The Coronavirus (Covid-19) changed the practice of psychotherapy, at least in the short run. In response to the virus, practices have added teletherapy to their service options and, as I write, are settling into new patterns. Now comes the waiting to see the next challenge. I think I know what that challenge is: managing practice finances in a crisis.
Post-Coronavirus practice finances
As part of the post-Coronavirus transition, about 1/3 of existing clients say things like, “I’ll be back in touch after this is all over.” Unfortunately, no one knows how long the limits on movement will last. Nor does anyone know whether the clients who left will come back. Some certainly will but probably not all.
Even if insurance companies pay the same reimbursement rates for teletherapy as in-the-room therapy, there will be an immediate reduction in income. Hopefully a short-term reduction.
How do we handle this? Since we cannot control how this will play out, how can we make plans to survive financially?
Financial threats versus financial glitches
I have previously written about economic problems in psychotherapy practice. I made a distinction between two types of money issues: threats and glitches. (See Practice management done right for more on threats and glitches.) Let me define my terms:
- Financial threats challenge the organization’s existence. These are downright scary. To succeed, we must address head-on. Failure here is often fatal to the organization’s life. Threats would be things like loss of key clinical staff or referral people, key insurance payers disappearing for one reason or another, or disastrously when your expenses are outpacing your income.
- Financial glitches are irritating and cause temporary inconvenience. But these do not threaten the viability of your organization. The most significant danger with glitches is that your staff may lose faith in your leadership abilities, whether the glitch is your fault or not. Examples might be computer issues that affect billing, collections, or phone calls, staff who fall behind on their responsibilities but do not let you know, or key office people leaving.
During financial crises, we must sort out whether we are facing a threat or glitch. After all, they require a different response. Let’s look at that question a little more carefully.
Why the Coronavirus is a glitch
In this situation with the Coronavirus, in my view, we face a financial glitch that will sort itself out within months no matter how long we have limited mobility. Why do I believe that the coronavirus is a financial glitch?
Most practices, at this early timeframe, are doing in-office therapy, telephone therapy, and teletherapy (sometimes called telemental health therapy through real-time video teleconferencing technology).
This range of services could change as time goes on and yet, even if in-office treatment is no longer allowed, psychotherapy will continue. And if we continue to find ways to deliver therapy, our finances will not deteriorate too severely. That will especially be true if insurance companies maintain their more flexible approach we have seen recently. If reimbursement remains close to what we have had, then our business model is not a bust.
How the Coronavirus should never be a threat
Of course, the status quo could change if we are quarantined for an extended period. If, for example, we face a year-long quarantine, ouch, will that change the equation? I think not. Even in that scenario, I think the demand for what we do will be there. Perhaps the demand for our services will be even higher. And if demand is high, we will find a way to meet that need. Consequently, our financial solvency will follow. Solvency always follows market demand.
How to deal with a short-term financial issue
All practices have weathered many economic challenges in the past. (See How mental health businesses weathered the healthcare storms.) Here are a few factors to consider.
Most private practices pay clinicians a percentage of the amount collected. This approach, called “productivity-based pay,” is the most common private practice approach. (To examine further how therapists get paid, see Calculating therapist pay in private practice and Therapist pay in private practice.)
One of the features of productivity-based pay is that when collections and income goes down, so does the payroll expense. Specifically, clinician salaries are not a fixed cost but rise and fall based on the amount collected. This feature adds resilience to the private practice business model. It spreads the financial risk between clinicians and the practice.
In contrast, were clinicians paid a salary, the salary is due no matter how much income was collected. Many businesses are facing this challenge right now. During downturns, then, the practice that pays clinicians a salary would be forced to lay people off to stay financially solvent.
Establish a Line of Credit
Most practices of a certain size will have established enough assets that banks are willing to offer a Line of Credit (LOC). Usually, a bank will base the LOC on the Accounts Receivable, that is, the money owed to you but not yet collected. Establishing a LOC is a good thing to do. It allows you to have cash at your disposal without resorting to using credit cards. The interest rates on a LOC will be much less than on credit cards.
