I’d like to start off this article by addressing a few of the conditions we as employees, owners, and citizens are experiencing in our daily lives and our employment situations, and how that relates to this article and the article published in our last newsletter. As I review my last article which was published on February 14, 2020, I note that within the conclusion I was to have delivered this article the following month. Moreover, as we now know, worlds can change in such a short period, and one month has now turned into three months as a result of the Covid-19 Pandemic. What traditionally would have been the conclusion of our busy tax season and our well-earned vacation time or time to recharge our batteries has morphed into the undertaking of unusual assignments from our clients, and not just any clients but many of our more financially secure clients and those within the medical industry. Whereas in the past we may have been working on commercial and individual tax work for our clients during the past few months, the pandemic has created such turbulent times that many of us at Capaldi Reynolds and Pelosi were asked to prepare SBA loan applications for numerous clients, many of which had their doors shuttered or saw substantial economic loss take hold of their businesses as a result of Covid. I mention these points for a number of reasons, the first being that as the adage goes “the best laid plans of mice and men often go awry” and how one minute you can be on top of the world with great expectations, a fantastic business plan in place, and a clear path for your financial future, and in the next minute we’re all eating at the same trough. Secondly, as we’ve learned during this crisis, not all of us are created equal, and some of us will fare better than others after this crisis shakes out. Finally, we see that the people that you surround yourself with are those who will be most important in your recovery and future successes. This being the case now leads me to the title of this article, “Metrics within a Bonus Plan”.
Building a Successful Plan
In order to have a successful bonus program in place, the larger the share of your employees or partners who feel that the plan is working for them, the more successful the plan will be and the more harmoniously the company will function. Again, surrounding yourself with the right people goes a long way in deciding the factors within a plan design, and those decisions come about via compromise and caring about one’s comrades.
Specifically, what I’ve learned working with many of our clients is that when there is enough bread to go around, most often a group can remain harmonious regardless of the bonus design. However, when things go south, such as a pandemic, then you really see who your friends are and realize whether the compensation plan in place works as originally intended or the ranks split and attempt to make modifications to compensation for personal reasons. In my humble opinion, if a plan is designed fairly from day one, then regardless of the circumstances, good or bad, the outcomes will be acceptable to most reasonable people.
As discussed in the past article, both quantitative and qualitative metrics go into building a compensation plan and in the below sections I’d like to bring some of those factors together to further demonstrate how different metrics can impact final compensation results. In this article I’ll focus on the quantitative factors as they would play out within a medical practice. What I’ve found to be true is that during the design of a bonus plan or, for that matter the full blown compensation plan, a debate will normally ensue as to how quantitative production is to be measured and the factors that go into this measurement. Some practices would prefer to use RVUs (relative value units) to value production while others prefer to use patient charges and/or cash collections. In the latter two instances, the bonus results will deviate from a traditional RVU model, and these results may be deemed unfair by some in the practice depending on how each is impacted by the results. Patient charges may be more in line with an RVU model, but for reasons outside of the scope of this article, there are flaws in using this method to gauge production. However, if all parties are being measured under similar terms and all parties seem to have a similar work flow, then I’ve seen that the use of this metric to measure production tends to result in fair allocations.
The Cash Collection Based Compensation Model
I wouldn’t necessarily recommend a cash collection based compensation model for a medical practice since, as we know, each practice’s insurance contracts differ and the payer mix within a practice can be quite diverse depending on the patient demographics. This could result in practitioners performing the same services realizing materially different levels of collections. You may see a model like this when you have more established owners who have admitted a new practitioner, void of a capital contribution, and the successor will have to pay his or her dues while working with specific insurance demographics in lieu of capital. Ultimately this formula will balance out, but it may take a year or so or the admittance of a second new hire before doing so.
Relative Value Units
As a brief discussion on RVUs, we know that RVUs within a production environment are measured two ways: a full RVU and a WRVU (work RVU). A full RVU is comprised of three components: labor, the cost of malpractice insurance, and practice overhead costs. The labor component of the RVU or the WRVU is considered the “relative level of time, skill and intensity to provide a given service”. Moreover, the make-up of one’s practice will help dictate whether a full RVU or a WRVU will be the driving factor behind production measurement, since the WRVU in most cases comprises approximately seventy-five percent (75%) of a full RVU. Additionally, some practices, for example a radiology practice, require significant overhead costs which could dictate the use of a full RVU, while others with far less overhead, like a democratic emergency department group, may settle on the use of the WRVU as their driver behind production measurements.
Additional factors that might be relevant when designing the bonus plan are the through time for a patient visit and number of patients seen during a given time period. Without a reasonable flow for the patient service time, RVUs by themselves could be a bit misleading since some practitioners may order more testing than others, which in turn could amount to higher RVUs and collections per patient assuming unbundled reimbursement rates. However, this practice technique may come at the expense of moving the patients through the system and quite possibly placing an undue burden on colleagues who have to pick up more of the patient census during a given time frame.
In conclusion, what experience has taught me is that under the right conditions most any production model will work for a medical group if all parties are aware of how it works, what metrics are being measured, the frequency of measurement, whether qualitative inputs are being considered and fairly weighted, and if the formula can be revisited after running through multiple cycles over a given period of time. Additionally, and quite possibly equally as important if not more so, is the ability to measure the collection of inputs through a quality billing and collection system and a manger who is skilled in digesting and analyzing those results. Since, as we know, all the hard work could be for naught or undervalued if the collection cycle is not working to its fullest.
I thank you for taking the time to read this article. As always, we at Capaldi Reynolds and Pelosi are here to meet your needs as they relate to this topic or other business matters that you may need assistance with.
This article was contributed by Thomas J. Freund, CPA.