DOGRA CPA LLC

Dividing the Practice Profitability

Taking a Look at Common Methods

Profit Sharing

Oftenthere are instances when physicians work in a group. In such cases, issues such as division of profitability from practice arise. While thisis an area where a physician’s experience and reputation comes into play, a physician must be well-aware of the different routes that can betaken.

Some of the ways in which profit distribution can take place are briefly listed below:

  • Division on per-capita basis
  • Fractional division.
  • Incentive compensation, where compensation is solely based on a physician’s          production. 
The strategies listed above are briefly explained as follows.

Profits Division on a Per Capita Basis
Profits are divided equally among all the physicians in a group. For instance, if there are four physicians in a group and the net profit is $900, 000, each physician will get $225,000. This method is most commonly used in hospitals for distribution among radiologists, anesthesiologists and pathologists. Another variation is one where a physician’s per capita share is influenced by factors like seniority, night or day shifts, etc.

Fractional Division of Profits
Thismethod establishes that certain physicians in a group will get a higherpercentage agreed upon by all others. However, things can get pretty dicey when this method is used especially when everyone is equally productive in generating profit.

Incentive Compensation
Thismethod establishes that the profit distribution will be solely on the basis of relative production. The net income is calculated and each physician gets paid according to his/her production.

Let’s take a look at some examples to understand this method better.

Example 1: Profit Allocation on Production
Excludingthe gross charges, bad debts and discounts, physician A, B and C rendered 40%, 35% and 25% productivity respectively. Supposing that the net income earned is $900,000, the amount physician A, B and C will receive are $360,000, $315,000 and $225,000 respectively.

Example 2: Profit Distributed Partially On Per Capital Basis and Partly On Productivity
Thereare variations to this method of distribution that are also available. Now, we’ll take a look at how profits can be divided using the approach listed above in conjunction.
Assumingthat the net amount earned is $490,000. Both physician A and B produced30% revenue whereas physician C contributed 40%. However, the group reached the agreement that taking into account the night practice and call, the first 15% will be divided evenly whereas the rest will be divided on the basis of relative production.

Example 3: Profit Division Partly On Relative Production, Partly On Basis Of Seniority, Partly On Per Capita Basis
Thegroup comprises of three physicians A, B and C. Dr. A and Dr. B have anexperience of 25 years of practice whereas Dr. C has an experience of 4years only. However, Dr. C generates the most revenue. Dr. A and B believe that their seniority entitles them to a bigger compensation whereas Dr. C is of the opinion that relative production should be used as the basis for profit distribution.

The net income is $490,000. Now,70% of the profit will be allocated on relative productivity, 15% will be given on the basis of seniority and the remaining 15% will be dividedequally.

Salary Continuation Plans
Thisplan allows physicians leaving the practice to collect a certain portion of charges that have been generated but not paid at the time they were leaving the practice. These are provided as compensation in the event of a physician’s termination for one reason or the other. The reasons could be retirement, severance, resignation, disability, death etc. The plan should clearly state how the amount will be calculated forthe physician leaving and the dates when the installments are due.

Usingthe information above, physicians will never again face any challenges when it comes to dividing practice profitability among a group.