishing to serve this target market successfully need to understand the key factors impacting the major medical specialties and design an approach that allows them to provide value-added solutions to health professionals or their employees.

Defining the target group

Medical practice characteristics vary depending on the state, location (urban versus rural), and type of medical group:

The financial characteristics of physicians vary widely by specialization. For example, an allergist operates in a different business environment than a radiologist, with different capital needs, malpractice insurance costs, etc. Salary levels also differ significantly. Average annual salaries for different specialties range from $120-208 thousand dollars.

Beyond the type of specialization, bankers also need to assess the organization structure in which doctors work. For example, primary care physicians usually own their own practices. Conversely, certain specialists such as ER physicians and surgeons, tend to work directly for hospitals as employees

These two types of doctors will have distinctly different banking needs. The owner/operator may need a working capital line and equipment financing as well as investments. With the specialists who do not own their own practices, business lending is not a factor. Rather, investment products become the most important bank offering.

Another group, dentists have relatively high capital needs because of the cost of the office equipment. Their median base annual salary is lower, slightly less than $100,000. Most dentists are sole practitioners. Opportunities also exist with chiropractors and physical therapists.

Focusing on the owner operator

Banks focusing on the owner/operator need to understand the environment in which they operate.

Medical facilities are heavily regulated. This is particularly true of doctors who rely on federal Medicare and Medicaid or various state programs. Billing and capitation requirements for these groups are very strict while the reimbursement fees are relatively low when compared with private insurance companies.

High penetration by managed care. Increasingly, employers choose HMO schemes as their preferred method of offering health care to employees. In certain cities, HMO penetration is very high (for example, Buffalo-64 percent, Sacramento-82 percent). Overall, the trend toward HMOs is strong. Managed care companies place pressure on medical practices by offering reduced reimbursement rates and by stretching a practice’s collection of receivables.

Heavy reliance on third-party payers. Most medical practices today bill

insurance companies directly rather than requiring patients to pay more than a small co-pay amount. Therefore, effective billing practices within the doctor’s office are critical to maintaining positive cash flow. Billing has created administrative burdens, leading to the development of an entire industry related to practice management. The newly created industry manages billing and administrative functions of the practice for a fee that is usually a percentage of gross sales.

Negative cash flow characteristics . Reliance on third party payors (including HMO and government programs) has lengthened collection times for receivables. This is clearly reflected on the practice’s income statement.

Reliance on circle of influence. Banking decisions are often not made by the doctor him or herself. Oftentimes, an internal office manager, external practice manager, and/or and accountant plays a key role in determining the choice of lender or investment advisor. A banker calling on this target group needs to diagnose whom the key influencers are and develop an approach for marketing to each of them.

Continuing professional development has high priority and affiliations with professional associations tend to be stronger than with other professions. National, state and regional professional organizations represent the interests of medical professionals, provide continuing education, serve as professional networks, and create standards of professional conduct.

Product requirements

While some significant differences exist across practices, bankers need to position their products with the unique needs of doctors in mind.

Transaction products. Virtually all doctors will require a DDA account. Because of their sensitivity to cash flow, sweep account are particularly attractive to this segment. Doctors also require merchant accounts to handle co-pays.

Credit products. Credit requirements are tied to near-term cash flow as well as long-term capital requirements. Overdraft or revolvers are important to many practices; equipment leasing is regularly employed. For those practices involved in expansion by acquisition, longer terms loan needs are high.

Investment products. Tax consulting and retirement planning are important to this group as well as many other professionals. One critical difference involves the degree to which personal and business finances are meshed together. While many small businesses view their business and personal requirements as interlinked, doctors are particularly prone to do so.

Insurance products. All of us are aware of the necessity for doctors to maintain a malpractice policy. The cost of these policies varies dramatically. For example, an allergist operating in Albany may pay only $2,000 in annual premiums; an OB/GYN specialist in New York City may pay closer to $85,000 for similar coverage.

A bank’s ability to offer insurance products to this market may be limited by the established position of specialty insurers as well as an unclear value proposition from a bank in this product area.

Other products. Various advisory opportunities exist for a bank that has a strong reputation with the medical community.

Developing a competitive approach

The transaction, credit, and investment requirements of doctors make this a particularly attractive segment for banks. Success with this group requires selectivity in targeting and in the products offered.

All doctors are not created equal. Segmentation and understanding the specific environment in which doctors operate allows banks to focus on high priority accounts.

Sell to and through intermediaries. While it is difficult for bankers to set up meetings with doctors, this problem may be largely irrelevant to a banker’s success.

Break the organizational silos. Within many banks, an arbitrary divide exists between the commercial area and the branch or private banking areas. Doctors and their advisors will react favorably to a suite of products that appears tailored to their joined business and personal needs.

Determine the value proposition. While listed last, this may be the first step to success with medical practices. Bank management needs to determine what the nature of their offer is, in effect, why a doctor should deal with them rather than their many other choices. Making this proposition as concrete as possible and ensuring that the bank can deliver on it will provide internal direction and can result in external reputation building.