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 | ||
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Professional Services, including:
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Supplies, including:
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| 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 | ||
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Insurance
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| 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 |