AAOS Bulletin - April, 2006

Evaluating practice opportunities: Part II

Asking the right questions can help you avoid costly career missteps

By Ryan M. Dopirak, MD

The typical orthopaedic surgeon will make two or three practice changes over the course of his or her career. About half of all orthopaedists will make a change within their first two years of practice—a disruption that can result in unnecessary stress, wasted time and lost income. To avoid such costly mistakes, orthopaedists must learn to evaluate practice opportunities with a critical eye.

Many factors must be considered when evaluating employment opportunities, and each individual has different priorities. This article—the second in a two-part series—provides a wide range of financial questions that orthopaedic surgeons should ask potential employers/partners when making important career decisions. Part one of the series (February 2006 Bulletin) dealt with questions concerning the group/opportunity and the on-call experience.

1. What is the income guarantee and what stipulations are attached?

Orthopaedic surgeons are in high demand in today’s market, so employment opportunities are plentiful—many including large income guarantees that may be very appealing to new graduates. However, it’s essential to understand the structure of any income guarantee, as well as the stipulations in the contract’s fine print.

First, clarify whether the guarantee is a “gross income” (“production”) guarantee or a “net income” guarantee. A gross income guarantee provides a set amount of money that is used to both run your practice and pay your salary. Any income guarantee that sounds extraordinarily high may be a gross income guarantee and not a true representation of take-home income. In contrast, a net income guarantee refers to actual income and should be guaranteed regardless of overhead costs.

Next, clarify the stipulations attached to the guarantee. Income guarantees are often contractually structured as loans. When actual production is not sufficient to cover both the surgeon’s overhead and salary, a deficit results and the hospital/group is left holding the bill. This is commonly considered a loan to the surgeon. Some hospitals will require that the loan be repaid over time and will offset future production bonuses against this debt. Others may “forgive” this loan over a specified number of years. In certain circumstances, this could be very unfavorable. To avoid potential pitfalls, always seek the advice of an orthopaedic business consultant and a health care attorney prior to signing an employment contract.

2. What is my projected peak income potential if I join this group?

Your ultimate income potential with a group is far more important than a short-term income guarantee. Looking at the income range of the group members in recent years should give you a general idea of your income potential. Although it may be uncomfortable to discuss the partners’ income with them, this information is critical to the decision-making process.

Income surveys may also be helpful. According to the 2004–2005 AAOS member census, the median income for U.S. orthopaedic surgeons is approximately $320,000. Subspecialists generally make more than general orthopaedic surgeons. Orthopaedists in Midwest and southern states typically have higher incomes than in other regions.

3. Am I eligible for a bonus when production exceeds the income guarantee in the first few years?

Some groups pay new physicians a strict salary with no bonus opportunity. In this scenario, senior partners may load work onto the new physician. There is no financial reward for the younger physician because the excess revenue he or she generates is split between the senior partners. This may lead to feelings of discontent in the work environment.

4. Is there a signing bonus?

Many orthopaedic opportunities include a signing bonus, although the amount is highly variable, depending on supply and demand. The signing bonus is often considered a forgivable loan, which is gradually forgiven over a specified number of years. A surgeon who leaves prior to completing the requisite number of years will be contractually obligated to repay a portion of the loan.

A signing bonus is considered taxable income. Taxes must be withheld or paid later. If the bonus is structured as a loan, it will be considered taxable income as it is forgiven.

Finally, beware of the pay advance disguised as a “signing bonus.” Some opportunities offer an initial “signing bonus” that is later subtracted from the surgeon’s base salary. Read the fine print.

5. Is student loan repayment offered?

Many orthopaedic opportunities include student loan repayment, which may be dispersed in one lump sum or in smaller increments over the course of the contract. In either circumstance, this will be considered taxable income.

6. Are relocation expenses paid?

Most groups offer some type of relocation assistance. This is fairly straightforward and should be included in the employment contract.

7. What is the group’s overhead?

Gross productivity (“total billings” or “charges”) is the amount a group bills insurance companies and/or individuals for medical services performed. Net productivity (“collections”) is the amount a group actually collects after write-offs.

