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Generalists vs. sub specialists

Generalists vs. sub specialists

Michael J Parshall. Dermatology Times. Cleveland: Apr 2009. Vol. 30, Iss. 4; pg. 80, 2 pgs
Abstract (Summary)

If the physician owners agree to share 20 percent of the profits equally to reflect the shared investment in practice assets (excluding assets allocated directly), the calculations would be as seen in Chart B. If the group had divided profits based upon gross collections excluding the PAs' revenue, the results would have been what's shown in Chart C. Caution should be taken when you are considering this or any other change to income/profit distributions. [...] keep in mind that physician reimbursement and compensation is constantly changing, and you will likely have to tweak and adjust the model to assure that it is perceived as fair to all.

Once upon a time, not so long ago, dermatologists practiced alike. Those who worked in a group practice varied primarily in the number of patients that they saw and the amount of money they generated in any given year.

Income/profit division was a simple matter; profits were divided equally or they were allocated according to production measured in collections or patient visits.

Practices that elected to allocate income equally usually were owned by physicians with similar work habits. They would work the same schedule, take the same amount of time off, see about the same number of patients and use the same collections efforts. They chose to ignore the minor differences that existed from year to year in their individual "production" and would split income evenly in the spirit of partner harmony.

Practices owned by physicians with different work habits commonly elected to allocate income based on productivity. There were large differences in their work habits, hours worked, patient volumes and the value of the services they performed, so they adopted a production-based approach to income allocation. In some cases, patient visits gave way to work relative value units (RVUs) as the production metric, but in most cases production was measured in dollars collected.

These methods, however, did not anticipate and are poorly designed to fairly allocate income in today's more complicated, multispecialty dermatology practice.

The new look of dermatology

Today's dermatology practice is different from that of 1989. Dermatologists' expanded training and interests allow for great differences in clinical practice. There are cosmetic dermatologists, dermatologic surgeons, dermatopathologists, and Mohs surgeons, in addition to general dermatologists.

Adding to the complications, not all the providers are dermatologists. There are nurses, physician s assistants (PAs) and other nonphysicians rendering patient care services that need to be supervised and managed.

The old productivity metrics of patient visits, work RVUs or collections no longer fairly allocate income and profits.

When a dollar is not a dollar

In the past, clinical services revenue bore about the same cost to produce. Putting it another way, all clinical dollars collected were equal in the profit margin contributed to the bottom line.

The production of practice profits was roughly equivalent to the revenue collected, thus making collections a fair measure for allocating profits.

Today, clinical service revenues have different costs to produce and contribute different amounts to the bottom line. A cosmetic dollar is not equal to a traditional dollar, nor is a Mohs dollar equal to either cosmetic or traditional dollars. The question then becomes: How can these dollars be adjusted so that they are equal? The answer? Subtract the unique costs.

Pandora's box

Practice overhead consists of two types of costs - direct and indirect. Direct costs are only those necessary to perform a unique service, such as the cost of goods sold, dedicated personnel, supply items and equipment. Indirect costs are those other costs that are not directly necessary to perform the unique service but are needed to support the group practice in general, such as billing, collection and cost of management.

There are two ways that collections can be adjusted to reflect the profit contribution. One way is to cost account every overhead item along service lines to calculate net profit. The other approach is to allocate just the unique direct costs to the service Unes to calculate gross profit. (Gross profit is profit before indirect overhead).

There is a need to tread carefully as you go about noting the differences within the group so that you do not destroy the sense of group income and profits and replace them with individual income and individual profits. You have to be careful not to create such a precise cost accounting that concern for the group is replaced by owner self-interest.

You also need to recognize that all owners have invested in the practice assets and have a right to a return on their investment. Remember that your fees and reimbursements are a combination of professional, technical and overhead components, so all owners are entitled to a portion of the profits that come from these components.

These issues are best addressed by adjusting collections to the gross profit level and by allocating some profits equally among the owners to reflect their shared investment in assets and their shared exposure to liabilities.

What about the profits from the services performed by nonphysician providers? Nonphysician providers differ from physicians in that they require physician supervision. Usually, supervision is provided by one or more of the physician owners during physician office sessions, thus reducing the number of patients the physician personally treats during those sessions and ultimately reducing their personal "production." To be fair, supervising physicians should be compensated for their supervisory role by receiving a portion of the profits generated by the nonphysician providers.

An example

Let's consider the profits derived by a group consisting of two generalists, a cosmetic dermatologist, a Mohs surgeon and three PAs.

For purposes of this article, each of the generalists provide "traditional" clinical services and supervise the PAs a total of 12 half-day sessions per week. The cosmetic dermatologist performs laser skin resurfacing, injects Botox and fillers and supervises a PA four half-day sessions per week, and the Mohs surgeon exclusively performs Mohs and derm surgery and supervises a PA two half-day sessions per week.

The PAs' revenues are tracked separately by the practice. The group will allocate the gross profit of the PAs according to the supervision time. The practice gross collections are $5.2 million, direct expenses are $800,000 and operating overhead is $2.18 million (50 percent of the practice gross profit). Operating overhead is distributed to the physician owners by service according to total gross profit. The gross profit by service is shown in Chart A.

Cosmetic services direct costs include the cost of Botox, fillers and cosmetic lasers. Mohs costs of goods are the histology lab supplies and equipment and the histology technician's compensation and benefits. The PA service costs are the salaries and benefits paid to the PAs.

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