AAOS Bulletin - August, 2005

Six steps to effective group practice governance

Payoff is improved profitability, decreased liability

By Steven E. Fisher, MBA

The need for effective governance in medical groups, even small ones, is growing every year, due to changing federal and state regulations, continuing cuts in reimbursement and double-digit cost increases. Good governance, although it cannot counteract the effect of these external factors, does permit orthopaedic practices to make the most of what they have.

According to D. Kay Kirkpatrick, MD, of Resurgens Orthopaedics in Atlanta, “One of the consequences of change has been that groups have had to develop increased business tools. In many cases, groups have merged, becoming larger organizations. In this environment, strong physician leadership and an effective board structure are critical to success in private practice.”

In practices with effective governance, the principals pro-actively engage in decision-making on important issue, accept responsibility for their decisions and provide support to administrative staff in their day-to-day activities.

The six steps involved in the development of effective governance are:

• Draft a mission statement.

• Create and maintain a legal corporate structure that meets practice principals’ needs.

• Establish good professional relations.

• Engage in strategic and tactical planning.

• Develop operating and capital budgets.

• Undertake periodic reviews.

Each step is discussed briefly below. More detailed information can be found in the online Practice Management Center.

Mission statement

Many groups create a mission statement, put it in a drawer and forget it. But the development and active implementation of a mission statement is probably the most important activity that practice principals can undertake.

A mission statement should answer the following basic questions: Who are we and whom do we wish to serve? What services will we offer? Where will we offer them? When will we be open for business and/or available to our patients? Why does the practice exist? And finally, how will we approach the art and science of patient care?

The mission statement should be reviewed every two years or so—more frequently if there is a significant change in the number and/or composition of physicians.

Corporate structure

From a legal standpoint, physicians can organize their practices in a variety of ways, ranging from professional corporations or limited liability companies to simple or complex partnerships. Obviously, no single form of organization works for all doctors in all practice environments and states. Each form has its pros and cons. As a practice grows and develops, it may need to change its legal form.

It is also important for physicians to consult qualified legal counsel on a periodic basis about their practice organization. At a minimum, state laws may change that may make one or another legal form of organization more or less beneficial.

Whatever legal form of organization is adopted, the documents establishing it should cover both the basics—such as the organization’s name and main office location—and the rules the practice doctors have formally agreed to live by. These include the number of officers, officers’ duties and the limits of their authority, the timing of officer meetings, the definition of a quorum, rules on the approval of contracts and the protocol for financial reviews. These documents should be periodically reviewed and updated. If they are outdated or ignored, physician discord and costly litigation may result.

Dr. Kirkpatrick’s group merged with eight other practices in 1999. “The foresight of the leaders of the group at the time of the merger gave us a strong framework for growth and continued success,” he said. As a result, the practice has been able to expand to 80 physicians in multiple locations with ancillary lines of business.

The relationships between individual doctors and the practice are usually described by an employment agreement or, in the case of a partnership, a joinder agreement. These contracts must also be very specific so they cover all eventualities and require the doctor to adhere to certain standards of physician behavior. If the contract relates to a new doctor who is not yet a principal, but who expects to become one at some point, both a timetable and the specific criteria for becoming a principal should be specified.

Professional relations

Doctors in groups once could practice quite autonomously without affecting other doctors in the group. Increasingly, however, this is not possible. For example, under federal laws such as anti-kickback, Stark and the Health Insurance Portability and Accountability Act, everyone in a group could be punished for the transgressions of just one member. Physicians in the group need to set standards for their own behavior (toward staff, patients and others) and standards for patient care (behavior, documentation).

Good professional relations also depend on the agreements that are reached by members of the practice for governance structure, work expectations of principals, basis for and the compensation formula, basis for and the buy-in and buy-out arrangements, and the organization structure of the practice and the staff’s reporting relationships.

Each of these agreements should be a separate document and should be reviewed and updated concurrent with the review of the mission statement. Ideally, this should take place during a weekend retreat, coordinated by an outside consultant skilled in organization development.

Strategic and tactical planning

The group also must engage in strategic and tactical planning to be successful in the long run.

