Best Practices

Compensation planning in the new world order

A new environment requires practices to revisit an often touchy subject.

By Bruce Maller

A client, facing Medicaid expansion in his state, knows the impact of many new patients on the practice will be good, bad — and a large unknown.

The good. This group is well positioned to obtain a sizable contract with one or more insurance companies.

The bad. The group also faces a significant increase in patient volume, but at reimbursement rates below the Medicare fee schedule. And, it is likely that some contracts may be offered on a so-called capitated basis, the prospective payment on a per-member per-month basis.

The large unknown. To my client’s credit, the group is considering the downstream impact that market changes of this nature may have on their shareholder compensation plan. This group has long used a “hybrid” model that rewards individual physician production and recognizes factors such as quality of care and other forms of group contributions, such as participation in group leadership. With the real possibility that CMS will continue moving away from traditional fee-for-service reimbursement, the partners are contemplating if they should reduce or eliminate that portion of their compensation pool determined by individual partner collections.

DEVELOPING THE “RIGHT” COMPENSATION STRUCTURE

This case is a good reminder that many ophthalmology groups struggle to find the “right” compensation model. The process can prove difficult because partners often are not aligned in terms of a shared vision, mission and set of core values. But in my experience, if groups invest more time at the front end focusing on them, the “right” compensation structure more naturally follows.

For example, if the group’s primary business objective is to provide a vehicle for sharing overhead, then an individual production model tends to make more sense. But, if the partners desire to create a more collaborative and interdependent culture, a compensation model that includes some sharing of revenue and expenses may be more appropriate.

Among ophthalmology practices, two primary compensation models dominate. In the first model, revenue from all sources is pooled, overhead is paid “off the top” and profits are shared among the owners. This model features some variability among groups in terms of how the net profits are allocated. Typically, some agreed-upon percentage of net income is shared equally, with the rest divvied up on the basis of the individual production of the shareholders. In most instances, production is based on net collections. The work component of Medicare relative value units (RVUs) is also used as a productivity measure.

In contrast to the “pooled” concept, some overhead items are “carved out” and allocated on some agreed-upon method. For example, capital items such as interest, depreciation and principal payments on debt service are often allocated in proportion to ownership percentages. It is not unusual to see physician-direct costs (facility fees) charged directly to the consuming shareholder. In addition, other physician expenses (retirement plan contributions, CME, insurance, dues) are also allocated to the shareholder as part of his or her total compensation package.

The second approach to compensation is more “individualistic.” Revenue is allocated to individual shareholders, and overhead expenses are allocated based on an agreed-upon formula. In these models, there are several categories of overhead expenses (including direct overhead and shared and non-shared expenses). Direct expenses would include the items noted above and would relate directly to the production of revenue. Shared expenses include the general and administrative expenses associated with operating the practice. Nonshared overhead items include physician-direct expenses and are allocated by the individual shareholder.

In most practices using this model, an agreed-upon percentage of shared expenses is divided equally, and the remaining overhead is allocated on some production measure. There are many variations on this basic theme. In some groups, painstaking detail is associated with allocating each line item of expense; whereas, in other models, the partners have agreed in advance to some percentage to be shared equally and the remainder is divided on the basis of production.

MY EXPERIENCE

I have found that a well-constructed shareholder compensation plan can be an effective management tool. If designed properly, board decisions involving major capital investment (such as new offices or equipment, the hiring of physicians) are easier when economic incentives are properly aligned to group goals. Other key success factors include:

1. Recognition of individual differences in production and resource use.

2. Promotion of transparency and accountability; encouragement of shareholders to continually strive for improvement in patient care and practice efficiency.

3. Sharing the risk and benefit of investments made in passive income sources such as an ambulatory surgical center and employed non-owner providers.

4. Making the plan relatively easy to administer.

5. Reviewing the plan periodically to make sure the structure is aligned with market dynamics.

FUTURE CONSIDERATIONS

With the shifting sands in health care, newer compensation models are emerging that link compensation to other factors, including quality measures, patient satisfaction and citizenship standards. Additionally, some groups are contemplating changes that include creation of a salary structure linked to workdays, patient volume, training, experience and efficiency.

For example, a group might consider dedicating an agreed-upon percentage of total distributable net income to fund the shareholders’ base salaries. The salaries could be the same or vary based on different factors. The remaining portion of the compensation pool could be allocated using a point system tied to quality measures and other partner contributions linked to the overall group success, such as participation in group governance. OM

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. For more information about the author, BSM Consulting, or content/resources discussed in this article, please visit www.BSMconsulting.com.