By: James T. Krupienski, CPA
Partner

When your medical practice was formed, many agreements were voted on, and have governed the operations of your practice since that time. One of these agreements was most likely the physician compensation formula. With the passing years and changing faces within the practice, it is likely that this agreement has remained one of the rocks – guiding the practice throughout the ever-changing medical environment.

While there may have been some temporary inquiries or internal disagreements, the provider and the practice always had the agreement to fall back to. Then came the spring of 2020 and COVID-19. This article will look at the current landscape under COVID-19, as well as some of the more common compensation formulas that are available – and whether they may be appropriate or due for a change.

It is clear in today’s marketplace that there is no one size fits all approach to physician compensation. There are a myriad of formula structures to choose from, which are then typically tailored even further for use in a particular practice. The most basic of all of these formulas is a straight salary formula. This approach is typically used in a hospital setting, or as a guaranteed salary when recruiting a new physician.

Another approach is an equal allocation formula, whereby all profits of the practice are shared equally by all owners. What makes this formula difficult in execution is that all physicians really need to be on the same page with how much they work and are able to contribute. It does not take long for one physician, who may be producing more for the practice, to not feel that they are being adequately compensated. For this, the whole approach can fall apart. Where this formula can be beneficial is in a practice where all owners see a similar number of patients but are reimbursed by a broad range of payers.

A third approach that is gaining some traction across the country is a Relative Value Unit (RVU) approach. This is a formula derived from the premise that compensation is non-monetary based, being driven by consumption as opposed to production. The physician’s compensation is driven by the time and complexity of a visit or procedure, as opposed to how much money was collected for the visit.

The final, and generally most widely used approach, is a production / incentive-based model. While there are different ways that these can be structured, the ultimate make-up is the same. Once the compensation pool has been established, some factor of an individual physician’s production is applied to determine how much is to be allocated to them. Certain other factors that are often considered in these formulas include the allocation of direct and indirect costs, ancillary revenues and administrative duties.

While there is no one size fits all approach to physician compensation, each agreement has its place within a practice. Whether the arrangement called for production splitting, profit sharing or an equal split, all generally contain a form of base compensation, followed by some sharing of the remainder available at established time periods. With COVID, much of this was thrown out the window for several reasons.

The first, and primary driver, was cash flow. Every practice’s goal is long term sustainability. With COVID, and the various mandated shutdowns and quarantines throughout the country, this sustainability was threatened. Within 3 to 4 weeks’ time, without the ability to see patients, many practices were going to see a shortfall of cash. What was seen in many instances was a tightening of the belt relative to expenses, staffing level reviews and often, a reduction or temporary stoppage of owner compensation.

In late March of 2020, the CARES Act was signed, providing for a new SBA based loan program – commonly referred to as PPP (Paycheck Protection Program). This allowed many businesses the opportunity to apply for a loan, to cover predominantly payroll costs, with the understanding that it may be forgiven at a later date. While there were limits built in as to how much payroll could be covered, the PPP allowed for many practices the ability to correct staffing levels and cover their ongoing payroll costs. What was seen in many instances were owners recovering their levels of compensation to those levels allowed for under the PPP.

Following on the heels of the PPP loans, within the CARES Act, were the provider relief funds issued by the Department of Health and Human Services. These grants have been issued to practices in waves, with the first being in Mid-April, received unexpectedly by many. The second and third waves, between May and today, were applied for directly by a practice, with the most recent round being open to those practices that bill Medicaid, and not just Medicare. With these grants, there are several terms and restrictions that must be adhered to, with one being in the area of compensation limits. What these grants allowed were for practices to supplement lost revenues, cover added expenses, and to an extent, cover certain payroll costs not covered by the PPP loan program.

So, what does this mean for your compensation formula? For many practices, there will need to be a view for the short term and then again for the long term. In general, compensation agreements took many variables into consideration. I am not aware of any that referenced or considered the impact from a long-term global pandemic. With that being said, it is recommended that the practice sit down and review their agreement and if it makes sense under the current circumstances. There may be the need for a short-term fix until the economy recovers. This might also be the time to reconsider the full document with an eye towards the future.

Overall, what you are experiencing as a practice is not something unique to your practice. What is important is the ability to come together and make the best decision for yourself and the ultimate goal – the long-term sustainability of the practice.