Collections are used to pay salaries as well as overhead, which consists of office space and furnishings, technical equipment, orthopaedic supplies, malpractice insurance premiums and physician retirement benefits, as well as employees’ salaries and benefits. A group should be able to identify its overhead as a percentage of collections. Inability to quantify overhead may indicate questionable business operations.

It is difficult to define what constitutes a “good” overhead percentage. Overhead depends on many factors, including cost-of-living indexes, payee mix, involvement in ancillary ventures, use of physician extenders and productivity of the group.

8. When is partnership offered to new physicians and what is the buy-in amount?

Partnership is typically offered to new physicians after a specified period of time. The criteria to achieve partnership must be explicitly stated in the employment contract.

Many partnership arrangements entail a “buy-in.” A large buy-in may be reasonable if it provides ownership in ancillary ventures, such as an MRI or ambulatory surgery center (ASC). Be very wary if you’re buying into the “hard assets,” “goodwill” or “reputation” of the group. “Hard assets” are commonly depreciated and have little actual value. The days of buying into the “goodwill” or “reputation” of a group are generally over.

9. Does the group own ancillary services?

To offset decreasing reimbursement and increasing medical liability insurance rates, many orthopaedists have invested in ancillary ventures. Currently, 24 percent of orthopaedic surgeons receive income from ownership in a private facility, such as a specialty hospital, ASC or imaging center, according to the AAOS 2004–2005 member census.

Although ancillary investments may provide the opportunity for increased income, they also entail some financial risk. A market analysis should be performed prior to engaging in such ventures. If the group is already involved in this type of endeavor, clarify whether or not new partners will have the opportunity to become investors.

10. What happens to accounts receivable if I leave the group?

Medicine is one business in which payment for the service provided is not made immediately upon provision of services. At any given time, there will be a number of accounts for which you have provided services but have not yet been compensated. These are known as “accounts receivable,” and they may amount to a substantial sum of money. For example, if it takes an average of five weeks to receive payment from insurance carriers, the accounts receivable will amount to approximately 10 percent of your annual salary.

If you should leave the group, it’s essential to know the fate of your accounts receivable; this should be included in the employment contract. It is not uncommon for accounts receivable to remain the property of the group when an individual resigns. Ideally, the surgeon will receive payment for accounts receivable after a reasonable deduction for overhead costs.

11. What is the group’s policy on income received from sources outside the practice?

Some physicians are involved in revenue-generating activities outside their clinical practices. Specific examples include writing textbooks, providing medicolegal testimony, performing disability examinations, consulting for industry and inventing and/or developing orthopaedic devices.

Many groups maintain that all income received from outside sources should be paid to the group and is subject to normal overhead if the income is in any way related to being a physician. This is reasonable if the physician conducts outside activities during the workday instead of performing professional services and generating revenue for the group.

In contrast, plans for revenue-generating activities that can be performed outside the practice may be contractually protected. For example, if a physician authors a textbook exclusively on the weekends and otherwise maintains a full clinical practice, profits from this product should be paid directly to the physician and not be subject to overhead. Always consider specific contractual language that protects your inventions and intellectual property.

Identify your priorities

Numerous factors must be considered when evaluating orthopaedic employment opportunities, and there is no such thing as a “perfect job.” Thus it is essential to identify and prioritize what is most important to you and your family.

In addition to the factors discussed in this series, it’s equally important to consider the social and cultural environment of the community, as well as the quality of the local school systems. Above all, keep in mind that your family must be happy for the situation to succeed.

Ryan M. Dopirak, MD, is currently a fellow in orthopaedic sports medicine and arthroscopic surgery at the Southern California Orthopedic Institute. He welcomes questions and comments by e-mail at rdopirak@msn.com

Resources

1. Merritt, Hawkins & Associates 2005 Review of Physician Recruiting Incentives

2. AAOS Orthopaedic Medical Income in the U.S. 2004–2005

3. Medical Group Management Association’s Physician Compensation and Production Survey: 2004 Report Based on 2003 Data


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