November 30, 2009

Partner Compensation — Piecing Together a Plan That Works for Your Group

By Timothy W. Boden, CMPE
Radiology Today
Vol. 10 No. 19 P. 18

A practice’s profit distribution scheme both reflects and reinforces the group’s culture. It says, “This is what we consider valuable enough to pay for.”

Which is better: sharing practice profits equally or basing partners’ compensation on their individual productivity? If the answer to that question ever was simple, it certainly isn’t anymore.

If differences in production seem negligible and the partners feel that everyone is pulling his or her own share of the load, equal income distribution (after expenses) is the way to go. It’s clean, easy to understand, and simple to administer.

But the realities of practicing radiology in the 21st century have prompted many group practices to rethink how they distribute income. Veteran practice management consultant L. Michael Fleischman, FAAHC, sees more practices moving toward a production-based model. Fleischman, a principal with Gates, Moore & Company in suburban Atlanta, says technological advancements over the past 20 years have brought new modalities that have given rise to increased subspecialization among radiologists. Teleradiology’s proliferation has dramatically affected how radiologists work and produce revenue. In addition to evolving modalities, interventional radiology’s growth adds new revenue, expense, and compensation issues to the mix as groups recruit more interventionalists.

Radiology groups are discovering that this expanding diversity can create significant differences in workload, responsibilities, revenue production, and overhead. As those differences grow, an equal profit distribution scheme seems less fair to more radiologists. Robert A. Maier, a consultant specializing in imaging services for 25 years, says, “I would estimate that nearly 90% of radiology practices still distribute profits equally, although there is growing interest in production-based schemes.”

Maier, founder and president of Regents Health Resources, Inc in Brentwood, Tenn., says today’s technology makes virtually every radiology practice more productive. Modern equipment generates more images than ever, and PACS delivers them to radiologists at previously unimaginable rates. That speed also exposes the fact that the physician is the greatest bottleneck in the process. He notes that most well-run practices measure production, but they don’t necessarily pay the doctors on that basis.

Add to this mix the much-reported lifestyle expectations expressed by younger physicians reluctant to work the same hours as those kept by senior partners of previous generations. The seniors often look askance at new recruits with serious doubts about their “work ethic.” Some suspect that lower pay for lower output may be more appropriate these days.

So a growing number of groups has begun considering an alternative to the equal-share approach. But how do you structure a fair and equitable plan that makes allowances for these variations without damaging the group’s cohesiveness?

What Do You Value?
A practice’s profit distribution scheme both reflects and reinforces the group’s culture. It says, “This is what we consider valuable enough to pay for.” Production-generating revenue is of unquestionable value, but what about other contributions to the group’s success? Some groups pay stipends or bonuses to partners for filling leadership and management roles; participating in outreach and marketing, communication, and relationship-building with hospitals; or medical directorships and other “good citizen” activities.

When designing a physician compensation formula, the members need to decide first what is expected of each physician and what activities beyond revenue production they want to reward and incentivize. Maier feels strongly that radiology practices should include a component in their profit distribution plans that recognizes and rewards physicians for performance measures such as quality and customer service. It’s common, he says, for satisfaction surveys to reveal that referring physicians “love” the reports from some doctors but dread receiving them from other doctors in the same group. (Your group should also identify what referrers love about those doctors’ reports and work to provide that in all your group’s reports.)

Once the group decides what behaviors it wants to encourage, it can determine how to measure those activities and how it wants to compensate the members who perform well. After that, it’s time to figure out how to fund the additional compensation. Many practices set aside a percentage of total revenue before production allocations for that purpose.

Some activities go beyond the expectations of day-to-day operations. For example, the physician who serves as the managing partner can spend a significant amount of time in that role. In a production-based plan, that usually translates either to a loss of income or an increase in working hours to attend to management duties—if not both. It’s only fair for the group to compensate him or her for that leadership. According to Fleischman, typical stipends for group leaders average around $60,000 per year.

Measuring Productivity
Years ago, most nonradiology practices using a production-based formula, simply tracked each physician’s net collections and then subtracted his or her share of expenses. The remainder was available for the doctors’ paychecks. But measuring production based on collections does not really measure work and effort. For example, although the physician applies the same amount of effort in both cases, performing a procedure for a patient covered by a private health plan usually pays much better than performing the same procedure for a Medicaid patient.

Fleischman notes that uncompensated care continues to be a significant issue for hospital-based radiology groups. Measuring productivity by collections in these cases amounts to unfairly penalizing the physician unlucky enough to catch most of those calls.
A significant number of groups has changed their approaches to measuring productivity. One popular method assigns value to each medical service using the procedure’s relative value units (RVUs) as determined by the Centers for Medicare & Medicaid Services’ resource-based relative value system (RBRVS). Each physician then receives a share of the practice’s net profit based on his or her percentage of total RVUs produced—regardless of his or her collections. Unlike plans that calculate productivity on gross billings, using a generally accepted, standardized gauge such as the RBRVS brings a certain level of objectivity to the measure.

The Quest for Fairness
Radiologists may raise objections to productivity measures because of seat assignments, says Maier. When covering the emergency department, the frequent interruptions for emergency readings will lower a radiologist’s overall output for that session. Subspecialists may complain that their particular field of expertise doesn’t provide opportunities for production levels achieved by other radiologists. Clearly a group practice must make sure that assignments are fair and equitable—that every physician has a fair share of both the high- and low-volume seats.