Strategic planning and tactical planning are not the same thing. (See sidebar.) Strategic planning looks at the long term and is “macro” in concept. Tactical planning deals with the short term and focuses on how to deal with issues on a “micro” level.

Strategic planning can best be undertaken at another weekend retreat coordinated by an outsider. Tactical planning should be done annually, during either a weekend retreat or a series of evening meetings. The participation of all physician principals, as well as the practice administrator, is critical. There is no hard and fast rule on how frequently strategic planning should be undertaken, except that it should be done on a regular basis, perhaps over a three-to-five-year cycle.

Operating and capital budgets

Based on the strategic and tactical plans, practices should develop annual capital and operating budgets. Capital budgets relate to major assets (such as the physical plant and equipment), and include the cost of the assets, the way they will be acquired, and the timetable for acquisition/depreciation. Operational budgets deal with the office’s day-to-day revenues and expenses.

Actual performance should be compared against the budget on a monthly basis. This enables the principals to identify and address operational problems (lower than expected revenues or higher than expected costs) before they become serious. In a typical orthopaedic office, five expense items account for more than 75 percent of total expenses: staff salaries, employee benefits, rent/building occupancy, professional liability insurance and medical and surgical supplies. So when reviewing expenses, focus on these areas first.

Develop capital and expense budgets for the coming year at least four months before the end of the fiscal year. Budgets should always be formally approved.

Periodic reviews

Practices regularly need to review how they function to make themselves more competitive, increase their operational efficiency and effectiveness and become more patient-friendly. Reviews can take different forms and be undertaken by different people. For example:

• It may make sense for an office to periodically hire an outsider to review the office operation, including the physicians’ professional relations. An objective third-party review can lead to significant cost savings and/or substantial improvements in operational efficiency.

• An outside accountant should conduct a formal review at regular intervals to ensure that protocols for internal control are appropriate and that accounting entries are being made correctly.

• On an ad hoc basis, staff work groups can analyze the impact of major capital expenditures, such as implementing electronic medical records, moving from one accounting/practice management system to another, or shifting from conventional radiology to digital or computed radiology.

• Teams of physicians (or doctors and employees) look at ways to improve doctor and staff productivity or enhance patient relations.

The timing of the reviews should be determined in advance so that anticipated costs can be incorporated in the budget. Results of reviews should be formally presented to the Board and any written reports should be distributed to all practice principals. Results should be taken in consideration for future planning activities and budgets.


Four benefits accrue to practices that implement good governance: improved profitability from more effective practice management; improved compliance with federal and state regulations; reduced medical liability risk; and lower turnover among both physicians and staff. In the long run, the savings, increased profits and reduced stress more than make up for the time spent in completing the six steps outlined above.

Steven E. Fisher, MBA, is manager of practice management affairs at AAOS. He is also staff liaison to the Academic Business and Practice Management Committee. He can be reached at (847) 384-4331 or sfisher@aaos.org

Learning good governance

There will be two sessions on governance at the “Orthopaedic Practice Enhancements: Expanding Patient Services” CME course, which will be held October 28, at the Sofitel Chicago O’Hare in Rosemont, Ill. For more information about the course, contact AAOS customer service at (800) 626-6726 or email custserv@aaos.org.

Information on group governance will also be presented at the 2006 Practice Management Symposium for Practicing Orthopaedic Surgeons, on March 7, 2006, prior to the AAOS 2006 Annual Meeting in New Orleans. For more information about this symposium, contact Steven Fisher at (847) 384-4331 or sfisher@aaos.org.

Differences between strategic and tactical planning


Strategic Planning

Tactical Planning

Time period under consideration:






Basis for discussion:

Mission statement

Strategic plan


“Macro” SWOT* analysis

“Micro” SWOT* analysis

Level of financial detail:

Informed estimates

Detailed quotes

Decisions reversible?

Less so

More so

Outside coordinator needed?

Yes, probably

No, probably not

Business manager present?




Weekend retreat

Retreat/evening meetings

Results documented in:

Written plan

Written plan

* Strengths, Weaknesses, Opportunities and Threats

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