Compensating group practice partners - Practice Management

Physician compensation--often called "income division" in smaller group practices--is clearly one of the most difficult concerns for physicians working together as partners. (1) And yet, every group must periodically face the challenge of whether to establish the "right" formula the first time or to re-evaluate it as conditions change in the practice, its dynamics or its environment.

It's no secret that financial incentives influence physician behavior--most people's behavior, for that matter. That's why group leaders must accept the idea of recognizing and compensating individual behavior when structuring pay for their partners. Doing so involves two important steps:

1. Design incentives that reward physicians for behaviors the group wants to encourage.

2. Make sure those incentives don't violate Stark anti-kickback regulations.

Getting independent-minded physicians to agree on what the group collectively wants isn't always easy -- sometimes it represents a miracle just a notch or two below the loaves and fishes.

Although there's no universal solution, making the effort to identify your group's objectives provides the best shot at developing bonus incentives to drive group members toward them. Texas consultant and accountant Reed Tinsley, CPA (2) offers this list of possible factors on which groups could base incentives:

* Individual performance. You can't ignore the fact that directly rewarding hard work nudges people to work hard.

* Group profitability. Establish a group view that "a rising tide lifts all boats."

* Risk sharing. Emphasizing pure production stands at odds with handling capitation successfully.

* Cost per patient. This approach lets you evaluate expenses and build group responsibility for overhead.

* Group contribution. Frequently overlooked in compensation plans, every successful practice has someone who makes practice-development happen. Several people sharing the duties work even better.

* Patient satisfaction. This issue might merit significant inclusion in a bonus plan if you perceive you have problems in this area.

* Seniority. When correlating to building the practice, not just time served, this can be an important factor.

* Referral patterns. Nurturing referral relationships is especially important in certain specialties.

* Utilization and quality outcomes. These factors grow in importance with the amount of managed care a group delivers.

Whatever incentive(s) you choose--and don't include them all or you'll create an overly complex system doctors won't fully understand--the amount must be significant enough to catch and hold partners' attention. Tinsley suggests structuring compensation plans so that at least 25 percent comes from incentives.

For the second step, Stark, "the issue is how can we equitably compensate physicians so that it's not based on the volume or value of referrals," says Tinsley. And it's best to have careful counsel about its ramifications from an attorney or expert.

Emphasize productivity

However you view these incentives, recognize that it is more important than ever to give individual production an extremely high level of importance in this very difficult medical economic environment. In the long term, practice growth and success may hinge on factors like expanding markets and/or services.

But the long term doesn't matter if you don't hang on through the short term. And the "double whammy" of rising malpractice premiums and declining reimbursement leads more groups than ever to deal mainly with short-term survival.

Physicians usually earn more when they work in practices that heavily stress production in their compensation formulas. If you sense your group sliding toward true financial hardship, heavily emphasizing production in compensation merits serious consideration--if you're not already doing so. This basic tactic also can help if your group is merely languishing with so-so financial results.

Just for example, physicians working in groups that pay 100 percent on production usually earn more than their peers working under compensation plans based less on individual productivity.

Paying partners 100 percent on production produced the highest income in 10 of the 18 specialties providing the most responses in the 2002 MGMA Physician Compensation and Production Survey. This survey is available online at www.mgma.com or by calling (800) ASK-MGMA.

Another key factor

Still, except for groups in dire financial circumstances, a conscientious effort to weigh the factors deserving pay at the partner level calls for looking at all of Tinsley's points shown above. One of them, however, deserves special--and very delicate--consideration. It is an incentive for providing strong physician-level leadership.

You would never consider investing heavily in a multimillion-dollar corporation lacking effective leadership. Yet, many physicians in small and medium-size groups across the country have effectively done just that by refusing to delegate responsibility and authority to a managing partner (or CEO).

A typical medical group with 5-10 providers commonly generates anywhere from $4 million to $8 million in gross annual revenue. That's not "cottage-industry" size! A company doing that much business deserves strong, empowered leadership.

Once you've determined which physician-member is best suited to serve as leader, he or she deserves to be fairly compensated not only for the time away from actual medical practice, but for doing the job well. How do you define "fair" pay for a medical group's physician leader?

While leader expectations and responsibilities vary from practice to practice, compensation methods tend to more or less reflect one of three approaches:

1. Percentage of net income. Paying on this basis carries a built-in reward for making the practice more profitable. And group members tend to go along with this plan more easily because they can see that they're "getting their money's worth."

2. Flat stipend. We've seen management stipends for leaders in small to medium-size groups range anywhere from $1,000 to over $6,000 per month. Some groups equate the stipend to the amount of time or productivity credit that leadership activity will take away from clinical work.

3. "Gross-up" approach. Some groups sharing profits on relative productivity compensate their leaders for lost clinical time by "grossing up" their normal production. If the managing partner uses one day per week to do administrative work, then the group agrees to pay a salary based on five fourths (125 percent) of his/her base production.

Obviously, you have to find the plan that works best for you and your partners. But recognize that successful groups almost always have strong leadership. Properly rewarding a good leader encourages him or her to step out and lead with confidence.

Calculating production

If you're going to consider productivity at all, the formula must clearly identify the members' production figures. They represent the "top line"--the revenue line--in an income statement and the "kill" factor in what's often called the "eat-what-you-kill" approach to partners' pay.

MGMA consultant Bruce A. Johnson, JD, MBA, (3) advises many groups on their compensation plans. He names a number of different ways to credit each partner with production, including these:

* Gross charges

* Net charges (gross charges less actual disallowances)

* Net collections (actual dollars received, less refunds)

* Gross charges times an agreed collection rate (perhaps the group's or the average for its specialty)

* Relative value units (RVUs)

While the first four are relatively straightforward, the RVU approach calls for further calculation. You might, for instance, multiply each partner's recorded RVUs by an agreed conversion factor to result in "actual" production. Or you could take the ratio of the members' RVU totals and apply those percentages to the group's actual collections, resulting in their allocated shares of group revenue.

Both single and multi-specialty groups increasingly use RVUs to determine productivity these days. Relative values specifically relate procedures to their time, difficulty and worth both across and within specialties, so they fairly and uniformly account for work and its intrinsic value. Using them takes factors like fee schedules and insurance coverage out of the equation, giving some form of objectivity to the measuring process.

RVUs merit increasing use because they effectively link physician pay to the service provided, rather than to outside factors like insurance reimbursement. Plus, they encourage a group philosophy of taking cases and patients on their intrinsic professional worth.

While no system is perfect, your professional standards merit looking hard at using RVUs when you reconsider your income division/physician pay plan.

1. The term, "partners" is used loosely, referring to doctors who work together as co-owners in private practice, whether as shareholders in a corporation, as members of a limited liability entity or actually in a true partnership.

2. Tinsley is a principal with Reed Tinsley and Associates. Contact him at (281) 379-5988 or by e-mail at reed@attglobal.net.

3. Contact Johnson at (877) ASK-MGMA, ext. 877, or e-mail him at consulting@magma.com.

Leif C. Beck, LL.B., CPBC, is publisher of Advisory Publications and a 25-year veteran medical management consultant. For information on Advisory Publications' many newsletters, books and reports on private practice medical management, go to the organization's Web site at www.advisorypublications.com.

COPYRIGHT 2003 American College of Physician Executives
COPYRIGHT 2003 Gale Group