To establish a LOC, the bank will ask for lots of financial records, both personal and company documents, and it takes time. They will want the owner to guarantee the LOC. Additionally, during times of economic recession, they may wish for the owner to sign a lien on the equity in a house or other personal assets. Banks want to come as close to a guarantee of repayment that they can. Banks representatives are always friendly people, but the underwriting department trusts no one.
Nevertheless, managing practice finances in a crisis may be partly about working with your banker to find a way through. Both you and your bank want to see your practice thrive. And especially during this time of the Coronavirus, banks will be looking for small businesses that they can support with the money they will get from the federal government.
Should you use the Line of Credit?
Most owners are quite hesitant to borrow for any reason. For some, it is a point of pride, as it should be. It is always best to have as little debt as possible. But there are times when that fiscal caution is a risker choice. Let’s consider when we might wisely use borrowed money.
So now that we have the LOC, when should we use it? The short answer is when the need is there, AND we are sure we can repay it. The mistake that owners make is to take out a loan to solve a financial THREAT. Yes, we can use the LOC for a financial GLITCH that will soon go away. Above all, it can be fatal to borrow money to solve a business problem that is threatening your future.
We should only take out a loan when we have a plan on how to repay it. And developing the repayment plan cannot be based on wishful thinking. It should take into account the worst-case scenarios. Optimism is our enemy here.
Examples of practice finances in a crisis
It is always easier to borrow than it is to repay. In most cases, we borrow in large chunks and then repay in monthly incremental payments. In my practice, we had several times we borrowed in crisis. Some of the crises were self-induced. Some were due to events we could not control.
Building out a new space
We borrowed to build out new spaces. Typically we had some reserves we could tap into, and then expenses were more substantial than we thought they would be. Buildouts are one of the more sensible places to borrow because additional space increases your capacity for more clinical work. (See more on decisions about space see: 8 steps to adding office space in psychotherapy practices and Rent, lease, or purchase psychotherapy office space?)
Difficult cash-flow months
January and February are always difficult cash-flow months in our business. As time went on, we got better at building up a reserve to get us through. But in the early years, we had times when we borrowed from the LOC to get us through. Borrowing was better than missing a payroll deadline.
There are two reasons why the early part of the year is tough. Firstly, we lose the better part of a week’s worth of income in both November and December due to the holidays. Therapist schedules are lighter in those months, so the income drops off at the end of each year and early in the new year.
Secondly, most insurance policies have a deductible that resets at the beginning of the new year. Therefore, we often see diminished insurance checks while we wait to collect from the clients who have said, “Bill my insurance and see when we meet the deductible.”
Of course, we were happier when we had the reserves and did not have to borrow, but there are times when even the best plan goes awry. Having the LOC ready just in case can be a life-saver.
A crisis that was NOT solved by borrowing
We faced crises that we decided could be financial threats to our practice. In these crises, we did not borrow to solve our practice finances. Instead, we made the changes that we thought were necessary to survive in the new context.
A dramatic threat to our practice finances occurred in 2011 in Illinois. Blue Cross Blue Shield, our biggest payer, cut the reimbursement rates for therapy by 15% to 30% for psychotherapy. I wrote about our decisions in this post: Walking our staff through a crisis. We did not borrow but instead made some massive adjustments. Sometimes managing practice finances in a crisis means saying “no” to borrowing from the bank.
Managing your practice finances in a crisis
As with all challenging times, wisdom and an honest appraisal of the situation is critical to the avoidance of putting practice finances in a crisis. Wishful thinking is disastrous. In my view, the Coronavirus will create some financially challenging months. And yet, I do not expect the virus to threaten the demand for our services. And when there is demand, I am confident that we will find a way to meet it.