Group Compensation Structures

Group Compensation Structures

Outline of a Compensation / Expense Structure in a Group Medical Practice

Here are a few compensation structures for your consideration. THE SIMPLEST COMPENSATION STRUCTURE Here it is: Each physician keeps his or her own collections, and pays a percentage of group expenses based on the percentage of his or her collections as against the group’s total collections. You can use collections in this structure or any other measure of productivity (but collections are the simplest). Frequently in life, the simplest is the best. This structure is eat-what-you-kill, because that’s as simple as it gets. A collateral benefit of this formula is that lesser producing physicians pay less in expenses, which makes it easier for doctors with small practices to stay in the group (e.g. a young doctor or one in semi-retirement). COMPENSATION STRUCTURES WITH MORE VARIABLES Simple might not be fair. For example, in the above formula, you allocate expenses based on collections, which might or might not correlate with actual usage of group resources (e.g. PA usage). Many practices prefer to allocate compensation directly to those producing it, and allocate each expense to the physician incurring it. In fact, some specialties require more staffing and other resources, but generate a lesser proportion of collections than other specialties. The question is, how to get a more accurate allocation of expenses? It’s not easy. Frequently it’s prohibitively complex to allocate expenses in detail based on physician usage. The trickiest aspect of eat-what-you-kill is calculating expenses accurately, because it requires allocating staff, supplies, equipment and other resources on a physician-by-physician basis. So let’s talk expenses. EXPENSES If you need more accuracy in dividing expenses, consider this 3 pool structure. Pool #1 Includes all general overhead expenses, such as rent, utilities, bookkeeping, tax preparation, legal, corporate, receptionists, and more. The physician / shareholders divide the expenses in Pool #1 based on their share ownership. Pool #2 Includes expenses that can be attributed to a physician / shareholder’s individual practice, such as physician assistants, nurses, employees, contractors, malpractice insurance, and equipment and supplies that are only used within a particular specialty. The physicians divide the expenses in Pool #2 based on their percentage share in the practice’s gross billings or collections. Pool #3 Includes all personal expenses, such as rental cars, continuing education, meals, and the like. Each shareholder individually pays all expenses allocated to him or her in Pool #3. Word to the wise: Keep the compensation plan simple and transparent. Including too many variables in the formula will make it too complex for physicians to understand and for staff to calculate. INCOME Dividing income usually is easy once you’ve figured out expenses. Recall that income is what’s left over after the payment of expenses. Consider this two-part system, which pays salary first for managerial services performed for the group practice as a whole, and divides collections after that. First, pay managers a base salary or some hourly rate based on time spent in administrative or managerial capacities, then second, distribute remaining profits to the physician / shareholders based on their individual collections, RVUs or what have you. At this second level, note that: *** Some practices use gross billings as the basis for allocating income and expenses, as opposed to collections. A practice uses gross billings when it wants to avoid the time lag between billing and collections. *** Using RVUs can be complex and in most cases will require a computer system capable of tracking utilization by CPT code and doctor. RVUs are useful in multispecialty groups where significant variations in reimbursement exist between the specialties.

