Cost Sharing

September 15, 2002
Paul Angotti

Use an allocation of expenses document to save arguments later

If there were just one piece of paper that could help you avoid 95 percent of money-related disagreements among physician partners, would you pay attention to it?

Sometimes the stack of legal documents required for physician partnership agreements can reach over an inch in height. And for 20 years, I have been telling my clients that all those agreements are necessary - but one piece of paper is the most important document in the whole stack. If all the partners understand this one-page document and agree on it, most of the potential problems among partners will not surface. That document is the "Allocation of Expenses" page and, as its name indicates, it defines how practice expenses will be allocated to the physicians.

It is almost always one page, containing about 40 items; I like to include it as an appendix to the Compensation Agreement, so it can more easily be modified when significant changes in the practice or sources of revenue flow warrants a change.

Most Allocation of Expenses pages are simply a listing of practice expenses and an indication of how they are paid. Expense categories might include Medical Supplies & