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How to divide the practice pie
Unfortunately for many medical practices, malpractice insurance, health insurance and other overhead expenses continue to rise at rates much higher than increases in third party reimbursement. Thus, the “pie” for the parties to divide may become smaller while the partners work longer hours. When there is plenty of money to go around, people are more willing to overlook things. However, as the pie shrinks or stays the same, it becomes more important to implement a fair and reasonable net income division formula. While most practices are able to accomplish that, others are not, which may lead to practice split-ups, partners leaving and buy-in deals not coming to fruition.
The simplest method of dividing the income of a medical or dental practice among the partners is equally. It’s easy, avoids partners competing with each other, and discourages over-utilization. This method tends to work better with primary care practices where the partners have practiced together for years, trust each other and have similar work habits and productivity. However, a problem with this approach occurs when a partner is a “slacker” and does not put in the same time and effort as the other partners. In addition, the higher producers (e.g., electrophysiologists and interventionalists in cardiology practices) may consider an equal division unfair, even if the lower producers (e.g., general, non-invasive cardiologists) provide all or most of the “referrals” to the more procedure-oriented partners.
If a practice has a philosophy of sharing the pie equally, one way to protect against slackers is to provide for a shift to a productivity-based compensation arrangement should a partner, in a given time period (perhaps six months), produce less than 90% (or some other agreed to percentage) of the other partner or the average of the other partners. Some agreements set the threshold at 90% of what equal would be. For example, assume Partner A generates 22% of the practice’s collections from January 1, 2006 to June 30, 2006, Partner B 26%, Partner C 25%, and Partner D 27%. Equal production would be ¼ or 25%. Since A is producing only 88% (22/25) of equal production for the July 1, 2006 to December 31, 2006 period, instead of A receiving an equal 25% share of the net income of the practice, he or she will receive the lesser of his/her relative productivity percentage or 25%, and B, C and D will share the remainder equally. The practice documents could then provide that if A reaches the 90% level in the last 6 months of 2006, he or she would be entitled to an equal split for the first 6 months of 2007.
At the other end of the spectrum from dividing the pie equally is a pure productivity, or “eat what you kill” approach. This allows those physicians who work harder, longer hours and/or perform more lucrative procedures to be compensated accordingly. However, this approach may also encourage partners to compete for patients (and/or patients from more lucrative payors), and can lead to over-utilization as well as upcoding. Almost all practices who use a productivity approach track productivity by collections, not charges, as charges can’t pay bills. However, dentists still often use charges, presumably since less insurance and write-offs are involved.
In most practices that use a pure productivity approach, it is the bottom line profits that are divided based upon relative productivity, which means that both the income and expenses are allocated in that manner. However, some practices take the position that only the income should be allocated by production, with the expenses allocated equally. This may be unfair as the higher producing partners may be using more overhead. Thus, a fairer, yet more complicated approach, is to allocate certain “fixed” expenses (that tend not to change according to productivity) such as rent, utilities, advertising, telephone, legal fees, accounting fees, office manager salary and benefits equally, and other “variable” expenses (which tend to fluctuate according to productivity) such as medical supplies, equipment maintenance, staff salaries and benefits, outside billing fees, and office supplies equally on the basis of relative productivity.
Since there are pros and cons to the two extremes, some practices use a hybrid/combination approach. Some of the pie may be split equally and some by relative productivity. For example, perhaps 40% of the net income would be divided equally and 60% by relative productivity. Another variation is to pay equal base salaries to the partners, with quarterly, semi-annual or annual bonuses paid according to relative productivity. Still yet another approach (which is more popular in dentistry) is to pay each partner a percentage (say 35%) of his/her charges, with any bonuses paid equally.
While most practices do not factor in seniority with partner compensation, some practices do pay an administrative/managerial fee to the partner, who typically may be the most senior partner, who does the bulk of the running of the practice from a business standpoint, including staff management, financial management and facility management. The annual fee for such services may run anywhere from $10,000 to $40,000, but usually should not be based on a percentage of the practice’s collections but rather on the amount of time and effort spent providing these extra administrative duties.
No matter what net income division formula exists, if a partner decides to cutback/“semi-retire,” the practice needs to decide how to handle his/her compensation. If the practice already uses a productivity approach and the partner will still take his/her share of call, it is easy to cut compensation on a pro-rata basis. But if the net income is split equally or the partner will no longer take call, it gets more complicated. A key factor is how much the practice values call.
Another important item to keep in mind with any productivity-based compensation arrangement is that under the Stark laws, compensation may not be based upon referrals for designated health services (“DHS”), such as imaging and laboratory services. For example, the income from such ancillary services may be divided equally among the partners or based upon their productivity from non-DHS services.
If a practice that factors in productivity has significant capitated income, a different approach may be warranted for the income. For example, the practice may split capitation income equally, by RVUs, by the doctor who is designated by the patient as his/her primary doctor, by the number of hours worked, or according to the fee-for-service equivalent charge.
Finally, no matter which net income division formula is used, the practice needs to decide what net income consists of. It obviously must include the partners’ salaries and bonuses if incorporated (and if not, their draw/share of partnership income), and also typically includes their retirement plan contributions, health, life and disability insurance premiums. It may also include malpractice insurance premiums, professional society dues, professional meetings, automobile expenses, and similar items.
Whatever way your practice divides the pie, it is important to evaluate the formula every few years to ensure it is still fair.
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2006 Kalogredis, Sansweet, Dearden and Burke, Ltd.
