The best way to divide income -

The best way to divide income - - ModernMedicine

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As physician reimbursement loses ground to inflation and doctors work harder just to stay even, medical groups have increasingly adopted an "eat-what-you-kill" approach to income division. Often coupled with overhead allocation based on cost accounting, production-based pay is becoming the norm in single-specialty groups, replacing equal income sharing in all but the smallest practices.

Multispecialty groups have always used production-based compensation plans because of the large differences in partners' revenues. But back in the '90s, when managed care gave primary care physicians greater clout in multispecialty groups, pay plans tended to be tilted in their favor. Nowadays, specialists are in the driver's seat, and they're less willing to subsidize primary care doctors, despite the role they play in referrals. "It's payback time," says Gary Matthews, a consultant with Physicians HealthCare Advisors in Atlanta.

Power Points
•	Production-based compensation encourages hard work if it's at least 20 percent of the pie.
•	The majority of groups use receipts as their yardstick for productivity.
•	In allocating costs, most groups go by productivity. Direct costs are generally subtracted from the income of the department or physician that generates them.
•	In a single-specialty group, it might make sense to split ancillary profits equally.

While compensation is increasing less than productivity for most physicians, primary care doctors are falling further behind the curve than specialists, says Daniel P. Stech, director of survey operations for the MGMA. In 2002, for example, primary doctors' production rose 5.2 percent, compared with a compensation gain of only 2.8 percent. Specialists brought in 5.5 percent more and their pay went up 4.3 percent.

What has softened the blow for many primary doctors is their ability to share in ancillary revenues from lab, imaging, and ambulatory surgical facilities. But only physicians in groups large enough to afford the investment in ancillaries reap those benefits. Those in smaller practices are less likely to have that cushion.

How each group divides income depends on many factors, including size, location, specialty mix, payer mix, and philosophy. But regardless of what kind of group you're in, the following advice from experienced consultants could help you evaluate and improve your compensation plan.

Production-based pay has plusses and minuses

The trend to production-based pay notwithstanding, Michael J. Wiley, a consultant in Bay Shore, NY, counsels single-specialty groups to incorporate both equal shares and production into their compensation formula. "How much I split equally and how much I split based on productivity depends on the disparity in production between the individual doctors. I still have OB and orthopedic practices that are splitting all income equally—in large part because of the impact that call has on the practice. But I also have OB practices that are splitting the OB income and a portion of the gynecology income equally, and the balance of the gynecology based on productivity."

Equal shares, he emphasizes, can motivate doctors to back each other up and do nonproductive work like reading test results of a colleague's patients when he's on vacation. The problem with equal shares is that high producers are irritated when less hardworking doctors make the same as they do.

Wiley suggests that groups insert a clause into their partnership agreement that creates a "trigger" for increasing the percentage of income that's divided on the basis of productivity. For instance, if an individual doctor's volume falls below 85 percent of any other doctor's revenue, the income distribution formula would be revised. Or if the ratio between what a doctor produces and what he brings home varies from his colleagues' ratios by a certain amount, it could trigger a revision in the compensation plan.

Production-based compensation encourages hard work if it's at least 20 percent of the pie, says Wiley. But basing 100 percent of income on productivity might penalize physicians whose payer mix is skewed, notes Matthews. In some areas of the country, this might mean too many Medicare, Medicaid, or indigent patients. In areas where Medicare is the best payer, having too many patients in low-paying commercial plans could prove financially ruinous. So groups must find a way to balance the payer mix among physicians.

One solution is to measure productivity on the basis of work RVUs. While consultants consider this a fair method, relatively few practices use RVUs in their compensation formula, and most of those are larger groups.

The majority of groups use receipts as their yardstick for productivity. Charges might be used to even out differences in payer mix, says Matthews. But as receipts have dropped as a percentage of charges, Wiley says, "more and more practices have said, 'We can only split what we've actually collected.' "

A cost accounting mentality takes over

How practice expenses are allocated among physicians can have an enormous impact on income distribution. An equal division of overhead won't have much effect on doctors with similar revenues, but in a multispecialty group, it will tend to favor primary care physicians, who have higher expenses, over specialists and surgeons.

