By Joan M. Roediger, J.D., LLM

Published May 1999

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Formerly, most group practices were small, including perhaps two or three physicians. Typically, they were of like mind and similar age. Their skills, goals, and work ethics were similar. They considered themselves entrepreneurs and strove to establish a strong financial stake in the practice.

Practice business was simpler, as well. Most patients paid for medical services out of their own pockets. Some had traditional indemnity insurance. Not today. Managed care is burgeoning and state and federal laws increasingly restrict actions that were previously considered only to make good business measures. The health care industry is changing in response.

To stay competitive, many practices must offer a broader range of services; longer, non-traditional hours of operation and greater geographic coverage. To capture charges formerly referred out, practices are adding new specialty, subspecialty and ancillary services. They watch their referrals and focus on providing what is medically necessary and economically prudent.

Over time, the demographics of physician practices has changed. More physicians are leaving solo practice and forming groups. Existing groups are growing. Practices are hiring new associates, merging and acquiring practices, and affiliating. They are opening satellite offices, clinics and ambulatory surgery centers.

In short, groups are growing larger and more complex.

Now, physicians in the same practice perform dissimilar functions with dissimilar fees that require dissimilar resources, particularly physician time, to perform. There are more internal referrals within the group practice to specially trained physicians and greater division of labor. Thus, productivity becomes more difficult to define, let alone use as the basis of fair and equitable income division. There is a greater interdependence among the physicians who realize that the group success is more important than their individual success. The compensation arrangements need to reflect the growing importance of group goals and performance while being fair to the individual physicians.

Further, it is vital to make sure that the unique compensation plan your group develops avoids a number of legal land mines.

Understand that where your practice is located will affect how you legally divide your practice income. Each state has different rules regarding fee splitting and referrals. For instance, New York has stringent fee splitting laws which prohibit certain arrangements with independent contractors, management companies and other billing companies. In Pennsylvania, practitioners are required to disclose to patients any financial interest in an entity to which the practitioner refers patients for services, tests, pharmaceuticals, medical devices and the like. Pennsylvania practitioners are also prohibited from receiving payment for referrals with respect to workers’ compensation and medical assistance benefits or claims.

Irrespective of the location of a physician’s practice, Medicare fraud and abuse laws, as well as the Stark I and II laws and regulations (as currently proposed), affect physicians income division planning. Under Stark, a bona fide physician employee may be compensated based upon his/her personal productivity provided that compensation is commercially reasonable and consistent with fair market value and does not take into account the volume or value of referrals between the physician and the employer. Income from "designated health services" which are provided by the group are typically divided based upon ownership interest in the group.

This leads to a larger issue: the equitable allocation of income within a group practice. Many private practices still compensate employees 100 percent based upon their individual productivity. Some practices compensate owner-physicians on an equal basis. Increasingly, practices are moving towards developing a compensation plan that accounts for the various contributions each physician makes to the group.

To develop a compensation plan that is right for your medical practice, consider what your practice seeks to reward. Separate the various physician roles and identify goals and appropriate rewards. In private medical practices, a physician typically serves three roles within the practice: worker, executive and stake-holder. Recognize that physician income in a privately owned medical practice includes not only base salary and bonuses, but retirement contributions, fringe benefits and physician-specific business expenses.

By separating each role and allocating a certain percentage of income to each role, you must identify goals that are realistic and fairly compensate members of the practice for their efforts. For instance, the goals for a physician’s "worker" role may be cost-effective patient management, production, patient satisfaction and positive clinical results. Compensation to a physician for his or her "executive" role may be based upon the physician’s "rainmaking" skills, fiscal management, employee management, service management and business growth. A group may compensate the "stake-holders" of the practice based upon the return on investment by the physicians, human resources investment or return for assumption of debt and other risk.

Appreciate that each group must set its own goals which properly reward and motivate practice physicians. Also understand that this type of compensation plan is most likely not appropriate for physicians who are not members of private medical practices.

Implementing a new compensation plan requires clear communication to the physicians on the reasons for change and the goals for change. Financial pro formas and examples must be developed prior to initiating any change. The compensation plan and financial pro formas must be clearly written and easy to understand. Enlist all physician members of the practice to contribute their thoughts and ideas on the proposed compensation plan prior to its adoption. If possible, have your proposed compensation plan reviewed by an experienced health care attorney or consultant to make sure your proposed plan is likely to achieve the sought-after results. If possible, implementing the new compensation plan incrementally will enable the practice to make responsive changes to the compensation plan if warranted.

Your compensation plan should be included as part of your overall compliance plan and reviewed not only prior to implementation, but also periodically, to ensure its compliance with all applicable laws and fairness to group practice physicians. As trends evolve in medical practices generally, and in your own individual medical practice, so will the need for you to amend your compensation plan.

Joan M. Roediger, J.D., LLM, is a consultant with The Health Care Group, Inc., and an attorney with Health Care Law Associates, P.C. in Plymouth Meeting, Pa.