Private practice orthopaedic groups generally do a good job of producing “top-line” or gross revenues through ancillary services. Good contracting with third-party payers ensures that private practicing orthopaedic surgeons are reasonably paid for the work that we do. Appropriate coding of office visits and timely submission of these claims also ensures a good revenue stream for the practice. But despite the revenue streams at our disposal, I often hear how often otherwise-solid partnerships can become divided (or worse) over hot-button financial issues, from miscalculating the allocation of overhead, to not properly communicating the distribution of the remaining funds, to the shareholders as physician income.
The methodology that a group uses to determine overhead and income allocation should be based on the group’s predetermined philosophy. For example, how will revenue be shared? How are expenses allocated? Will we reward value or volume? Not having clear answers to these questions is a recipe for resentment and discord among private-practice shareholders. Here are some ways to navigate the key issues that all private practicing orthopaedic groups face.
Hot-button Item: Expenses
Practice expenses must be paid prior to the shareholders receiving any revenue from the corporation. All expenses should be carefully evaluated to separate items that are expensed to a specific surgeon or subgroup of surgeons from those expenses that are shared among the entire group. For an expense to be shared among all shareholders, there should be some apparent value to the whole group. If the expense only benefits a subgroup of the practice, that subgroup should absorb the cost of that item.
But there are gray areas; some expenses yield indirect or subtle benefits to the whole group while providing value disproportionately to a subset of that group. Contentious arguments over these costs can shatter a practice. For instance, what if the group decides to purchase a new MRI machine? Will the cost be allocated to the group evenly, or should the cost be allocated based on the number of patients that the physicians will refer? Should an orthopaedic surgeon who rarely refers to an MRI be responsible for the cost and potential risk of buying the machine?
If the revenue from MRI is distributed only to the physicians that refer patients for that study, clearly the expenses should be allocated to those physicians as well. If a portion of the revenue is distributed evenly among the group (ie, the revenue from governmental payers), a pro rata share of the expenses must be distributed among the group against the revenue that is generated.
Hot-button Item: Fixed versus Variable Expenses
Expenses generally can be classified as fixed or variable. Fixed expenses are those that don’t vary over time or based on aggregate usage, and so are evenly shared by members of the group. Tension may arise when the benefits of seemingly fixed expenses accrue variably among group members. One could classify rent for a clinic space as a fixed expense, because it must be paid in order for the practice to continue, even though one could advance the argument that busier partners make greater use of the resource (and derive greater remuneration from it) that is being paid for equally by all partners.
A low-volume surgeon could effectively argue that rent should be a variable expense. Variable expenses are allocated according to usage; that is that the physician who uses the resource more pays a proportionally greater cost. The practice could say that although they must pay rent whether they are open or not, the opportunity to use the clinic space is disproportionally used by the high-volume surgeons. The high-volume surgeon effectively blocks the slower physicians from using the space, and so the cost should be divided according to volume. Both arguments have merit, and the decision should be based on the group’s philosophy.
To some degree, most practices accept that the high-volume surgeons may be required to subsidize low-volume surgeons. The argument to this effect is that low-volume surgeons provide necessary services to patients that allow the practice to market itself as a comprehensive provider of musculoskeletal care. The low-volume surgeon may also offload diverse problems from the high-volume surgeon so that they can focus more on developing their high-volume specialty. This subsidization can be manifested in the allocation of variable overhead so that the high-volume surgeon may pay more than the low-volume surgeon.
Hot-button Item: Financial Philosophy
Once expenses are paid, what remains is net revenue, and this must somehow be divided among the corporation’s shareholders. Generally, the highest-producing surgeons believe that they should receive a greater share of the net revenue. But how should this balance against the contributions of a surgeon who sees more uninsured patients? That role is a financial burden in a collections-driven system, and one that would have to be shared if that partner was not there. Some groups believe that withholding a certain portion of the net revenue to reward physicians who meet the practice’s quality, access, and compliance goals appropriately incentivizes the physicians.
This is where the philosophy of the group is important. High-volume outpatient sports-medicine surgeons who are extensive utilizers of ancillary services may feel entitled to a higher proportion of revenue that comes out of a practice. They are more inclined to prefer a fixed distribution of expenses. A partner in the practice who specializes in trauma could argue that (s)he performs an important role in reducing the stress on the sports medicine surgeon and maintaining positive relationships with the hospital. Although this trauma partner may see a disproportionate number of uninsured patients, (s)he could argue that the high-volume sports-medicine surgeon would not be as successful without the trauma surgeon offloading the uninsured trauma patients.
Groups should discuss overall philosophy and outline the group’s specific beliefs and guiding values. After the philosophy is agreed upon, the shareholders should systematically decide how expenses will be allocated according to the group’s philosophy. After this is completed, the group should decide how the net income is divided and should create an incentive plan that recognize all of the values the group supports; cash collections may be a part of this, but a thoughtful approach also might consider work performed, access and compliance imperatives, call obligations, and quality goals.
Hot-button Item: Ambulatory Surgery Centers
Another example of a topic that can divide an orthopaedic practice is the purchase of an ambulatory surgery center (ASC). I’ve worked at two different practices, with two different philosophies on ASCs. One practice divided the cost and the revenue equally since all physicians in the practice enabled the high ASC utilizers to have the type of practice that allows them to only operate in the ASC. The trauma partners offload their hospital on-call work, and everyone referred outpatient cases to these high ASC utilizers. The other practice unequally divided ownership with the high utilizers owning a higher share of the ASC. Though very careful to not divide revenue based on volume referrals, this practice decided to base ownership on the amount of commitment that the individual surgeons had to the success of the ASC.
Which practice handled the ASC issue better? The answer depends on the nature of the individual physician’s practice. More importantly, I believe that the ancillary philosophy of the practice must be made clear to all physicians, and this set of values must guide the decisions of the group. Communication regarding the ideology of revenue distribution should be understood during the initial interview process, after executing the employment contract, upon beginning practice, during the scheduled employment reviews, and again after the employed physician achieves shareholder status.