Physician compensation models and expenses
One of the most important decisions that a growing medical practice must make is how to compensate its providers. When a practice has only one provider, the compensation model is very simple. Revenue is received, expenses are paid, and any funds remaining are paid to the owner. However, when new providers (whether they are associates or partners) join the practice, the compensation model suddenly becomes more complex. There are many different ways for the income and expenses to be split and all of them have pros and cons. This article will discuss the “eat what you kill” (also known as the “eat what you treat”) model. While there are many other ways to split the profits of a medical practice, this model has become the most popular in smaller, physician-owned practices.
Under the “eat what you kill” model, each provider is allocated 100% of his/her professional receipts. From that, expenses are taken and a bottom line amount is calculated. This bottom line becomes the compensation available to that provider. Separating the income is fairly simple with the caveat that Stark and other Medicare fraud and abuse laws must be observed. Because each provider is uniquely identified in the billing system of the practice, a report can be run each month showing each provider’s professional collections. The ease and accuracy for calculating receipts is one of the major benefits of this method. On the other hand, splitting expenses can become difficult and requires some careful planning.
It is easy to understand that a physician who saw a patient should receive the money paid to the practice on behalf of that patient. It is less obvious how expenses should be split among physicians. When tracking expenses, it is important to remember that sometimes we will not know exactly who incurred the expenses, and other times it will be cost-prohibitive to calculate the precise amount incurred by each individual provider. Some view these approximations and proxy calculations as a downside of this model.
When allocating expenses among the providers, we usually recommend using a combination of three categories for expenses, although it varies by practice. The first category contains expenses shared equally. This would normally include administrative staff, accounting, and rent. Because the providers are essentially sharing these expenses close to equally, the expense is divided evenly among them. For example, if we have a practice with three owners, then each owner would be allocated 33% of the wages for the office manager.
The next category contains expenses split pro rata. These are expenses that are not used equally and may include medical supplies, billing staff and nursing staff. When splitting these expenses, we want to use a variable that would approximate who incurred the expense. Most of our practices choose to do this based on collections but others use number of patients or half-days worked. It depends on the practice which is the best method. For example, if a provider is collecting 45% of the revenue for a practice, he/she would be allocated 45% of the billing expenses. This is an approximation for ease of understanding and accounting. While we could track the exact number of patients billed or have the billing staff clock in for each physician, these measures may be costly and reduce efficiencies practice-wide. We generally try to avoid making a system less efficient simply for cost accounting purposes.
The third category is direct expenses. This category consists of expenses that can be easily traced to an individual provider and that the practice would probably not incur without that provider. The simplest examples are malpractice insurance and continuing education. If that provider did not work for the practice, these expenses for him/her would not exist. Therefore, we allocate that cost to the provider.
At the end of the month, a provider is allocated his/her collections, then the equally shared expenses are split equally, the pro rata expenses are split based on collections (or some other variable), and finally the direct expenses are allocated. Once this is done, each provider will have a bottom line number and that will be the compensation due to them. As your practice grows, it is important to meet with your advisors to find a compensation model that fits the needs of your specialty and the providers in your group.
— Blake King, CPA, MAcc, CVA. The author is a Partner and Director of Accounting at DoctorsManagement.