Dividing Practice Income
To avoid creating friction, a medical practice needs a fair and reasonable
formula for splitting its income. Agreement requires compromise—and finding
a good compensation arrangement may not be easy. Income splitting
arrangements range from equal division to a pure productivity approach, with
many possible variations in between.
Equal Shares
Sharing practice profits equally is simple, and it avoids internal
competition for practice resources. Equal shares can work well when
physicians have similar skills, motivation and work habits. But equal shares
fail to reward high producers and can generate resentment and friction if
individuals do not contribute roughly equivalent time and effort.
Salary
Although straight salary-based compensation is simple to administer, it
offers no performance incentives. A salary plus bonus formula provides
incentives for physicians to grow the practice. It also adds some
administrative complexity and must carefully balance the secure salary with
the less-secure bonus opportunities.
Full Productivity
With a productivity split, the percentage of collected practice income
(or another measurable standard) that each individual generates determines
the division of profits. Some practices with productivity-based compensation
also divide their overhead proportionally. Other practices use a
productivity-based split for income but divide all their expenses equally
(or divide fixed expenses equally and variable expenses by productivity).
A productivity split encourages professional effort. Partners who work
harder—in terms of their time commitment or high-yielding procedures—earn
more than those who generate a smaller share of the practice’s income. The
undesirable effects of a pure productivity arrangement can include
competition within the group, the accounting complexity needed to split
overhead and a tendency to over-utilize practice resources.
Mixed Formulas
Given the limitations of equal and productivity-based splitting, many
practices create a mixed compensation formula. They combine
productivity-based rewards with elements of either a base salary or an equal
sharing of expenses and income. For example, they may pay:
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An equal base salary plus periodic productivity-based bonuses
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A set percentage of practice net income that is shared based on productivity, plus equal amounts of bonus pay
-
Equal shares of a fixed percentage of net income, plus productivity-based shares of the balance
Definitions
Within a productivity formula, physicians need to agree which income
element will determine compensation. That might be net charges, relative
value units (RVUs), gross charges, gross collected revenues, a combination
of these measures or another standard. The categories of physician income
that the productivity formula will apply to also need careful definition.
Beyond draw or salary and bonuses, the formula could include retirement plan
contributions, insurance premiums, professional dues, etc.
Semiretirement Situations
An income-splitting formula might also be utilized for physicians who
want to begin phasing out of active practice at a future date, whether near
or distant. A pure productivity division of revenue can easily accommodate a
semiretirement situation. Compensation can simply be reduced by a percentage
to correspond with the physician’s office and/or call commitment. A practice
that splits income equally or uses a mixed formula would need to formulate a
reduction that suits the shift in responsibilities.
Use Our Experience
Creating an income-splitting structure that is fair and acceptable to
all principals in your practice can be challenging and time-consuming. Our
Health Care Team's experience and planning skills can help you settle your
compensation division issues. Please
contact us for assistance.
Health Care Commentaries is
provided by Somerset’s
Health Care Team
for our clients and other interested persons upon request. Since
technical information is presented in generalized fashion, no final
conclusion on these topics should be made without further review. For
additional information on the issues discussed, please contact a member
of our Health Care Team. This
document is not intended or written to be used, and cannot be used, for
the purpose of avoiding tax penalties that may be imposed on the
taxpayer.
Somerset CPAs,
P.C.
3925 River Crossing Parkway, Third Floor
Indianapolis, Indiana 46240
317.472.2200 • 800.469.7206 • FAX 317.208.1200
http://healthcare.somersetcpas.com
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