Best Practices

Beware of potential pitfalls in new associate compensation

Find a figure that both practice and physician can live with.

By Richard C. Koval, M.P.A., CMPE

Richard C. Koval, MPA, CMPE, is a principal and senior consultant with BSM Consulting, an internationally recognized health care consulting firm headquartered in Incline Village, Nev., and Scottsdale, Ariz. For more information about the author, BSM Consulting, or content and resources discussed in this article are available at the BSM Café at www.BSMCafe.com.

Many practices approach compensation of a new associate without fully understanding the implications of the selected parameters. Obviously, compensation needs to be competitive, allowing the practice to attract capable, qualified candidates. But you should also consider the individual’s compensation structure within the context of the practice in terms of profitability, contributions to overhead and the associate’s interest in potential co-ownership.

THE USUAL FORMULA

Especially in those instances where practice overhead exceeds national averages (around 60% in ophthalmology), practice principals often get trapped between competitive compensation levels and what they perceive they can afford. Typical contract terms for combined salary and bonus will pay an associate no less than 30% to 33% of net collections (gross collections minus refunds).

If such terms were offered and practice overhead were 72%, the inverse of overhead at 28% might seem to suggest the practice would lose money by paying an associate at that market rate of 30% to 33%. However, the actual cost of adding that associate will be limited to variable costs such as the associate’s compensation and benefits, additional staffing, supplies and other expenses specific to that associate. The practice’s fixed costs will not change.

As a result, although practice overhead may be 72%, the additional overhead it incurs by adding the associate will be less than that percentage. This allows the practice to benefit from recruitment even though the associate may be paid at a higher compensation rate than the owners.

THE CO-OWNERSHIP FACTOR

The problem in such cases arises when co-ownership is considered. A basic premise of co-ownership is that the buyer will enjoy a positive return on investment in the practice. Under the previous example, the prospective co-owner would face the unattractive opportunity to earn less compensation as a co-owner than an employed associate, while assuming the burden of a buy-in payment and the inherent risks of co-owning a business.

In these cases, co-ownership is unlikely, unless overhead decreases to the point of a positive return. Otherwise, the relationship can be viable, provided the newly recruited associate is willing to continue indefinitely as an employed provider.

Overhead challenges can be addressed either through reducing unnecessary expenses (usually centered around staffing) or increasing revenue. Recruitment can often reduce overhead, but practices having severe cost-control problems will usually face particularly difficult challenges. OM