Show Me the Money

Money – and financial responsibility – may not be the root of all evil, but it can complicate business relationships, especially among physicians working together in a practice. The practice has several ways of structuring each physician’s compensation, including a production method, an equal method, a hybrid of equal and production, or a self-defined relative value unit.

When your practice makes a change, such as opening a new office, beginning an ancillary service, bringing in a new partner or offering a new specialty procedure, the situation offers the perfect time to examine the compensation structure within your practice, because these changes will impact everyone’s compensation. However, there is never a bad time to review this important part of practice management to ensure that each participant is being treated fairly. By being proactive and having this discussion at least on an annual basis, you’ll keep communication lines open and better understand the expectations of everyone involved. You don’t want to wait until something goes wrong to have this conversation.

Within the umbrella of compensation structure, a thorny issue is unequal spending on certain expenses, such as continuing medical education, disability insurance or malpractice expenses. Should there be limits on such expenses, or should each physician spend whatever he or she wants? It is up to the group to control spending and establish policies. By ensuring that everyone follows these processes, you reduce stress and have a healthier bottom line.

After 23 years in the healthcare industry, I’ve come to realize that there is no perfect, universal way to structure your practice’s compensation structure because no two practices work the same way. Unfortunately, there is no “best method” for structuring compensation among larger or smaller group practices, because so many differences exist among specialties, practice management styles and the goals for each practice.

The most important step in developing a compensation structure is to determine what physicians value most. This comes down to the culture of your practice. Is it a “eat-what-you-kill environment,” or “we’re-all-in-this-together” environment? Or something in between? Determining what matters in your practice requires an open, honest and frank discussion among practice partners to determine what each one considers fair and equitable.

I recommend that practices have at least some form of this discussion at the annual partners meeting and revisit the discussion whenever a change occurs in the practice. By using an outside facilitator such as your accounting professional, the discussion can be guided on neutral ground to form a consensus of what type of compensation structure your group prefers. Your accounting professional can facilitate this discussion by presenting the four most common types of compensation structures outlined below, and asking for feedback from the partners.

Methods of Dividing Income

Gross income of a practice can be divided among physicians in four basic ways:

  1. Production – compensating physicians based on business brought to the practice;
  2. Equal division – equally compensating all physicians in the group;
  3. Hybrid of an equal base compensation plus added compensation based on production; or
  4. Self-defined relative value unit method which pays per service performed or a unit of time worked.

Income by Production: The income a physician produces is allocated to that physician, before any expenses are deducted. For example, if Dr. Brown collects $200,000, then $200,000 is allocated to Dr. Brown before expenses. This method rewards those physicians that are bringing more business to the practice, however might not foster physicians to work together.

Income Split Equally: Put simply, the income is split equally amongst the physicians. For example, if the practice has five physicians and the total collections for the practice are $750,000, each physician would be allocated $150,000 before expenses. This method does not reward high producers; however, it provides physicians with incentive to work together.

Income Hybrid Method: Using both production and income split equally in combination, the production method is applied to a percentage of the gross income and the balance of the income is split equally. For example, 60 percent of the gross income might be allocated on production, while the balance is split equally among the physicians. When the two methods are shared, a physician’s personal choices come into play. For example, one physician may choose to work fewer hours to achieve work-life balance, knowing that he or she will still receive a base compensation, while also recognizing additional production compensation will be sacrificed. Another physician may work harder to bring more revenue into the practice, knowing that he or she will be financially rewarded for doing so.

Relative Value Unit: The practice defines a relative value unit (RVU), which is either a service or a unit of time worked. For example, a day worked during a normal work week might be worth one RVU, but a day worked on a weekend is worth 1.25 RVUs. The RVUs can also be assigned by the type of work, such as surgery versus chart reading. Medicare has developed its own system of Relative Value Units. As an example of the types of values of Medicare RVUs, an office visit might be valued at 1 RVU, a mid-level office visit might equal 1.5 RVUs, while a surgery might equal 20 RVUs. For a complete list of the official Medicare RVUs, listed by CPT code, go to cms.gov/pfslookup.

Some have suggested that physician compensation may one day be tied to quality. As the new healthcare reform legislation measures take effect, more ways of measuring quality, including whether physicians follow federal quality standards, will become trackable through medical claims coding; however today, such a system may be a bit premature.

Methods of Dividing Expenses

There’s no getting around it: your practice has to pay its bills, and each physician in the practice must share in those expenses. Three methods are most commonly used to allocate the expenses in the practice – based on each physician’s production, equally among all physicians in the practice, or the actual expenses each physician incurs.

Expense By Production: This method uses the percentage of gross income each physician contributes to the practice to determine how expenses will be divided. For example, if the office expenses are $10,000 and a physician produces 23 percent of the income, that physician is charged $2,300 for office expenses.

Expenses Split Equally: As the title suggests, the expenses of the practice are all split equally among all physicians. For example, if the office expenses are $10,000 and there are five physicians, each physician is charged $2,000.

Expenses Allocated By Actual Use: The expenses under this method are allocated directly to the physician that uses them. For example, if a physician spends $575 on continuing education, the $575 is charged directly to that physician.

Net Income Allocation Method

Net Income Allocation: Net income allocation is derived from the practice’s financial statement. It begins with the gross income for the practice, and subtracts the expenses. The resulting net income is then distributed among the physicians using the compensation structure chosen by the practice. This method is not used by many practices.

Understanding the compensation expectations of the physicians in your practice and structuring it in a way that meets expectations is an important part of managing a successful practice. An honest discussion with the partners in your practice on an annual basis, and whenever practice changes occur, will help keep money from becoming a source of conflict in your practice.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.