Kalogredis, Sansweet, Dearden and Burke, Ltd.

News Briefs
___________________________________________________

DIVIDING GROUP INCOME WHEN FINANCES GET TIGHT

Compensating physician co-owners of a group practice is of-ten called "dividing the pie." That's a nice description in good times, but a consultant-friend once added this comment: "When the pie shrinks, the table manners get worse."

As advisors to so many groups in Pennsylvania and neighboring states, we have found this statement to be accurate. The combination of stagnant — even shrinking — reimbursements and ballooning malpractice premiums indeed puts pressure on group members who fear or see their take-home pay declining. Their concern often leads them to take a renewed look at the group's compensation formula.

It is no wonder! When any organization comes upon difficult times, it looks hard at all aspects of its operations. Cost-cutting is one natural response, and physician pay is a practice's largest "cost" When the doctors are also the owners, there is a natural impulse to ask if each partner's efforts merit what s/he takes as income.

Cash Becomes King

Net income division — how owner doctors are paid — has historically been accomplished in one or a combination of two methods: percentages (usually equal) and production. For generations, doctors shared their incomes relatively equally on the belief that each partner contributes to group success in various ways. However, paying on relative productivity has overcome equal division as the method of choice. Today most practices pay largely on the basis of who produces the collections, charges or — with more frequency — the RVUs.

In effect, "Cash is king" in determining who earns what. For most practices, that makes sense since only revenue can pay the bills, whether those bills are the practice's or the physician-owner^'s.

And yet looking only at productivity may not serve the business perfectly well, either. What about the partner who takes on leadership and thus creates opportunities for the entire practice to sustain itself? And what about the group whose members equally share responsibilities such as call, late afternoon admissions, no-charge follow-ups and even surgery schedules so the whole can be stronger than the sum of its physician-parts? Productivity pay can create incentives that contradict group success.

Even when it is absolutely essential to create revenue in a financially threatened enterprise, we as advisors know a client's financial picture may be more complex than it first appears. Each group's dynamics are unique. What formula will help one practice become as profitable as possible will not be the same as that of another group. Those dynamics have shifted as the medical practice climate has changed, so what seemed to work in the past may need a new look.

What Lines to Divide

There are two basic ways to calculate income shares. One is to divide the net profits, the bottom line, and the other is to separately allocate each of the upper two lines — the revenue and the expenses. Each approach has certain nuances that can lead to confusion and even dispute.

By dividing the net profit line, group members truly share the net income. Allocating that end figure on relative productivity, for instance, essentially gives each partner the revenue s/he produces, and it charges him/her for the same percentage of the expenses. This may or may not be fair, for some partners might handle more visits, procedures and/or surgical cases without using more of the overhead. Conversely, another doctor might be under-productive from a dollars and cents standpoint but still use more staff, exam room space or supplies than his/her partners. Despite such complications, the bottom-line method thrives by its simplicity.

Separately dividing each of the two top lines fosters greater partner-level accountability. It considers how the partners produce their group's revenues and, separately, how they consume practice expenses. The two factors may not be the same.

While things such as the Stark rules may complicate things, it is fairly easy to credit each member with his/her own productivity. Allocating over-head, though, gives rise to any variety of options. We've seen and recommended approaches ranging from strict cost accounting to simply splitting costs equally to allocating various overhead items in different ways (e.g. some equally and some on the basis of relative productivity), and we've had to look at the doctors' patterns, the group's dynamics and, of course, the numbers.

No two practices' circumstances are alike as to income-sharing, and even a long-standing formula will likely come under strain as times and economics change. Given the likely cross-currents of interest among group members even in good financial times, it is often best to get help from a disinterested but experienced source. If you feel such a need, give us a call.

Leif C. Beck

>> back>>