Compensation structures for a group medical practice
By Matt Dickstein
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In this article, I talk about compensation plans for group medical practices. For a barebones outline of a compensation structure, read Outline of compensation / expense structure in 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. Without further ado,
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 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.
It is with great joy that I conclude this article. Call me if you want to talk more.