Medical Group Physician Income Formulas under Capitation
by Keith Borglum

Question:

The medical practice I've been employed with is both making me a partner and changing their income distribution formula to accept capitation. How should income be divided?

Answer:

There are a number of ways to structure a physician compensation system for a practice that has a mix of fee-for-service (FFS), discount-fee-for-service (DFFS) and capitated (CAP) patients. Be forewarned that none are perfect, but many fall within a reasonable range.

In the mixed reimbursement practice, the fairest approach is usually to use a mixed formula. As always, income formulas incentivize behavior. Peer review can prevent abuses of behavior.

I recommend a dual compensation formula that addresses both expenses and revenues.

Excepting the new or part-time physician, the fairest way to divide expenses is often by a modified cost-accounting formula allocating costs by those that are divided equally, by productivity, and individually by doctor. For example rent and utilities may be divided equally, supplies by productivity and physician's autos by doctor. This approach accommodates many variables of practice. When we consult to a group we usually review hundreds of costs and variables and develop a spreadsheet tailored to that practice. Once the spreadsheet is completed it is easy to track and report costs with a computerized accounting package.

FFS and DFFS income are often completely allocated to the physician that sees the patient. There may be a reduced twice monthly draw against income by each physician based on historical productivity to allow time for bookkeeping to be caught up on profitability quarterly and to provide income during vacations to cover expenses.

Prepaid (CAP) income requires greater complexity. You may simply allocate the CAP revenue and bonuses to the patient's physician. That physician may pay other physicians in the group, and on-call physicians outside the group, on a predetermined discount fee schedule for coverage. Alternatively the group may allocate a percentage of the CAP to be paid to the individual physician (ex.: 75%), with the balance (ex.: 25%) pooled and split equally or by a ratio among the physicians. A third choice would be to pay the CAP to the patient's physician with risk pool returns or bonuses to be divided equally or by a ratio among the group.

Another issue to consider is the compensation of physicians for administrative service to the group. You want to be fair, but not incentivize bureaucracy over clinical activity. This can be done by the hour, paid out of a group withhold, or by a point system.

In a point system a target number of points can be set to equal a base salary or for division of the group's internal withhold, or any other reason. Points above or below that total provide income above or below the threshold. This provides great flexibility to each physician to balance work, lifestyle, administration and income. Extra hours or better efficiency equals higher pay. More time off or a pattern of inefficiency equals lower pay. Physicians accrue or lose points based on agreed upon criteria.

The least appropriate formula in most groups is to pay all the doctors equally, as it incentivizes nothing except laziness.

 

 

Copyright and Reprint Permission Copyright (C) 1997 Professional Management and Marketing. Reprinted with permission from CALIFORNIA MDs BUSINESS ADVISOR, author and consultant Keith Borglum, 3468 Piner Road, Santa Rosa, California 95401.
(707)-546-4433. Reprint or quote permission is granted provided proper credit is posted exactly as in the previous sentence and two copies of publication are mailed immediately upon distribution to the author at the above address.

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Additional Recommended Reading:

The Medical Practice Forms Book (phone 1-800-MED-SHOP)

The Medical Practice Pre-Employment Tests Book (phone 1-800-MED-SHOP)

The Managed Care Handbook (phone 1-800-MED-SHOP)

The Answer Book (phone 1-800-MED-SHOP)

The McGraw Hill Pocket Guide to Managed Care (phone 1-800-MED-SHOP)

Critical Concepts in Medical Practice Management (phone 1-800-MED-SHOP)

Capitation Management Report by NHI  (phone 1-800-597-6300)

By-line:
Author Keith Borglum is a medical practice business consultant with Professional Management & Marketing of Santa Rosa, CA. (1-707-546-4433) He is or has been a member of: the American Academy of Family Physicians Network of Consultants, the American College of Physicians Managed Care Professional Advisory Network, the American Medical Association's Physician Advisory Network, the National Association of Health Care Consultants, the Society of Medical Dental Management Consultants (90-94), the Institute of Business Appraisers, and is an affiliate of the Medical Group Management Association.