At the opposite end of the spectrum—when all practice expenses attributable to a particular doctor are charged against his revenues—the disparity between incomes is accentuated, and doctors are motivated to become very cost-conscious. Robert C. Bohlmann, an MGMA consultant based in Arlington, TX, says he's seen a trend toward this cost accounting approach in medical groups.

There are two methods of cost accounting. One is to look at fixed, variable, and personal costs. Fixed expenses are things like rent, utilities, and a group administrator's salary. They may be shared equally or in relation to productivity. Variable expenses, such as the costs of clinical staff, supplies, and equipment, are broken down by physician and charged against that doctor's income. Ditto for personal costs such as an auto lease or travel to a CME meeting.

Some groups break down overhead into just two categories. Indirect costs include the cost of the group's finance, administration, and accounting staff as well as the prorated rent and utilities for common areas of the office. Direct costs include the prorated rent and utilities for the amount of space each physician uses as well as his malpractice premium, his clinical staff, supplies, and dues. Stephen F. Messinger, a practice management consultant based in Arlington, VA, says this method is used more widely than the fixed/variable expense approach (see "In Virginia, a Darwinian tack").

The majority of groups allocate indirect costs on the basis of productivity, but some share them equally, says Bohlmann. Direct costs are generally subtracted from the income of the department or physician that generates them, he adds.

Capital investments represent another cost factor. They may be financed by borrowing or by retaining earnings, but in either case, the group has to decide how to allocate loan payments or pay reductions. Messinger, who advises groups to retain some income for investment despite the extra tax bite, says that practices usually split it equally or as a percentage of each doctor's collections.

The Ellington Clinic, a seven-doctor family practice group in Atlanta, TX, has used both methods: For normal investments, the partners share the cost equally; but when the clinic recently borrowed $250,000 for an EMR, the doctors divided the loan payments in proportion to each physician's share of receipts.

The 14 doctors in one cardiology group invested equally in a nuclear medicine facility, recounts Bob Bohlmann, even though only two of the doctors were nuclear medicine specialists. They divided 30 percent of the profits equally—reflecting call coverage and ancillary equipment investment—and the rest on the basis of productivity.

Ancillary profits are often the glue

Ancillary income is the glue that holds many groups together, notes Messinger. "If a medical group doesn't get at least 30 percent of its revenue from ancillary services, it has a hard time justifying its existence, because a physician can say, 'Why am I paying all this money for management and infrastructure? I can do much better alone.' "

In a single-specialty group, it might make sense to split ancillary profits equally. But in a multispecialty practice, says Messinger, giving primary care physicians the bulk of ancillary income could reward them for all the tests they order, while allowing specialists to receive compensation in line with their contribution to the group's bottom line. This would "moot the argument between specialists and generalists" over whether the specialists should subsidize the primaries in return for their referrals, he says. He argues that the specialists are happy to "eat what they kill" after deducting their own expenses, without worrying about ancillaries.

Another approach, Messinger says, is to pay the group's indirect costs out of its ancillary profits. "Then all each doctor sees is the direct expenses of his own practice. So the doctors feel the benefit of practicing in the group is that they get all their own revenue and manage their own direct expenses. As a result, they can do better than the guys who are practicing on their own, because their costs are lower."

So what kind of compensation plan should your practice have? The only rule, says Gary Matthews, is that the formula should promote your group's goals. "Often, physicians don't deal with that. They're just busy trying to see as many patients as possible. But your compensation plan should include incentives to achieve your practice vision."

In Virginia, a Darwinian tack

Virginia Physicians Inc., a multispecialty group in Richmond, VA, once had 90 physicians, about 60 percent of them in primary care. During the '90s, when the group was owned by PhyCor, it lost about 20 physicians. Since 1999, when it agreed to repurchase its assets from the practice management company, VPI has shrunk to 40 doctors, 30 of whom are shareholders. Now, about 85 percent of the group is primary care.