Compensation Structures for a Group Medical Practice

In general, a group practice pays its physicians in some combination of three ways: (1) salary, (2) productivity payments, that is, productivity bonuses or shares in profits or collections, (3) corporate dividends. Your balance of the three forms of payment determines in large part the culture of your group practice. SALARY VS. PRODUCTIVITY PAYMENTS In a compensation structure, the tension is between salary and productivity payments. Both have their pluses and minuses. On the positive side of the ledger, salaries create team spirit, while productivity payments give incentive to work. As for the negatives, a compensation structure that is heavy on salary leads to freeloading. [see ft.1 below for definitions of freeloaders and malcontents] Why work so hard if either way you’ll get paid the same? A compensation formula heavy on productivity bonuses and profit shares leads to: (i) malcontented doctors who are unhappy to make less than others in the group; (ii) administrative staff devoting their time to tracking individual production and allocating overhead; (iii) complexity because you must find some other way to compensate physicians for necessary work that doesn’t produce revenue, for example, practice governance, management, staff development, hospital committee work. Further, some group practices now factor capitation into the mix. This creates another tier of compensation, and requires a separate system for tracking data to measure capitation rewards. COMBINE SALARY AND PRODUCTIVITY PAYMENTS, AND ACCOUNT FOR SPECIAL OVERHEAD I’m sure you saw the “solution” coming a mile away – use a combination of salary and productivity payments. To determine base salary, you can use compensation surveys conducted by organizations such as the Medical Group Management Association, the American Medical Group Association, and the American Medical Association. To reduce the freeloading effect of salaries, you can tier salaries based on volume of work performed. For example, to be eligible for a full salary, a physician must work 90% of the group’s work days in the year + achieve 90% of the group’s annual quota for office visits (regardless of complexity of procedures) + 90% of the group’s quota for on-call hits. The group can reduce a physician’s salary proportionately based on the percentage drop below each 90% level. As for productivity bonuses and profit shares, most groups simply base them on collections from a physician’s work. If that’s not a fair method for your group, you can pay bonuses based on such factors as patient encounters, some other relative value unit (RVU) applicable to the practice, panel size or capitated lives under management, and even such non-revenue factors as seniority or management services for the group. No matter what factors you use, try to pay the productivity bonuses (and deliver the corresponding accounting reports) on a monthly or quarterly basis. Beware: a group medical practice must comply with the Stark and Kickback laws for every aspect of its compensation plan, especially productivity payments. See my next article, Stark and Anti-Kickback laws regarding the compensation structure of a group medical practice. Lastly, a group practice can charge a portion of certain costs against individual physicians. You do this if the costs inure to a particular physician’s benefit, for example, insurance for the doctor’s specialty, extraordinary continuing education expenses (the cruise to Hawaii) and special equipment or supplies. CORPORATE DIVIDENDS Corporate dividends are much simpler than the first two forms of compensation. Most corporations pay dividends on a per-share basis, meaning that the more shares you own, the more you get paid. Founders get paid more because they usually own more shares. Consider using stock options or restricted stock (stock subject to repurchase by the group) to regulate stock ownership among founders, incoming physicians and outgoing physicians. Ft.1 — Matt’s theory of freeloaders and malcontents: All partners in a business, including you and me, fall into one of two categories, and frequently both. Each of us is either a freeloader or a malcontent. Having trouble with the concept? – visualize your marriage. You’re a freeloader if you’re happy to do less work than the other guy. Freeloaders say things like, “The value I bring is intangible but necessary; someone has to keep morale up.” You’re a malcontent if you resent working more than the next guy. Malcontents say, “I’m so tired of doing all the work around here; it’s just not fair.” In practices that survive, the physicians develop a sense of perspective because they know they’ve played either or both roles before, and will do so again. In case you’re interested, I’m a freeloader. My article, Shareholder buy-sell agreements for medical corporations, elaborates on the subject. Again, for a barebones outline of a compensation structure, read Outline of compensation / expense structure in a group medical practice

Stark and Anti-Kickback Laws Regarding the Compensation Structure of a Group Medical Practice

In this article, I briefly outline the legal requirements that apply when a group medical practice pays compensation to its members (whether owners, employees or contractors). My prior article, Compensation structures for a group medical practice, explains compensation plans from a non-legal perspective, including a discussion of “eat what you kill” practices and more team-oriented compensation structures. This article is hard work because I talk about the law, specifically, medical practice compensation plans under California and federal referral laws (Stark and Anti-Kickback). In general, a group medical practice pays its physicians in some combination of three ways: (1) salary, (2) productivity payments including a percentage of collections, (3) per-share corporate dividends. Let’s start right away with how the referral laws treat salary. SALARY Salary is the first element of a compensation plan. In general, salary should be reasonable and consistent with fair market value without taking into account any referrals. Salary usually is not a problem for Stark and Kickback compliance, and I won’t belabor it here. If you want to read more on the topic, see Stark and Anti-Kickback laws regarding physician employment and contractor agreements. In all cases, make sure you have a solid employment agreement that clearly shows its compliance with the Stark and Kickback laws. For more on employment agreements, see Physician employment and independent contractor agreements. PRODUCTIVITY PAYMENTS - BONUSES & SHARES IN PROFITS OR COLLECTIONS Productivity payments are the second element of a compensation structure. They include profit-shares, percentages of collections and productivity bonuses. To make productivity payments, your group must meet the Stark definition of a “group practice.” [The definition of group practice is important for many reasons, not just making productivity payments, but that’s a topic for another day.] A group practice may compensate its physicians (regardless of status as owner, employee or contractor) based on their productivity or work as follows: 1. Based directly on DHS (designated health services) personally performed by the physician. This can be a straight percentage of collections for professional services personally rendered. 2. Based on DHS that others perform “incident to” the physician’s personally performed services and subject to his or her supervision. This can be a percentage of collections or profit share that includes the billings made by other health care providers under the doctor’s supervision. 3. Based on factors that have nothing to do with referrals, for example, tenure in the group or management services. What you may not do is base payments directly on referrals of DHS. Compensation may not be directly related to the volume or value of DHS referrals by the physician. Notes: *** The group must charge its overhead expenses and distribute its income in a manner determined prior to their occurrence (no ad-hoc allocations). The group may, however, modify its distribution method as often as desired so long as the changes are only applied prospectively and are not based upon a pattern of referrals. *** The group must have a written compensation plan for its members. Usually you see the plan as an attachment to board of director resolutions, but you also see it in shareholders agreements or even the bylaws. The compensation plan must track the Stark law without deviation. *** Word to the wise: Do not think that your compensation plan is OK just because other groups seem to pay their physicians the same way. Yes, it’s true that most medical practices pay percentages of collections or profit shares. It’s also true that the law doesn’t care what everyone else is doing. The law only cares about what you’re doing. DIVIDENDS AND OTHER PER-CAPITA SHARES IN PROFITS Dividends are the third element of a compensation plan. The group may pay per-capita shares of overall group profits, for example per-share dividends, provided that the share of profit is not directly related to DHS referrals. Dividends are straight-forward because a per-share dividend rarely has any relation to referrals. The referral laws are voluminous, complex, subtle and idiotic. Get competent legal help for your group practice’s compensation plan.

