Navigating Income Distribution in Medical Practices

Jan 15, 2025 | Healthcare

Medical practices often face complex decisions regarding income and expense distribution among physicians. These decisions not only impact financial sustainability but also influence workplace dynamics and overall morale. This article delves into the essential considerations, opportunities, and challenges in crafting income distribution formulas, offering guidance for practices aiming to balance fairness with motivation.

Shaping Income Distribution Formulas

The foundation of an effective income distribution formula lies in aligning with the practice’s core values and goals. Physicians’ expectations, behaviors, and work efficiency play significant roles in determining the success of these formulas. However, dissatisfaction may arise from:

  • Unrealistic income expectations.
  • Overstatement of potential earnings.
  • Lifestyles that surpass income realities.
  • Inefficient work habits or excessive time off.

To mitigate these issues, practices must manage expectations and encourage open dialogue about compensation models.

Common Models for Revenue Distribution

Several approaches are commonly used in income distribution:

  1. Equal Split: Rarely used today as it lacks incentives for productivity.
  2. Productivity-Based Models: Encourage greater individual output. For example, a formula might allocate 80% of revenue based on productivity and 20% equally, or a 60% equal/40% production split for specialists working collaboratively.
  3. Hybrid Models: Tailor income distribution to specific practice needs, incorporating both productivity and equal sharing.

Practices using productivity-based models often report increased motivation and overall productivity. Metrics like billed charges, WRVUs, or patient encounters can be used to address differences in payer mixes and ensure fairness.

Compensation for Management Roles

Leadership responsibilities, such as practice management, should be compensated fairly. Stipends can be calculated based on:

  • Income generated.
  • Time spent on administrative tasks.
  • Industry benchmarks (e.g., MGMA or AMGA).

Alternatively, an arbitrary stipend may be agreed upon.

Addressing Semi-Retirement and Changing Roles

For physicians transitioning to semi-retirement or reducing certain responsibilities (e.g., on-call duties or surgeries), compensation adjustments are critical. Reduced workload should align with income reductions, while any administrative roles taken on can warrant a stipend based on time or industry standards.

Expense Sharing: Key Considerations

Expense sharing in group practices requires clear agreements to avoid misunderstandings. Key components include:

  • Fixed Expenses: Rent, telephone services, office management, and equipment maintenance are typically split equally.
  • Variable Expenses: Allocated based on usage or production metrics, such as staff costs, medical supplies, and billing fees.
  • Direct Expenses: Individual responsibilities include malpractice insurance, CME/travel, and professional dues.

Practices should also address contingencies such as disability or death by considering overhead insurance and Key Man insurance.

Advantages and Challenges of Expense Sharing

Advantages:

  • Maintains the benefits of group practice while keeping individual incomes separate.
  • Ideal for high producers who prefer not to subsidize less productive partners.

Challenges:

  • Potential for conflicts over shared staff or expense allocation.
  • Liability concerns if the practice operates under a shared name (ostensible agency).

Ground Rules for Effective Partnerships

To foster collaboration and minimize conflict, practices should establish:

  • Respectful Communication: Avoid interruptions and personal attacks.
  • Shared Goals: Prioritize the practice’s needs over individual preferences.
  • Creative Problem-Solving: Encourage brainstorming for complex issues.

By implementing transparent and adaptable income and expense distribution frameworks, medical practices can navigate these challenges effectively, ensuring fairness, motivation, and long-term success for all partners.

© Copyrighted Practice & Liability Consultants, LLC 2025
Contributed by Debra Phairas, President, Practice & Liability Consultants, LLC

Subscribe to our Accounting, Tax and Business Insights Newsletter

Email Address:
Name(Required)
Privacy(Required)
This field is for validation purposes and should be left unchanged.
Client Spotlight: DeSatnick Real Estate

Client Spotlight: DeSatnick Real Estate

Todd deSatnick began investing in real estate in 1996 when he purchased his first home in West Cape May.  After working with his family’s business, deSatnick’s Window Fashions, for a decade, Todd ventured into a full-time career in real estate in 2003.  In November of...

read more
Big, Big News from the IRS on August 24

Big, Big News from the IRS on August 24

In an effort to free up resources to address a huge backlog of returns to process and other pending issues, the IRS announced major relief for most taxpayers with certain failure to file penalties and International Information return penalties for tax returns for the...

read more
Roth IRA Conversion

Roth IRA Conversion

During the pandemic, the value of many traditional IRAs dropped with the decline in the stock markets, so it may be time to consider a Roth IRA conversion. Lower income in the conversion year could also be a factor in this decision, since the conversion amount could...

read more
Highlights of The Inflation Reduction Act of 2022

Highlights of The Inflation Reduction Act of 2022

President Biden signed this bill into law on August 16.  Here are some of the more interesting provisions.  For more information about any of these items, please contact us. Revenue Provisions Corporate Alternative Minimum tax of 15% which applies only to large...

read more