The doctors who left the group, including most of the surgeons, did so because they were dissatisfied with their compensation, says W. Philip Morrissette III, a family physician and one of VPI's two managing partners. He explains that, under PhyCor, the group's administrative expenses were very high, and PhyCor took its typical management fee (about 15 percent). Also, he says, the company miscalculated how much the group was taking in, so doctors' salaries had to be cut.

When the group bought itself back, it restructured operations. Central office functions unrelated to the group's ancillary facilities were shifted to VPI's divisions, consisting of primary care sites and specialty departments. Now each division has its own manager and billing staff.

VPI has also introduced an income division method based wholly on production and cost accounting. The group splits the costs of the central office and ancillaries equally, and the doctors in each site or department divide its business costs equally. All other expenses—including rent, utilities, supplies, clinical staff, and equipment—are charged against each doctor's revenue. The physician keeps what's left, minus payments on the loan he took out to repurchase his share of the group.

Ancillary profits are split equally—a switch from the original plan, which was to divide 25 percent of them equally and 75 percent based on the number of office visits. That formula was designed to acknowledge the amount of work the primary care doctors did and even out the income in the group. But it helped convince some specialists that they were giving up too much to subsidize the primary care doctors, says gastroenterologist Joseph W. Longacher Jr., VPI's former president.

VPI's restructuring has led to sharply higher compensation, says Morrissette. While physicians' average income dropped 25 percent in 2000, he notes, it has since climbed by one-third—and that includes the cost of repaying loans that will disappear within two or three years. He attributes much of the turnaround to increased efficiency now that doctors are aware of how their individual costs affect their incomes. He also credits a drop in central administrative expenses, the elimination of vacant office space, and the renegotiation of office leases and payer contracts.

Culture trumps cash in Oklahoma

Integris Physicians in Oklahoma City is a rare bird on three counts: The 50-doctor primary care group is owned by a hospital system, yet has positive cash flow. Until last year, its physicians did very well with full-risk contracts in partnership with the Integris healthcare system, earning considerably more than other local primary care doctors. And, despite suffering a 30 to 50 percent drop in base salaries as a result of payers terminating those risk contracts, the physicians have stayed together.

When half of the group's income came from capitation, doctors received a base salary equal to 80 percent of their previous year's income. Beyond primary care capitation, they got whatever remained in the risk pool for their own patients at year's end. If a doctor had more than his share of high-cost cases and owed money, his colleagues would share some of their surpluses with him. The doctors kept 46 percent of whatever fee-for-service income they generated.

Combining productivity with cost-effectiveness, this formula enabled the average Integris doctor to earn income equivalent to about 150 percent of the Medicare fee schedule. Some doctors made two or three times the Medicare level, according to internist Mary Ann Bauman, the group's medical director. But with all of the group's revenues now coming from fee-for-service work, the physicians receive only 115 to 130 percent of Medicare fees.

The pay split is now based purely on production. To boost their incomes, the doctors are seeing more patients and ordering more tests. They've also added some new services, such as cosmetic procedures. While they still get a base salary, the percentage of gross revenue they receive has dropped to 44 percent, as overhead costs have risen to 56 percent of their diminished receipts. They divide ancillary revenues on the basis of work RVUs.

The group eschews the cost accounting approach to income division. The expense of office space and renovations, for instance, is spread across the whole practice. And if doctors in one site want to hire a new physician, the entire group absorbs the cost of setting him up in practice.

Individual cost accounting would destroy the group culture that was so diligently nurtured during Integris' managed care years, says Bauman. During that period, she says, physicians became concerned about how their colleagues practiced, because it affected them financially. That's why they created a quality committee that would withhold up to 30 percent of the pay of a doctor who failed to meet group standards.

Some of the incentive to practice that way has vanished, Bauman concedes. But she insists that this is what has bound the group together, and hopes it won't be lost. "Cost accounting can have an adverse effect on camaraderie and groupthink, and groupthink has done very well for us."

Ken Terry. Group Practice: The best way to divide income. Medical Economics Apr. 9, 2004;81:88.