Dr. Sally Jones, a practicing Orthopedic Surgeon, owns Sunset Medical, a professional corporation located in Colorado. Sunset is a small practice servicing patients from the local community and tourists who are in the region to frequent one of the area’s ski slopes and hiking trails. Sunset is well respected by both Sally’s peers and patients; Dr. Jones has been approached several times to move her practice to a large urban hospital where her practice could increase its $1 million revenues several times over. However, Dr. Jones prefers the quite lifestyle of rural Colorado to the more frenetic pace of urban living.
Sunset Medical experienced a great deal of turmoil over the past few years. In 2008, while at a medical convention, Medical Management Inc. (MMI) approached Dr. Jones with a proposal to provide managerial and billing services. MMI’s pitch centered on utilizing synergistic core competencies, exploiting MMI’s marketing and managerial expertise and Dr. Jones’ professional reputation to increase revenues, decrease expenses, and improve cash flows. After lengthy negotiations, Dr. Jones signed a contract with MMI and after a three-month trial period, effectively turned over Sunset’s day-to-day operations. However, at the end of the first full fiscal year, Dr. Jones finds herself questioning whether to continue Sunset’s contract due to unforeseen financial setbacks or to terminate the contract and in-sourced all previously outsourced activities. Sunset Medical Pre-2009
Prior to contracting with MMI for managerial and billing services, Dr. Jones fostered a family atmosphere within the practice; many of the employees had been with the practice since its inception in 2000. This informal atmosphere facilitated a great deal of flexibility in employee roles, allowing Sunset Medical to function efficiently and effectively with minimal staff. In addition to Dr. Jones, Sunset Medical employed a support staff that included an office manager, billing secretary, nurse, and radiology technician. The office manager oversaw the practice’s operations including scheduling patients, managing medical records, insuring compliance with various state and federal regulations, purchasing supplies, and managing the firm’s finances. The billing secretary was responsible for taking coded medical records and preparing patient billing statements, and then maintaining contact with both the patient and their insurance provider to insure collection. The nurse and radiology technician performed activities in direct support of the doctor, with the radiology technician also tasked with maintenance of the practice’s x-ray machine and other equipment. In addition to her staff, Dr. Jones also retained Jackson and Associates, a local CPA firm, to provide financial statements and tax documents for the practice. Since Sunset is a relatively small, privately owned corporation, Jackson and Associates prepared a yearly Income Statement and Balance Sheet using a cash basis for accounting. To insure conservative estimates of income for tax purposes, revenues listed in the Income Statement were reduced by 100% of Accounts Receivable and the Allowance of Bad Debts was calculated at 100% of Accounts Receivable leaving net Accounts Receivable as $0 in the Balance Sheet. Exhibits 1 and 2 shows the Income Statements and Balance Sheets provided by Jackson and Associates for the years ended 2006, 2007, and 2008. Similar to most professional corporations, Sunset’s income statement shows very little Net Income in order to avoid double taxation.
Medical Management Inc.
In 2008, Dr. Jones was considering the purchase of a new X-ray machine due to technological advances in imaging, growth of her practice, and useful life of her current machine. While at a medical convention in New Orleans to investigate the purchase, Medical Management Inc. (MMI), approached Dr. Jones with a proposal to...