Maier points out that PACS has done much to level the playing field among radiologists. Today, it’s quite easy for a physician covering, say, MRI on a slow day to read plain films and other images between cases.

How Groups Share Expenses
Once a group figures out how to measure and reward productivity, it has solved only part of the “fairness” puzzle. At first glance, simply sharing expenses equally among the partners seems fair, but it doesn’t reflect the real dynamics going on in the practice. To share equally, you only need to pay all the bills before allocating the remaining profits. But consider issues such as these:

• Dr. Jones reads (and gets paid for) 25% more plain films and scans than Dr. Smith. Should they pay equal shares of film and chemical costs?

• Dr. Brown performs only 6% of the procedures billed by his 10-physician group. Should he pay an equal share for billing services calculated on a per-claim basis?

• Dr. Gray is the only interventionalist in the group. Should other physicians help pay the expenses associated with maintaining, staffing, and running a clinic and an interventional radiology suite?

• Dr. Senior reads plain films and a few MR exams. Should he pay an equal share of maintenance costs for the MRI magnet, the CT scanner, and the mammography unit?

Some practice expenses fall into the variable-expense category—that is, expenses that rise and fall with business volume. In freestanding practices, consumable supplies dominate the variable expense list.

Accountants refer to other costs as “fixed” expenses, or items such as rent or insurance premiums that remain relatively unaffected by business volume.

A few groups go so far as to implement a detailed cost-accounting system for tracking every expense back to the “responsibility center” (department) that incurred it. Hospitals generally have highly complex systems to measure the profitability of each department and service line in the organization. Most practices don’t need that kind of detail. So in an effort to treat everyone fairly, production-based groups often allocate expenses according to the following categories:

• Fixed expenses are shared equally. Rent and other facility costs, management staff, and purchased professional services, such as accounting and legal work, marketing, and advertising, are all items that remain relatively unaffected (in the short term) by patient volume.

• Variable expenses are shared according to production percentage. Billing services (or billing staff costs if done in-house), general and medical supplies and equipment maintenance (especially contracts based on usage) are expenses that increase proportionately with patient volume.

• Direct expenses are tracked back to individual physicians. Fringe benefits, insurance premiums, education and travel, personal professional library, memberships—anything that’s billed to the practice per physician or those items over which the individual physician has control or exerts his or her personal preference—should be the direct responsibility of the physician.

Hospital-based radiology groups generally have fewer operational expenses and may not find it worthwhile to calculate and allocate expenses this way. Not only do they usually enjoy a lower overhead rate (Fleischman cites the Medical Group Management Association’s most recent survey as reporting 36% as the national median), they seldom experience great variance between physicians. Therefore, splitting expenses equally may work well enough for them.

On the other hand, a fully diversified radiology group—especially in a freestanding setting—may find it more equitable to track revenue and expenses to individual departments before allocating the shares to the individual physicians. Each department (general radiology, mammography, interventional, MRI, CT, etc) allocates a share of its expense only to the physicians who utilize it. The added layer in this calculation helps keep physicians focused on controlling expenses within the areas in which they have direct control.

That ‘Other’ Income
Not all revenue generated by a radiology group comes from fee-for-service billing. Fleischman points out that it’s not uncommon for a group to receive a medical directorship stipend from the hospital it serves. It’s typical, he says, for groups to divide that fee (averaging around $75,000 per year) equally among the partners. Any contractual income of this type can be handled the same way.

Overreading films and scans for other specialists who own and operate their own equipment can generate income that calls for special handling, too. If the radiologists receive a flat “per-click” fee directly from the specialty group, they incur no significant billing and collection expenses. Of course staff time and effort will be negligible since there is no “hands-on” involvement with the patients.

The rapidly growing teleradiology industry has created a new—and perhaps huge—revenue potential for reading others’ images. Affordable technology provides radiologists with opportunities to deliver services for hospitals and clinics around the globe. Fleischman worked with one pediatric radiology group dealing with several income distribution issues arising from the fact that several partners wanted more time at home. The group set up a reciprocal night coverage arrangements with a pediatrics clinic in Sydney, Australia, that allowed these working moms to read films and send preliminary overnight reports from their offices at home.

Groups wanting to develop teleradiology as a major service line can more or less isolate the revenues and expenses to that department and run it like a business within a business. If some partners don’t want to be involved at all, they don’t have to pay for the technology or direct administrative costs in that department. Of course, they won’t be entitled to any of the profits either.

Time to Rethink Your Formula?
The productivity gains brought by technological advances in recent years have helped radiologists compensate somewhat for flat or declining reimbursements, says Maier. But now some experts predict even further reductions in the near future that may remind radiologists of the aftermath of the Deficit Reduction Act in 2007.

Expenses, of course, continue to rise, making it harder than ever to grow—or even maintain—profit margins. Maier believes that a smaller “pie” will result in more groups rethinking how they slice it. It’s logical to expect higher producers to push for a production-based income distribution formula. In the end, each radiology group will have to decide for itself whether its current distribution scheme can continue to meet its needs both now and into the future.

— Timothy W. Boden, CMPE, is a Starkville, Miss., resident who has spent 22 years in practice management as an administrator, a consultant, a journalist, and a speaker. He has led medical groups of various specialties, authored or edited eight books and hundreds of articles on practice management, and has made dozens of conference presentations.