Cost Sharing Partnerships
Practicing in a dental partnership can be a great experience or it can be a nightmare. As a brokerage, we deal with Equity Partnerships and Cost Sharing Partnerships all the time and I would say that, on average, dentists who have been in Cost-Sharing Partnerships would be split 50/50 into the positive and negative aspects of the arrangement. Interestingly enough there are actually some systemic reasons why Cost Sharing Partnerships have such a bad track record and unfortunately, many of the partnership traps are well disguised and not particularly obvious. In this particular blog, we are going to explore the pros and cons of a Cost Sharing Partnership.
To begin with, you need to understand the differences between the two primary types of partnerships – Equity and Cost Sharing.
An Equity Partnership is one where two or more individuals are owners of a single business entity, usually an unincorporated practice. This is most commonly seen as two or more DPC’s (Dentistry Professional Corporations) entering into cost-sharing arrangements. The profit from the practice is divided on some pre-determined basis between the partners, and what is good for one is usually good for all. A new patient can see any of the partners and because the revenue (and expenses) from that patient goes into one pot or pool, it doesn’t matter to the partners who that new patient sees. The profit from that patient is divided between the partners.
Cost Sharing Partnerships are quite different and to most, sound like they should be easy and preferable to an Equity Partnership. Cost Sharing Partnerships are such that each partner has their own separate practice which shares the facilities and most of the common costs. The key here is that each partner is the sole owner of their own practice and only contributes some of their revenue to pay for their use of the facility within which the practices are located, as well the use of equipment therein. What is split in a Cost Sharing Partnership is only some of the expenses but none of the revenue. While this sounds good in theory, it is actually the main source of the problem. For example, take the situation where a new patient is directed to Partner A, 100% of the benefit from that new patient goes to Partner A, and 0% to Partner B.
Cost-sharing partners, barring a detailed agreement otherwise, can operate their practice’s as they see fit. As a result, what started out as two colleagues with similar philosophies and practicing styles, often ends up as two dentists with two very different practice philosophies and/or operating styles. People’s attitudes change over time and there is no implicit requirement for Cost Sharing Partners to agree on any changes they may want to make to their practice or their style of practicing. As a result, one partner’s practice may end up seriously conflicting with the other partner’s practice. As an example, a number of years ago we were approached by a dentist in a cost-sharing partnership that had started out as a high-end, well-respected office. For whatever reason, one of the partners fell on difficult times and his practice was languishing. In order to fix this problem, he decided that he would substantially discount all of his fees. The difficulty for his partner was that they had patients who were members of the same family so the discrepancy in fees began to seriously affect the non-discounter. Over a short period of time, this schism ruined both the practices and the personal relationship between the two partners.
One time we were recommending that two Cost Sharing Partners consider forming a true Equity Partnership. Privately, one of the partners shared with us that he had concerns about the way his partner handled money and he was worried that forming an Equity Partnership could expose him to significant financial risk. In reality, exactly the opposite was true. In an Equity Partnership, the partners have to agree before they make any material practice-related decisions. Typically, both have to sign all the cheques and generally agree on any significant procedural changes within the office. In fact, the best way to control this partnership was to disband the old Cost Sharing Arrangement and form an Equity Partnership which, in the end, they did.
Any partnerships can be tricky and if they are not properly put together in the beginning, they can lead to very significant problems down the road. If you would like to talk to Derek about how to make a partnership work for you, and not against you, please connect with Derek Hill at firstname.lastname@example.org.