Medical Practice Profit Sharing: Top 5 Considerations for a Successful Profit-Based Compensation Arrangement

  |  December 10, 2018

This is the first installment in a three-part series about the design and implementation of compensation arrangements in independent medical practices.

Are you considering starting a group practice or making changes to the compensation arrangements in your existing documents? In this article, we outline the top five considerations in designing a successful profit-based compensation arrangement.

  1. Fairness of agreements. When designing the profit split arrangement, it is important to determine whether the Memorandum of Understanding and various physician employment agreements are designed to match the intent of both the entity and individual physician. Consideration should be given to how the agreements will affect current and entering physicians with regard to each individual’s current and projected compensation.
  1. Allocation methods. The second consideration is how to determine allocation methods.  Once the intent is discussed, the agreements must be written in a way that discusses the allocation of a) revenues and other income, b) shared expenses, c) non-owner physician and ancillary profits/losses, and d) management compensation arrangements. The allocation of each item should be designed in a manner that will incentivize individual provider productivity, while compensating providers for management services, and allowing them to share in the revenues from ancillary services such as physical therapy departments, medical research, physician assistants, employee physicians, etc. It is important to find the balance between production-based or per-provider (shared equally) allocations to avoid producing negative correlations between productivity and each provider’s bottom-line compensation.
  1. Transparency of arrangements. It is important that all parties subject to the arrangements are privy to how individual compensation is determined, in order to maintain transparency and an equal playing field. Transparency can be obtained by providing complete profit allocation reports to owners and decision makers and excerpts of these reports to employee physicians and other parties whose compensation is profit-split based. Face-to-face meetings at least once annually are the best way to ensure that all parties have a thorough understanding of how their compensation is determined.
  1. Knowledge of healthcare-specific rules, regulations, and arrangements. It is essential to retain experienced legal and accounting counsel who specialize in healthcare to ensure your practice is compliant with Stark and Designated Health Services rules and regulations. Furthermore, your accounting counsel should have experience reading and interpreting medical practice agreements, to ensure that any profit allocations or calculations of compensation adhere to these agreements.
  1. Consideration of the future. When designing an agreement, consider how your practice might grow in the future (opening new offices, hiring additional providers, working with a new hospital or payer, etc.). Amendments are costly and time consuming, so it is important for your agreement to align with both current and foreseeable goals to the best of your ability.

REDW’s healthcare team provides timely and accurate allocations to doctors and other providers in a variety of healthcare fields. We have extensive experience working with legal teams, managers, and doctors in designing and implementing profit sharing arrangements. Please contact Cayla Anderson to discuss the profit-sharing arrangement for your practice.

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