There are a number of ways health care practices can structure their business and engage health care practitioners to work at their practice. Whatever option you decide will have implications that affect everything from your tax obligations to the employee entitlements you owe and your personal injury liability.
If you’re setting up a new health care practice, or want to restructure your existing practice, then we’ve compiled a list of the three most common models. We’ve included the advantages and disadvantages of each to help you work out which model is best for your practice.
The significance of the health care practice model you choose
The model that your health care practice uses to engage health care practitioners needs to be carefully considered because it affects so many aspects of your business. These include:
- Your obligations:
(a) under the law including tax, personal injury liability, and employee entitlements;
(b) to health care practitioners who work at the practice;
(c) to patients who attend the practice; and
2. Your rights:
(a) to receive payment from health care practitioners who work at the practice or patients who attend the practice;
(b) to require health care practitioners to do certain things at the practice for example complying with your policies, assisting you in the event of a data breach and ensuring they do not bring your practice into dispute.
The three most common models
There are numerous models of engaging health care practitioners. Three of the most common models are:
- employer/employee;
- health care practitioner as a contractor;
- shared services model.
Here’s a description of these three models with some of the advantages and disadvantages of each. It’s important to remember that there will be small variations to each model from practice to practice.
The employer/employee model
Under an employer/employee model, you would typically establish a ‘Pty Ltd’ company owned by you, your spouse and any business partner (Practice Company) that will provide health care services to patients.
The Practice Company employs health care practitioners under an ’employment contract’ to enable the Practice Company to provide health care services to patients of the Practice Company, using the Medicare number of the health care practitioners.
Patients pay the Practice Company, or assign their Medicare reimbursement, so it’s received by the Practice.
The Practice Company provides its health care practitioners a salary, and superannuation and leave benefits.
The advantages
As employer, the Practice Company controls how its employee health care practitioners work including:
(a) setting the days and hours the health care practitioner must work;
(b) monitoring and controlling the quality of the health care services provided;
(c) the fees that patients pay for treatments by the health care practitioner.
The Practice Company will also more easily retain rights over the patient records created by the health care practitioner which can be important upon a future sale of the practice. This also applies to any Intellectual Property developed by the health care practitioner, for example in clinical trials. A restraint of the health care practitioner is also more likely to be enforceable.
The disadvantages
As employees, the health care practitioners are entitled to paid leave at the Practice Company’s expense which is four weeks of annual leave and ten days of personal leave per year, plus long service leave after ten years.
The Practice Company must pay the health care practitioner superannuation of 9.5% of the health care practitioner’s base salary.*
The Practice Company may also be liable for WorkCover insurance which is roughly 1.2% of the base salary.*
If the Practice Company has annual taxable wages of $1.3 million or more, it will be liable for payroll tax which is calculated at 4.75% of taxable wages if they’re $6.5 million or less, or 4.95% if more than $6.5 million.*
The Practice Company will be liable to patients if the health care practitioner is negligent or engages in misconduct, and under the legal indemnity that employees automatically receive from employers. This means insurance premiums will increase, or if the policy doesn’t pay out, the Practice Company could be liable to pay out a lot of money.
The employer/employee model is not the preferred option for most practices.
The ‘health care practitioner as a contractor’ model
Under this model, the health care practitioner is engaged as a contractor and the Practice Company provides the health care services to patients.
The Practice Company contracts with health care practitioners under a ‘contractor agreement’ to enable the Practice Company to provide the health care services.
Patients pay the Practice Company, or assign their Medicare reimbursement, so it’s received by the Practice.
The Practice Company pays a prescribed amount to the health care practitioner.
The advantages
As head contractor, the Practice Company has some control over how the health care practitioners work, via appropriate contractual provisions, including:
(a) setting the days and hours the health care practitioner must work;
(b) monitoring and controlling the quality of the health care services provided;
(c) the fees patients pay for treatments by the health care practitioner.
The Practice also more easily retains rights over the patient records created by the health care practitioner which can be important upon a future sale of the practice. These rights also cover any Intellectual Property developed by the health care practitioner, for example in clinical trials.
The Practice Company is less likely to be liable to patients if the health care practitioner is negligent or engages in misconduct, than if the health care practitioner was an employee.
The disadvantages
There is a risk that if the contract with the health care practitioner gives the Practice Company control that is similar to the control of an employer, the Practice Company will still be found liable for employee entitlements. Further, under payroll tax legislation, payroll tax will more than likely be payable on the wages of the health care practitioners if the thresholds are met.
The Practice Company might need to forfeit a lot of control over the health care practitioners to mitigate that risk.
This model is commonplace for small practices that have health care practitioners that earn less than $1 million and do not intend to grow much past that point.
The ‘Shared Services’ model
With a shared services model, the health care practitioner provides health care services to patients. The Practice Company provides resources to health care practitioners, such as medical equipment, facilities, therapeutic supplies, and staff such as receptionists and nurses.
The health care practitioners contract with the Practice Company, under a ‘shared services agreement’, to receive resources from the Practice Company. This enables the health care practitioner to provide the health care services to patients.
Patients pay or assign their Medicare reimbursement to the health care practitioner, but payment is received by the Practice Company on the health care practitioner’s behalf. The payments are held by the Practice Company on trust for the health care practitioner.
At the end of a period, for example a week, the Practice Company returns those payments from patients to the health care practitioner, less a specified percentage of those payments (usually 35%) as a service fee to the Practice Company.
The advantages
The Practice Company is not providing health care services to patients, it’s only providing resources to health care practitioners. So the Practice Company is not an employer of the health care practitioner.
This means the Practice Company should not be liable for employee entitlements such as paid leave and superannuation, or for payroll tax. The Practice Company is also less likely to be liable to patients if the health care practitioner is negligent or engages in misconduct, than if the health care practitioner was an employee.
The disadvantages
The Practice Company needs to make sure they have very limited control over the health care practitioner under this model, otherwise that control could be inconsistent with the Practice Company being a true service provider to the health care practitioner. The Practice Company should take care with the following:
(a) how it sets the days and hours the health care practitioner must work;
(b) how it monitors and controls the quality of the health care services provided;
(c) setting the fees patients pay for treatments by the health care practitioner;
(d) retaining rights over patient records.
The Practice Company may wish to retain some control over the health care practitioner but that will increase the risk that a Court rules the model is not truly a ‘shared services model’. If that happens then employee entitlements or payroll tax may be payable.
This is the most common model used in medical practices, but it’s not always the best option for you.
Key considerations when choosing a model for your health care practice
The best model will depend upon your specific circumstances, including the size of your practice and how much control you want over your health care practitioners.
Whichever model of engaging health care practitioners you choose, make sure that:
(a) you are clear about the model you choose from the start;
(b) you have well drafted agreements in place;
(c) you are clear about the actions you should and shouldn’t take under the model you choose. Your behaviour and what happens in real life will inform a Court’s view on which model actually applies, even if that’s different to the contract.
Mahoneys team of experts has extensive experience advising health care practices on the specific commercial legal issues they need to consider.
If you’re setting up a new health care practice or considering a restructure for your existing practice, then please contact Mahoneys Commercial Partner Antony Harrison, Associate Rhys Williamson on (07) 3007 3777 or email aharrison@mahoneys.com.au, rwilliamson@mahoneys.com.au.
* numbers correct at the date of this article.
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