DEVELOPING THE INCOME DISTRIBUTION FORMULA

As any group prepares to establish or revise an income distribution formula, one basic approach is to review all the individual types of income generated by physicians or ancillary services and the relevant practice expenses. Each category of income or expense should be allocated in a specific manner to individual physicians.  

Any income or expense which is determined to be direct, gets assigned directly to the physician, or office location, responsible for the income or expense. This is the initial allocation. Secondarily, those dollars generated by or from a specific site, might then be allocated either equally to all physicians using the site, or proportionately based on some other rationale (such as billings or square footage).  

For Example:

Rent for a specific location would be charged directly to the site first and then split among all the providers using the site, perhaps equally (because no one can practice without a building), or perhaps proportionately based on the square feet assigned to each physician, or hours used by each physician.

Other important issues to consider in developing an Income Distribution Formula:

What will be the basis for income distribution?

Gross Charges

Net Cash Receipts

How will the group handle revenue and expense from employed physicians?

On a direct basis with deficit shared equally by shareholder physicians

On a direct basis with the employed physician at risk

Which expenses will be allocated to the employed physician?

All categories of expenses

Only direct expenses such as salary and benefits

How will the allocation of the following revenue and expenses be handled?

Drugs administered in the office and billed to a third party

X-rays billed to a third party by the group

Lab billed to a third party by the group

Physical therapy or any other ancillary service billed by the group

How will physician assistants and nurse practitioners be paid?

How will physician assistants and nurse practitioners revenue and expenses be allocated? 

Following is a list of the types of Revenue and Expense Categories which are common in group practices. Once participants understand the types of categories available, and their definition, then the goal of the first analysis regarding income distribution should be to review all the various income and expense accounts and assign each to one of these initial categories. The accountant or practice manager can then use this as the basis upon which to calculate compensation for each physician in the future. 

It is important to remember that in a group practices without walls, each location is usually operated as an independent cost center. Only the common administrative expenses are shared among the providers (management, advertising, billing etc.).
 

Definition of General Ledger Revenue & Expense Categories for Income Distribution Allocation Purposes:

Direct  

Revenue or expense which is allocated specifically and only to the individual provider responsible for the revenue or expense.  

Outside Income  

Income earned by a specific provider for the provision of services outside the office. A common example might be income paid as the medical director of an HMO.  

Direct/Variable  

Expenses which are assigned to a specific location (office address) first and then split among the providers using the office location based a predefined production formula. 

Direct/Equal Split  

Expenses which are assigned to a specific location (office address) first and then shared equally among the providers using the location.  

Variable-Shared  

Expenses which may vary depending on the volume of services produced and billed by an individual provider. Divided and allocated to the provider based on the relationship of net receipts or gross billings to the total of the group.  

Administrative-Shared  

Expenses which produces equal benefit for all providers. This type category should be shared equally among all providers.

INCOME DIVISION FORMULA WORKSHEET

General Ledger Account	Interim Assignment	Long Term Assignment
Revenue from Patient Services
Return of Withholds
Outside Income
Staff Salaries (nurses, reception, site specific personnel)
Administrative Salaries (office manager, bookkeeper, billing personnel, or other staff whose responsibilities are primarily for the group and not individual sites or providers)
Payroll Taxes-Staff
Payroll Taxes-Administrative Staff
Staff Benefits (health, life, and other insurance, any other benefit costs)
Administrative Benefits
Workers Compensation
Staff Pension
Administrative Staff Pension
Professional Services, including:   Legal   Accounting   Payroll Service   Answering Service
Supplies, including:  Office Supplies   Medical Supplies   Drugs   Lab Department   X-Ray Department   Postage/Freight   Physical Therapy
Building and Building Maintenance (includes rent/mortgage, grounds maintenance, snow plowing, mowing, etc.)
Equipment Maintenance (repairs and service contracts, parts; all equipment)
Utilities (water, sewer, gas, electricity)
Telephone/Pagers
Insurance   Business interruption   Property   Liability   Director's insurance
Taxes (including property taxes, corporate federal, state, and local income taxes, SBT, etc.)
Medical Services Fees (diagnostic test interpretation services, HMO subcontracting, etc)., Does not include pathology/radiology which will be allocated to the specific department.
Contributions
Promotion (includes yellow pages ads, image design, marketing efforts, brochure development and printing, etc.)
Meals & Entertainment (food and related expenses for common business meetings, such as board meetings, meetings with outside third parties, etc.)
Staff Continuing Education
License, Periodicals, Dues (magazines for waiting areas; professional dues, license, subscriptions for staff; not physicians)
Bank Charges
Interest Expense
Miscellaneous
Laundry
Employed Physician Salaries
Employed Physician Benefits (health, life, disability, pension, etc.)
Recruitment (advertisements, moving expenses, agency fees, etc., for physicians or staff)
Shareholder Salary
Shareholder Benefits (life, health, disability insurance)
Malpractice Insurance
Auto Expense (reimbursement for use of personal car in business)
Shareholder Pension/Profit Sharing
CME (all expenses associated with CME, including transportation, meals, registration fees, etc.)
Dues, License, Journals (state license, AMA and other society/academy dues, professional journal subscriptions).
Entertainment (business entertainment)
Other