Practice Management Workshop

July 9-11, 2004

The Westin O’Hare Rosemont, IL

Compensation and Benefit Distribution for Allergists in

Larger Single Specialty Practices

Robert J. Holzhauer, MD, MBA, FAAAAIand

Michael J. Caruso, CPA

Part One

Basic Principals of Compensation Systems

Michael J. Caruso, CPA

No Compensation System is Perfect

No Compensation SystemLasts Forever

No Two Compensation Systems are Alike:

“Once you’ve seen one compensation system, you’ve

seen one compensation system.”

The Ideal Compensation System for a Practice is one in which each Physician is

Equally Unhappy

The Compensation Formula Should Fit the Group’s Goals

and Objectives

Need to Define the Goals and Objectives of the Group

(i.e., mission statement or practice vision, a good starting point)

The System should be Simple and Understandable

The System should be Fair and Equitable

Types of Compensation Systems

• Equal

• Productivity Based

• Hybrid (pros and cons)

Understanding Expenses

• Direct/Allocated

• Equal

• Production Based

Outside Constraints

• Stark

• IRS

Part Two

Physician Compensation Formulas:

Robert J. Holzhauer, MD, MBA, FAAAAI

Physician Compensation Formulas: Straight Salary

Advantages to Employee• No worry about how much you will be making (assuming practice solvent). Can plan personal budget with degree of certainty• Less need to work very hard

Disadvantages to Employee:• Salary is limited• Ownership position in practice less likely

Physician Compensation Formulas: Straight Salary continued….

Advantages to Employer:• Salary obligation is known & limited. Can plan

practice budget with degree of certainty• Would not be expected to share ownership or

profit of practice

Disadvantages to Employer:• At risk for salary regardless of performance of

employed physician (could lose money)• Salaried physician has little incentive to work

hard, limit costs and improve practice profit

Physician Compensation Formulas: Salary Plus Productivity

Advantages to Employee• Less worry about how much you will be making.

Can plan personal budget with fair degree of

certainty• Can earn larger share of fruits of labor• May be able to become a practice owner, sharing

more fully in its profit

Disadvantages to Employee:• Will have to work harder and probably longer

hours to maximize income

Physician Compensation Formulas: Salary Plus Productivity continued….

Advantages to Employer• Employed physician has strong incentive to work

harder and longer hours to maximize practice

income and profit

Disadvantages to Employer:• Remains at risk for guaranteed portion• In most Salary Plus Productivity formulas the non-

owner physician has little financial incentive to limit

costs to help increase practice profit

Physician Compensation Formulas: Full Productivity-Based Comp

Advantages to Employee• May have potential for largest share of fruits of

his/her labor• Should be able to become a practice owner. In

most circumstances, a physician would not enter

into this type of arrangement without high

likelihood of ownership

Disadvantages to Employee:• Most worry about salary; hard to budget• Will have to work harder and longer

hours to maximize income

Physician Compensation Formulas: Full Productivity-Based Comp

continued….

Advantages to Employer• Employed physician has strongest incentive to

work harder and longer hours to maximize

practice income and profit

Disadvantages to Employer:• In most Productivity formulas the non-owner

physician has little financial incentive to limit

costs to help increase practice profit

Physician Compensation Formulas: Equal Sharing

Advantages to Employee• May promote camaraderie among partners

assuming that each is working approximately

equally hard and productively• Equal sharing of risk & reward of practice

Disadvantages to Employee:• May promote discord if one or more partner(s)

perceive that the group is not working equally

hard and productively

Physician Compensation Formulas: Equal Sharing continued….

Advantages to Practice• Egalitarian feeling engendered by equal

sharing of risk & reward, may reduce conflict

Disadvantages to Employee:• With equally sharing owner/physicians, each has

somewhat reduced financial incentive to work

hard, limit costs and increase practice profit

Physician Compensation Formulas: Salary Plus Share of Contribution Margin

Contribution Margin=

Revenue minus Marginal Cost

Marginal Cost=Costs attributable solely to the Revenue in question

Costs which practice bore before new physician(s) arrive are not part of

Marginal Cost

Physician Compensation Formulas: Salary Plus Share of

Contribution Margin continued….

Advantages to Employee • Less worry about how much you will be making.

Can plan personal budget with fair degree of

certainty• Can earn larger share of fruits of labor• May be able to become a practice owner, sharing

more fully in its profit

Disadvantages to Employee• Will have to work harder and control

costs to maximize income

Physician Compensation Formulas: Salary Plus Share of

Contribution Margin continued….

Advantages to Employer • Employed physician has strong incentive to

work harder and control costs to maximize

income and practice profit

Disadvantages to Employee• Remains at risk for guaranteed portion of salary

Physician Compensation Formulas: Compensation Based Upon Revenue and

Cost Centers, Percentage of Full-Time Work and % Full Shares

Individual Productivity X Clinical Profit % (CP%)

+Practice Productivity X Full-Time % (FT%) X Full-Share%(FS%) X CP%

+Research Revenue X FT% X FS% X Research Profit %

+Management Compensation

=Total Compensation

-Benefits =Salary

Physician Compensation Formulas: Compensation Based Upon Revenue and

Cost Centers, Percentage of Full-Time Work and % Full Shares continued….

Advantages to Shareholder Employee • Reasonably equitable way to share

risk and rewards of practice• Does not severely punish physicians spending time seeing

less remunerative patients, e.g., rheumatology & young kids

Disadvantages to Shareholder Employee• Physicians rewarded less for spending many

hours seeing patients than with a compensation

system solely based on patient revenue production

Physician Compensation Formulas: Compensation Based Upon Revenue and

Cost Centers, Percentage of Full-Time Work and % Full Shares continued….

Advantages to Practice • Shareholder physicians have some incentive to

work hard and control costs to maximize practice

profit

Disadvantages to Practice• Incentives for shareholder physicians to work

hard and control costs are weaker than in a

compensation system based upon contribution

margin

Part Three

Structuring a Compensation System to Balance Group Goals with Individual Physician Needs

Define the Goals and Objectives of the Group

(i.e., mission statement or practice vision)

Expression by Physicians of Individual Goals and

Objectives

Appointment of Compensation Committee

and/or Outside Assistance Team

(i.e., CPA, Consultant, Attorney)

Review of Equal versus Productivity Based Systems, and applicability relative to

Balancing Group and Individual Objectives

Definition of Equal, Production and Direct Expenses

(for your group)

System Proposals

(Based upon Prior Year and/or Pro-Forma Data)

Group Discussion

Approval

Implementation and Documentation