Most Dermatology Groups Use Production Pay as Demand Soars

Most Dermatology Groups Use Production Pay as Demand Soars

Dermatology groups continue to set physician pay mainly by production formulas, but there are also equal shares elements in their formulas, in part to bridge the revenue and overhead gaps between general dermatologists and high priced subspecialties akin to the gaps in cardiology.

Dermatology can be a high dollar specialty. Annual incomes of more than $1 million are not unheard of, and there are a fair number of incomes of $400,000 or more among active practitioners who also are owners of their groups. But general pay levels are much lower (MGMA median of $206,000 in 1999), held back in part by fairly high overhead rates.

Demand for service continues to soar’, most of all to deal with skin cancers in the growing elderly population, but also because skin cancers are appearing more frequently in the 35 50 age range. Other reasons are greater interest by patients in cosmetic care, and vastly improved equipment and medicines over those available several years ago.

“There is a dearth of dermatologists in Virginia and elsewhere,” says Bert Wilson, CMPE, administrator of six physician Dermatology Associates of Virginia in Richmond. Many groups are having problems recruiting. All the groups interviewed for this article, though they have eight or fewer physicians, could take on one to three dermatologists right now, and most of them are hiring one or two this year:

Four Subspecialties Dominate Practices

Joe Huffman, CMPE, practice administrator of five physician Associates in Dermatology in Lakewood, Ohio, explains that the business and compensation dynamic in many dermatology practices today is based around the interaction of four subspecialties:

* General dermatology. A general dermatologist doing no cosmetic care, working in the office five days per week (dermatology has little call or hospital duty), should be able to generate revenues of about $550,000 per year: This is generated from a lot of patients, typically 40 to 50 per day with most pulling in $50 to $75. The many patients means the physician is using three to five exam rooms, a fairly large clinical staff, and a lot of collections help. The result is overhead in the 56% 57% range, akin to primary care, leaving a net income for the general dermatologist of about $240,000. He or she is generating 1,000 to 1,500 pathology specimens per year’, as well as many referrals for cancer or cosmetic surgery or care.

* Dermatopathology. Another high throughput subspecialty, a “derm path” can look at up to about 100 slides per day, and charge about $75 each. Thus, revenues can approach $2 million per year per physician. What’s more, a typical overhead rate is about 30% much lower than in general dermatology.

* MOHS surgery. This is the most common kind of skin cancer surgery today. Huffman says it can generate $1.5 million per year in revenue, with overhead of about 40%. Also, MOHS patients need reconstructive work, which some MOHS surgeons do. But most make hundreds of thousands of dollars of referrals to plastic or cosmetic surgeons. MOHS surgery has a cure rate of about 96%, says Janey Mills, administrator of Dermatology Associates of Tyler (Texas), compared to the high recurrence rate of the earlier’, excision techniques.

* Cosmetic surgery and care. This can generate $2 million per year, with overhead again in the 40% range.

Dermatology practices try to have at least the first three subspecialties. Many groups have no cosmetic subspecialist and perform little or no cosmetic work. Many dermatologists perform general dermatology perhaps half the time, and other subspecialties the other half.

On the recruiting market, the other subspecialties are in particular demand.

Several years ago when Medicare went to its re source based pricing system and raised its RVU ratings and reimbursement rates for evaluation and management work in physicians’ offices, dermatologists benefited along with primary care physicians, Wilson says. Many commercial payers refused to go along with these price hikes or even tried to pay less than Medicare. Wilson’s group was able to get out of contracts with such payers. It remained with other payers who raised rates along with Medicare, and has many patients who pay out of pocket.

Similarly, Huffman reports that his group accepts most third party payers in his area, but many Ohio dermatology groups do not work with any of them.

Pay Plans Focus on Revenues

Huffman’s group pays all its physicians a fixed percentage of the receipts that each pulls in. He declines to reveal the percentage, but it is usually in the mid to upper 30s. Even first year physicians are on this formula, although they are also guaranteed a salary.

To this fixed percentage, several adjustments are made. For instance, if a physician’s disability insurance premiums are above the practice average, a deduction is made; if the premiums are below average, an addition is made. Another adjustment is for buy ins and outs to or from the corporation. The group pays benefits to its physicians apart from the compensation calculation.

The group’s overall overhead ratio is around 45% of revenues most years. Subtracting overhead and the percentage of revenue pay to physicians leaves an amount that is paid to the group’s three shareholders in proportion to their share of receipts.

Its buy out system for retiring shareholders is quite generous. They receive the full value of their accounts receivable at the point of retirement, minus an 8% collection charge but not minus an amount for any overhead associated with earning the receivables. They also receive the dollar value of their stock investment in the corporation and an equal share of any employed physician accounts receivable.

For the last 15 years, eight physician Dermatology Associates of (Lexington) Kentucky, has figured pay as follows:

(1) Determine the group’s net profit before physician compensation.

(2) Divide the net profit among the shareholders (now five), 40% by equal shares and 60% by production, with production figured by the proportion of each one’s net receipts.

(3) Employed physicians (now three) are paid a negotiated salary, plus 40% of revenue above individual thresholds. One employed physician with four children under five years old works just one day a week.

The group is “very happy” with the system, says administrator Kathryn Kesheimer. The group has two MOHS surgeons and one pathologist, and is extremely busy Shareholder pay ranges from $400,000 to $800,000.

The five shareholders of Wilson’s group have been on equal shares for a number of years, but on Oct. 1, 2001, it is going to 50% equal shares, and 50% production based on the fee for service revenue collected by each. For the roughly 15% of revenue that is capitated, half will be paid be equal shares, and half in proportion to each shareholder’s number of capitated patients. In this pay system, costs are allocated by equal shares. Wilson says it’s unnecessary and “too complicated” to allocate costs to each physician. (For a contrary view, see article p. 1.) A physician who works 80% time still pays a full share of costs.

In an unusual twist, one reason for going to production pay is to relax the production incentive. Wilson explains that “the physicians seem more comfortable just working at their own pace, because they know it won’t affect anyone else’s income.”

He adds that, while some physicians’ incomes will rise and others fall, they agreed on the change out of a sense of general fairness.

The three owners of Mills’ group split pay evenly. The group formed in 1999 when two of the physicians joined one already practicing in Tyler: All three had worked together for more than 10 years in the military health system.

Two work half time as MOHS surgeons, and one half time as a pathologist. They also employ two semi retired physicians and a physician’s assistant on fixed salaries. They earned more than $500,000 last year:

Recruiting in an Employee’s Market

General dermatologists coming out of residency have a wide choice of jobs, and MOHS surgeons and dermatopathologists can choose among “hundreds of jobs…anywhere they want,” Huffman says. Starting pay for people out of residency is from $140,000 to $200,000.

Of course, physicians with experience earn more. Mills’ group will pay a dermatologist who’s been practicing for several years, and is joining the group in 2002, from $200,000 to $240,000 over the first three years.

Starting salaries are rising, but not “astronomically,” Wilson says. His group hired one dermatologist in July, and another will join at the end of the year’.

Contact Huffman at (440) 627 2042 or; Mills at (903) 534 6200 or; Wilson at (804) 323 4254; and Kesheimer at (859) 233 1359.

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