Getting in tune: New partners

Before anything else, physicians in a newly merged practice must hammer out compensation packages.

By Bruce Maller, Lisa Peltier and Dana Jacoby, MBA

When two or more ophthalmology practices merge, the new partners should think about adopting the buzz-phrase “getting in tune.” The reason: Because the practice’s fellowship must start at the top with the partners, and the first item on the fellowship’s agenda must concern their compensation. If the partners are content, then the practice will feel safe and secure. And those feelings will affect patient care.

The new partners should recognize that an effective shareholder compensation plan has to be based on their shared values and run parallel with the group’s mission and vision. Their compensation strategies should be aligned with their new culture of collaborative engagement and not one focused purely on performance metrics.

Based on our research, many groups have struggled to find the “right” compensation model. In the case of merging groups, many have allowed partners to retain their prior compensation plans among each division. Although this approach can prove to be an effective transition strategy, it is important for them to “move” the partners to a more unified and consistent model.

Evolving, morphing and anticipating

In a Harvard Business Review article, the authors write, “Physician engagement can no longer be about short-term maximization of fee-for-service revenue; it must further the long-term strategy of improving outcomes and lowering costs — increasing value for patients.”¹ Achieving this goal will be difficult if merging partners can’t or won’t modify the shareholder compensation program so it is better aligned with the group’s long-term vision and strategy.

The other buzz-word here is flexibility. Fee-for-service is evolving into fee-for-value; shared saving, bundled payment and capitation are other value-based payment or risk models that are morphing. Anticipate the provider payment changes and adjust accordingly.

Newer compensation models may be based upon the physician achieving quality, patient satisfaction or citizenship standards. As value-based reimbursement increases, evolving compensation models should allow for an easy adjustment in the compensation ratio to whichever metrics the group prefers. Better alignment of payment incentives, transparency of performance measures, cost data, initiatives to improve efficiency and incentives to coordinate full continuum of care should be addressed within the compensation metrics. Partners should hone in on their group’s mission to maximize their long-term partnership goals. Whatever plan you pick, revisit it every year.

Success = added income

Many groups are also adopting aspects of compensation that recognize the group’s success; this way, they can further optimize group performance. These additions might include adding bonuses based on group performance (i.e., pay-for-performance scores or shared savings), sharing distributions earned through participation in bundled payment models or overall group profit sharing. These distributions may be given based on individual performance, equal distribution or other methodologies that blend individual performance with rewards for being a team player. As with overall partnership strategy discussions, compensation-structure talks are highly personal and customized discussions that hinge on transparent communications, a specific mission and a dedicated focus toward strategic long- and short-term group goals.

Bags of carrots

A well-constructed shareholder compensation plan can be an effective management tool. The key here is to align the plan with economic incentives, including board decisions involving major capital outlays such as: buying new offices or equipment and hiring physicians and nonphysician providers. Successful plan designs include:

1. Aligning the plan with the group’s vision and values.

2. Recognizing individual differences in production and resource consumption.

3. Promoting transparency and accountability and, as such, encouraging shareholders to continually strive for improvement in patient care and practice efficiency.

4. Sharing the risk and benefit of investments made in passive income sources such as an ambulatory surgical center and employed nonowner providers.

5. Avoiding making a plan too complicated to administer or requiring ongoing tweaks to satisfy individual shareholder requests.

Group practices especially like two compensation models. The first pools revenue from all sources; overhead is paid “off-the-top” and owners share the profits. This model allows some variability regarding how the net profits are shared. In most instances, some agreed-upon percentage of net income is allocated equally with the remainder allocated based on individual shareholder production. Typically, production is measured based on net collections (gross receipts minus patient refunds). The work component of Medicare relative value units (RVUs) is also used as a measure of productivity.

Some variations of the “pooled” concept exist. Some overhead items are “carved out” and allocated on an agreed-upon method. For example, capital items such as interest, depreciation and principal payments on debt service are often divided in proportion to ownership percentages. Also, physician-direct costs, i.e. injectable drugs or facility fees are sometimes charged directly to the consuming shareholder. Other physician expenses such as retirement plan contributions, CME, insurance and subscriptions can be allocated to the shareholder as part of his or her total compensation package. Table 1 illustrates the “pooled” or income-sharing model.

The second approach to compensation commonly found in group practices is a more “individualistic” approach in which revenue is allocated to individual shareholders, and overhead expenses are also allocated based on an agreed-upon formula. In these models, there are several categories of overhead expenses, including direct overhead and shared and nonshared expenses. Direct expenses include those noted above and relate directly to revenue production. Shared expenses include the general and administrative expenses associated with operating the practice. Nonshared overhead items include the physician direct expenses noted above and are generally allocated by individual shareholder.

In most practices using this model, the partners agree to a percentage of shared expenses, divided equally, and the remaining overhead is allocated on a production measure. Myriad variations exist on this basic theme. In some groups, painstaking detail is associated with dividing each line item of an expense, whereas in other models the partners agree in advance to some percentage to be shared equally, and the remainder is shared on the basis of production. Table 2 provides an example of the “individualistic” or profit-center model.

As noted, an important element is for the group to design the plan as to best align with the practice’s vision and values. While no right or wrong approach exists, problems arise when the plan is not in sync, and if and when a partner’s behavior contravenes what is right or best for the group.

Conclusion

Over the past decade, regulatory, legislative and reimbursement changes have forced ophthalmology group practices to rethink their business model. To ensure that they remain viable, many have merged into larger integrated group practices. The larger groups, however, struggle with issues of developing a strong culture, making good business decisions, and building consensus on how best to share income and expenses. Building a successful and sustainable business model requires group leaders to invest the time and resources in addressing these issues in a proactive manner. Research suggests that ophthalmology groups that are successful in this transition have outstanding physician leaders who recognize the importance of creating a common culture built on a foundation of a strong mission, a vision, and an established set of values. These leaders are adept at communicating effectively with all group stakeholders. Additionally, they understand the value of developing a compensation plan that effectively aligns the incentives of the shareholders in achieving the group’s long-term goals. OM

REFERENCES

About the Authors
	Bruce Maller is the president and CEO of BSM Consulting, an internationally recognized health care consulting firm headquartered in Incline Village, Nev. and Scottsdale, Ariz. Lisa Peltier and Dana Jacoby are senior consultants at BSM Consulting. More information about the authors or BSM Consulting are available at www.BSMconsulting.com.