April 2001 Bulletin

Practices use hybrid systems to split income

Distribution plan promotes vitality, growth, unity and specialization

By Sandra Lee Breisch

It’s a classic group practice concern: how to divide the income to keep everyone happy and practice profits growing.

It’s a complex question made even more so by the growing pressures of managed care, capitation and contracts with utilization-based withholds that require orthopaedic surgeons work smarter–not just harder, to get by.

As a result, many practices are moving away from the traditional productivity-based income distribution plans, which "often promote damaging internal competition within the group and may even promote over-utilization toward hybrid arrangements that reward doctors," according to Robert J. Cimasi, president of Health Capital Consultants, St. Louis.

"The movement toward hybrid income distribution systems recognizes the importance of maintaining the vitality, growth and unity of the practice," says Cimasi "These are critical attributes to cultivate if the group is to work together to improve care and control utilization and costs."

Another reason for moving away from the straight productivity distribution model to a hybrid model is "to promote specialization among group members, which can lead to higher efficiency and overall profits for the group," says Bruce A. Johnson, a Denver lawyer and health care consultant, who advises many private and academic orthopaedic practices on compensation matters. "Basically, the goal is what every doctor says about their compensation plan: they want it to be fair, keep the group together by promoting strategic goals and promote productivity," stresses Johnson.

To achieve these goals, Cimasi sees a trend toward incorporating some of the following methodologies in income distribution plans:

Even though a lot of groups try to look at RVUs for income distribution, "cash is king," says Johnson. "You’ve got to look at who brings in the money so you measure production and work based upon collections," he says. "The group will typically then assign an overhead factor to those collections or they’ll simply divide all the money available after payment of expenses based upon a combination of equal share and production."

Generally, there are three ways to distribute practice income, says James B. Albertson, director of Integration Services, at ProSTAT Resource Group, a health care business consulting company in Panama City, Fla. "One would be splitting income up equally among physicians," he explains. "On the other extreme it would be splitting up profit, based upon production. And the middle of the road is more detailed: take the overhead and distribute some of the overhead to specific doctors before they split up the profit. But in the third scenario, one physician might say, ‘I want an assistant,’ and another might say, ‘I don’t need that assistant,’ So, the physician who wants the assistant might be charged [that salary] before he or she takes out the profit."

Although there are a lot of ways to compensate, it really boils down to achieving fairness and equity among the partners and keeping peace among the group.

"For instance, there should be recognition for physicians who tend to boost the image of the practice–being a team doctor, the researcher in the group or the community leader–which benefits all the partners, not necessarily the individuals doing the work," says Albertson. "Since we’re all (continued on p. 14) under managed care, maybe a doctor who spends a lot of time negotiating contracts and working with payers should be compensated beyond their normal compensation models for doing all of these duties."

According to Cimasi, the golden rule is that the income distribution plan and compensation scenario for an orthopaedic practice should strive to do three things:

Further, Cimasi says doctors should invest in marketing and development of product lines and ancillary services. "For instance, if orthopaedists are not specializing in sports medicine or any of the other patient-driven subspecialties, they may be too reliant on insurance-driven services," he says. "Investing in their own surgery center allows the group to achieve ancillary revenues. Further, updating office facilities to become more cost-effective saves overhead. In many ways, orthopaedists invest now or pay forever in terms of inefficient office facilities."

Before determining what income distribution system works well for your group, factor in market conditions, notes Cimasi. "Also, keep in mind that going from one extreme to another may not work," he says. "Each income distribution method has its own downside as well as incentive. A productivity-based system may encourage greater utilization, while capitation requires lower utilization. A hybrid approach allows the group to combine the appropriate incentives to create an income distribution system that is responsive to market conditions, encourages cooperative behavior where it is needed and rewards hard work–always."

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