Profitability Drives Orthopods’ Pay; Cost Allocations Spur Creativity

Profitability Drives Orthopods’ Pay; Cost Allocations Spur Creativity

Orthopedic surgeons in both single and multispecialty groups are widely paid on profitability – production measured by collections, minus some measure of costs, to yield a net profit contribution to the group – PCR’s informal survey of such groups indicates.

There seem to be as many methods of allocating costs to orthopedists as there are groups that use such plans. A number of groups allocate by some formula related to each physician’s production, on the ground that the more a physician does, the more costs he or she incurs for the group. One group has turned that into a powerful production incentive by setting costs for pay purposes equal to collections multiplied by an overhead ratio that falls as production rises (see article, p. 1).

An academic group is changing its formula to make sure that physicians practicing only part-time contribute enough to overhead. Another group got tired of the complications of allocating expenses, and imposed a simple formula to distribute costs (see box, p. 4).

In general, orthopedics is one of the best-paying specialties (see chart, p. 3). Adding substantially to incomes in many physician-owned orthopedic groups are ancillaries. The key ancillaries are imaging, such as X-rays and MRI; durable medical equipment, including braces and crutches; and physical therapy, says administrator John Nosek of Greensboro (N.C.) Orthopaedic Center. A recent addition is prescription drugs, such as antiinfiammatories and muscle relaxants.

Another administrator said that, when comparing orthopedists’ incomes, you must know what ancillaries a group has. This administrator’s group has no ancillaries because they are performed by the hospital at which the group does most of its work, and income levels are accordingly below national benchmarks.

Orthopedics has several subspecialties, such as spinal, hands, sports, and total joint surgery There also is a very wide range of reimbursements. Nosek says the top reimbursements go for spinal surgery; then down a notch for total joint replacements such as knees and hips; then down again for “general” orthopedic surgery, such as shoulders, knees, feet, ankles and hands; and finally way down for office visits.

Groups Peg Pay to Profitability

Two four-orthopedist groups separated by 1,000 miles have quite similar pay systems. NASA Bone & Joint Specialists, located across the street from the NASA installation in Houston, and Dover (Ohio) Orthopaedic Center, both measure production by collections. They divide costs between “fixed” or “indirect” — meaning costs incurred by the practice as a whole and divided by equal shares — and “variable” or “direct” — meaning costs incurred by individuals and assigned to them.

Neither group actually counts every variable expense against a particular physician. The Texas group distributes all variable expenses by each physician’s number of patient encounters or number of accounts, says administrator Jerrod Smith. The Ohio group distributes them according to a six-month running average of receipts, administrator Marilyn Orr says.

Orr says incomes last year of the four physicians ranged from $340,000 to more than $500,000, based mainly on how well established each one’s practice is. The group benefits from being the only orthopedic group in a five-county rural area in southeast central Ohio with a population of 200,000. The group does not retain reserves, and pays bonuses the last week of each year based on the difference between pay draws and the compensation figures under its formula.

Incomes last year from the Texas group to its four physicians ranged from $175,000 to $1.1 million, Smith says. The partner at the low end only joined the group in May 1999. The Texas group is centered around the practice of its senior member. Regular paychecks are set informally, and if they’re excessive in light of the group’s production, Smith attempts to cut them back.

Orthopaedic Group of San Francisco, owned by five orthopedist partners, also has a profitability system, but differs from the two groups above in three main ways:

* It measures productivity and distributes collections by each physician’s work RVUs.

* It assigns group-wide or “fixed” expenses by each physician’s share of RVUs.

* It assigns each “physician-allocated expense” to a particular physician.

Administrator Karen Sollar says the group’s RVU system largely follows Medicare’s, with some differences like giving credit for legal consultations.

This group gave up an equal shares arrangement in January 1999. Sollar gives the reasons: (1) equal shares seemed unfair to the harder workers; (2) using RVUs removed stigmas for accepting low-paying patients on Medi-Cal and some managed care plans; and (3) the new system reduced pressure to perform unwanted tasks, as for instance physicians who did not want to do legal consultations.

So far, the physician partners are “accepting” the new system, in part because everyone’s income either went up or stayed the same, she says.

Fixed Costs Added to Allocation Formula

A for-profit, purely clinical practice, owned by its 17 orthopedists, who also serve as the faculty at a northeastern teaching hospital, is in the midst of making subtle changes to its pay plan in part to prevent subsidies by its harder-working physicians of others who are slowing down their practices.

The group measures production by collections and allocates all costs against the physicians. But the allocation method will change dramatically, says its administrator, who asked not to be identified.

The current allocation divides costs in two ways (akin to the San Francisco group above):

* Direct expenses allocated to each physician, such as salary draw, malpractice insurance, CME costs, dues and subscriptions.

* Group-wide expenses divided by each individual’s share of overall production.

The problems with this very production-centered system of allocation, the administrator says, are: (1) providing no disincentive to a physician who produces so little as not to cover a fair share of the group’s overhead; (2) placing a very heavy overhead burden on the highest producers; and (3) giving no incentive to treat patients in low-cost outreach locations.

