Eyeworld

AUG 2014

EyeWorld is the official news magazine of the American Society of Cataract & Refractive Surgery.

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60 August 2014 OPHTHALMOLOGY BUSINESS by John B. Pinto high-revenue doctors (e.g., retina, elective plastics) working with lower producers sometimes complain that they are unfairly covering the over- head and that this model provides a disincentive for high producers. It is often reasonable to con- sider a compensation premium for high-producing members of the practice, either directly through the compensation model or indirectly, as by the board having a pool of profits to allocate by majority vote to doctors who have made special contributions to the group (by high collections, securing contracts, managing the practice, or leading important projects). It is sometimes reasonable to consider a subsidy or "kink" in the compensation rules for low-produc- ing members of the practice. This is often related to the philosophy and values of the owner-doctors. Perhaps the values of your practice declare, "We believe we should be a setting where low-profit pediat- ric subspecialists, or slower-paced doctors who emphasize patient education, or doctors who balance work and family life should be able to practice fruitfully." In such cases, you may need to subsidize provider compensation. This is a delicate area requiring significant group practice openness and discussion. A small number of practices— usually larger and located in markets with a historically high penetra- tion of managed care—use some variation on an RVU-based system. Although this is common for eye departments embedded in larger multi-specialty groups, as a matter of principle, I shy away from this approach because of the percep- tion among most providers that 1) the RVU methodology is flawed in assigning work units, and 2) how much a doctor gets paid should be related to how much money he collects (i.e., how much tangible VALUE he generates), not how many arbitrary "work units" he or she accrues. A rare approach is to reward doctors in a hybrid fashion, partly for revenue productivity, and partly for actual clinical time spent in the practice, irrespective of production. While few ambitious doctors would be comfortable with their partners being paid for "just showing up," this approach can work in a Imagine a practice with $2 million in collections. Dr. A collects $800,000 per year; Dr. B collects $1.2 million per year. Practice overhead is 60% or $1.2 million. Practice profit available for distribution is $800,000. The partners have agreed to distribute all profits equally. This approach is "fair" in proportion to how close the doctors are to each other in revenue production and the use of resources. Note that with this approach, we don't eliminate com- petition. But rather than competing for patients and cases, doctors com- pete with each other for time off. Variable split of profits A large number of ophthalmic practices today use some variation on the following: X% of profits are shared equally among the partner providers and Y% of profits are shared pro-rata to each partner's personal collections, charges, patient visits, RVUs, or some other measure of personal production. It is com- mon to find that "X" is in the range of 20–50% and "Y" is in the range of 50–80%. Here is an example: The same $2 million practice. Dr. A collects $800,000 per year; Dr. B collects $1.2 million per year. Practice overhead is 60% or $1.2 million. Practice profit available for distribution is $800,000. Partners have agreed to distribute 30% of profits equally and 70% pro- rata to their individual collections. $800,000 in profits times 30% = $240,000. So they start by getting an equal $120,000 each. The residual $560,000 in profits is divided up 40% to Dr. A and 60% to Dr. B. One test for the relative fairness of this approach is the percentile spread between doctors A and B. In this case, there is a 5% spread (43% minus 38%) between the doctors. In my consulting work, I have found anything significantly above this 5% figure (or 10% or 15%, depending on other conditions present) can suggest a potentially unfair dispro- portionality, which can be easily adjusted by small changes in the methodology. Variable split of expenses Some practices use a variation on the variable split of profits, and concentrate on expense sharing rather than profit sharing. Under this alternative approach, X% of overhead (often indexed in some manner to the fixed overhead—rent, marketing, computer systems, core management staffing, etc.) is shared equally among the providers and Y% of overhead (related to the variable overhead for supplies, support staff, etc.) is shared pro-rata to personal collections, charges, patient visits, or some other measure of personal production. Here is an example: The same $2 million practice. Dr. A collects $800,000 per year; Dr. B collects $1.2 million per year. Prac- tice overhead is 60% or $1.2 million. Practice profit available for distri- bution is $800,000. Partners have agreed to share 30% of costs equally and 70% pro-rata to their individual collections. $1.2 million in expens- es times 30% = $360,000. So they start by each paying $180,000 of the overhead. The residual $840,000 in practice expenses is divided up 40% to Dr. A and 60% to Dr. B. Depending on the percentages applied, this approach can be more favorable to higher-production partners and less favorable—even punishing—to lower producers. The high producer is in an advantaged position, perhaps appropriately so, he or she would think. Other methods A number of practices take a pure "eat what you kill" approach, where 100% of overhead (or profit) is shared pro-rata to personal pro- duction. This can be great for some practices, poor in other settings. High patient volume providers and O f all the variables that go into making a professional partnership work, nothing contributes more to owner happiness—or rancor— than the compensation methodolo- gy. Partner comp is the "biggie." If two doctors are using the same resources and generating the same revenue, then any compen- sation model is fair. In all other cases, the feelings and the math get complicated. Compensation modeling is a zero-sum environment. Any change to the model creates winners and losers. For this reason, it is usually inappropriate to ask the practice administrator to lead the compensa- tion modeling process—if a change is made, the doctors who "lose" can hold a grudge against anyone who led the process. It's often more appropriate to use a peer-partner or external accounting or consulting resources to lead the process. No enduringly perfect comp model has ever been developed. Conditions change. Doctors who need perfect fairness should be in solo practice. Like a marriage, you have to be able to say, liberally, "I can live with that." Equal split A very small number of egalitarian, economically "socialist" practices take an equal split approach where all profits are divided equally. Here's an example: Trends in shareholder physician compensation methodologies

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