Having partners in a medical practice definitely has its advantages. You have peers to share the workload and to share costs, which often drives up your revenue and drives down your overhead costs. You have partners that can help make business decisions about practice growth, employee matters and clinical protocols. But when you split the responsibility, you must also split the pie. The income pie, that is.
Mathematically, splitting income and expenses equally is the easiest method to apply. Inevitably, questions and discontent arise between partners over variances in work production and how overhead costs are shared. Splitting the pie fairly involves making decisions about how to allocate your patient income and each of the practice’s costs. Here are some things to consider when developing your practice’s income distribution agreement.
Allocating Receipts by Rendering Provider
Allocating receipts by rendering provider, whether you use charges, RVUs worked or payments received, is the most often used method of allocation in independent medical practices where there are no ancillary services or multi-disciplines. A perfect example is primary care. Even in specialty care, you can allocate income from direct patient encounters and procedures performed to the rendering physician.
But what if you have ancillary services like nuclear stress testing or retail sales, like skincare products or optical frames? Some of the income from these types of services is not the result of direct physician contact. You may have a technical component that is allocated directly to the physician, but the remaining income might be equally shared by all the partners.
If you and your partners are operating in an S-Corp, any income not allocated through physician compensation must be shared equally. Make sure your tax planning takes into account any residual income that may be left at the end of the year.
A Look at Categorizing Practice Expenses
Practice expenses are often broken down into three categories: direct physician expenses, fixed operating costs, and variable operating costs.
Direct physician expenses like dues, continuing education, malpractice, and even direct staff salaries, like scribes, are allocated to each physician when they incur the expense.
Fixed operating costs like rent and other facility expenses can be allocated based on square footage used or days in the office. This method comes in handy when you’re trying to assign facilities expense to ancillary departments like nuclear testing or retail sales. You’ll need to consider how fixed depreciation costs for equipment will be shared if not all physicians are using the equipment. It seems appropriate to assign costs associated with expensive equipment to the physicians that are getting credit for the income generated by the equipment’s use.
Variable operating costs increase or decrease based on how much work is performed. Medical supplies, staff salaries and basically all other practice expenses that can’t be carved out as either direct or fixed fall into this category. These costs can be allocated in the following ways:
- By production (applying the method used to allocate income),
- By calculating the costs as a percentage of total income and allocating each physician a share of the costs, or
- By sharing these expenses equally or in any other way agreed to by the partners.
There are multiple ways to allocate income and expenses between you and your partners. Finding and agreeing upon a fair income distribution agreement allows you to realize the advantages of group practice while ensuring you’re taking home your equitable share of the pie.