The new allocation will add a third category:

* Fixed costs, including many group-wide expenses previously distributed by production levels, now to be distributed by equal shares. This will include rent, utilities, maintenance and repair, management staff, and some clinical staffing costs.

Two other important changes are being made. First, the group eliminated a minimum salary which allowed low producers to draw substantial incomes from the group. This move accentuates the effect of adding the new cost category.

Compensation and Production Indicators

For General Orthopedic Surgeons

25th

MGMA Data Mean %ile Median

Total Cash Compensation – rounded to nearest thousand dollars

Overall $340 $239 $306

1-2 years in specialty $245 $200 $220

Single specialty $365 $253 $340

Multispecialty $311 $225 $279

No capitation $369 $251 $336

10% or less capitation $329 $233 $291

11%-50% capitation $309 $217 $280

51% or more capitation $298 $254 $296

Eastern $312 $227 $280

Midwest $374 $260 $344

Southern $384 $251 $369

Western $289 $224 $270

Production Per FTE Physician

Ambulatory encounters $3,835 $2,714 $3,517

Ambulatory encounters: [*] [*] $3,142

hosp. owned

Ambulatory encounters: [*] [*] $3,522

non-hosp, owned

Physician work RVUs $7,693 $5,395 $7,088

RVUs: hosp. owned [*] [*] $6,475

RVUs: non-hosp, owned [*] [*] $7,354

Compensation per RVU $45.07 $34.82 $41.95

Sullivan Cotter Data – Staff Physician

Total Cash Compensation – rounded to nearest thousand dollars

Overall $264 $173 $250

Hospital owned $242 $150 $243

Group practice $333 $240 $274

Northeastern $224 $142 $220

Midwestern $317 $203 $275

Southeastern $246 $150 $171

Western $319 $253 $293

75th 90th

MGMA Data %ile %ile

Total Cash Compensation – rounded to nearest thousand dollars

Overall $395 $512

1-2 years in specialty $290 $368

Single specialty $420 $531

Multispecialty $361 $490

No capitation $426 $559

10% or less capitation $398 $511

11%-50% capitation $373 $451

51% or more capitation $337 $416

Eastern $366 $462

Midwest $430 $580

Southern $434 $598

Western $328 $430

Production Per FTE Physician

Ambulatory encounters $4,442 $5,928

Ambulatory encounters: [*] [*]

hosp. owned

Ambulatory encounters: [*] [*]

non-hosp, owned

Physician work RVUs $9,991 $12,223

RVUs: hosp. owned [*] [*]

RVUs: non-hosp, owned [*] [*]

Compensation per RVU $52.92 $67.16

Sullivan Cotter Data – Staff Physician

Total Cash Compensation – rounded to nearest thousand dollars

Overall $300 $407

Hospital owned $295 $381

Group practice $338 $518

Northeastern $280 $332

Midwestern $333 $512

Southeastern $291 [*]

Western $374 $469

SOURCES: MGMA, Physician Compensation and Production Survey: 1999

Report based on 1998 Data. (888) 608-5601 ext. 895. Sullivan, Cotter

& Associates, Physician Compensation and Productivity Survey Report

(1999). (313) 872-1760. [*] Not in printed report. See PCR 4/26/00, for

information on source data for these surveys.

RELATED ARTICLE: Center Uses Set Formula to Divide Costs

Rather than allocate every cost among its 11 physicians, Greensboro (N.C.) Orthopaedic Center divides all costs by an automatic formula: 60% fixed and assigned by equal shares, and 40% variable, assigned to each physician according to production.

Administrator John Nosek says this method greatly simplifies physician compensation for group, which includes nearly every subspecialty within orthopedic surgery. The system works as follows.

Step 1: Add up each physician’s collections.

Step 2: Add up all of the practice’s costs except personal physician expenses, multiply them by 60%, and distribute them by equal shares to the physicians. This flat calculation replaces one in which items such as the mortgage payment, utilities and administration were separately totaled as fixed costs and then distributed equally to the physicians.

Step 3: Again take the practice’s costs, multiply by 40%, and allocate them by each physician’s share of the group’s overall collections. This calculation replaces the individual assignment of spending on such items as supplies and clinical staff salaries.

Step 4: “Back out” the revenues and costs from ancillaries such as magnetic resonance imaging and physician assistants. MRI is backed out to assure the group’s compliance with the Stark laws (PCR 5/10/00, p. 5) by preventing credit to the physician who orders the MRI. PA charges are backed out simply because all the physicians use the PAs.

Step 5: Put the group’s profits from ancillaries “back in” via equal shares to all owner physicians. This is the contribution to the group’s profitability

Step 6: Subtract personal physician expenses paid by the group, such as salary draw, car and telephone expenses, continuing medical education, and individual business expenses.

Step 7: If Step 6 yields a surplus, there is a bonus; if it yields a deficit, the amount will be with held from future pay.

Contact Nosek at (336) 545-5015 orjsnl017@aol.com.

Second, more money will be transferred to the practice chair to reward research and teaching work.

Contact Orr at (330) 343-3335 or johnorr@sprintmail.com; Smith at (281) 333-5114 or @nasabonejoint.com; and Sollar at (650) 992-7700 or ksollar@aol.com.

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