Buy-In and Buy-Out of Physicians to a Medical Group

Physicians come and go from medical groups. When a physician enters a practice as a shareholder or partner, the practice should prepare for the physician’s exit. The exit is inevitable. In this article, I give one simple rule for structuring the doctor’s buy-in to a practice and the later buy-out of the doctor’s shares from the practice. THE RULE Buy-in should mirror buy-out. If a doctor buys-in to a medical group at $X, the group should buy-out the doctor at the same $X. In other words, you should use the same formula to determine both a doctor’s purchase price for shares in a practice, and the doctor’s buy-out price when leaving the practice. The reason for the rule is fairness. Neither the practice nor the doctor should get a windfall from the buy-in and subsequent buy-out. Founders are the primary exception to the rule. Founders usually get a special deal because they built the practice and made it valuable. In the start-up years, a founder’s compensation is low and he suffers higher risk, so it’s fair for the founder to receive the full buy-back price later on. THE PURCHASE PRICE FOR BUY-IN AND BUY-OUT The buy-in & buy-out prices (when taken together) can be high (for example, $100,000-in and $100,000-out), or they can be low ($10-in and $10-out), depending on the practice. In most practices, the price is either a formula that approximates fair market value (FMV), or an arbitrary or nominal number. I’ve seen many different buy-in and buy-out prices. I’ve seen one medical group with a nominal price of $10 for both buy-in and buy-out, and what’s more, the structure worked! Most practices, however, base the price on FMV. An FMV buy-in / buy-out price will equal the percentage share of the practice to be bought or sold, multiplied times the value of the practice. You determine the value of the practice based on 3 factors – tangible assets, accounts receivable, and goodwill. You can determine tangible assets and accounts receivable without much debate, because they represent hard assets that exist in the here and now. Goodwill is much harder to fix. Goodwill is the value of the practice’s expected future earning power, and the future is unknown. Goodwill varies from practice to practice. Although you can spend thousands of dollars on a fancy practice valuation and appraisal, ultimately you make a gut call on the value of goodwill. This is especially true for medical practices because they operate in a regulatory flux, and you can never predict what crazy policies Medicare will implement tomorrow. PAYMENT TERMS The doctor can pay the buy-in price, and the practice can pay the buy-out price, in cash or in installments. If a doctor pays for shares in cash, the doctor should receive the buy-out in cash (to the extent that practice liquidity permits this). Likewise a doctor who buys-in to the group over time using installment payments (e.g. a promissory note or salary reduction) should receive a buy-out in installments (e.g. a note or deferred compensation). Many groups pay the buy-out price as a combination of the buy-back of shares and deferred compensation. They do so for tax reasons because deferred compensation is deductible to the group and taxable to the doctor as ordinary income. Deferred compensation can be useful if a doctor paid the buy-in through reduced salary (which are pre-tax dollars for the doctor). At buy-out, the practice gets to deduct the deferred compensation, which evens out the tax benefit. If the practice pays a part of the buy-out price through a promissory note, the maturity of the note should be long enough that it does not overburden the practice yet short enough so the departing doctor does not wait too long for closure (e.g. 2-4 years). COMPETITION AFTER BUY-OUT A California practice can impose a non-competition clause on the departing doctor. In California, a non-competition clause is legal if it occurs as part of a bona-fide buy-back of the doctor’s shares. Some practices take very seriously the threat of competition, but other practices don’t really care. It depends on the nature of the practice and the market. If a practice does not demand a non-competition clause, it should at least regulate the process by which the departing doctor leaves. The practice should control how the doctor communicates with referral sources, employees and patients. The practice needs an orderly and professional process for separating the doctor from the practice. You don’t want either side (whether the departing doctor or the medical group) to poison the other’s well. For more on non-competition clauses, read May a physician compete against his or her former practice? and Stealing employees. CORPORATE DOCUMENTS The practice’s corporate documents should state the terms of the buy-in and the buy-out. Ordinarily you cover the buy-in in a Purchase Agreement, and the buy-out in a Shareholders Agreement. See also, Shareholder buy-sell agreements for medical corporations. To learn a little more about the process by which a medical group should bring in a new physician, read Bringing a new physician into a medical practice. You need an experienced attorney to implement my rule for buy-ins & buy-outs. Do not do this alone because there are many considerations and choices that I don’t have time to cover in this short article.

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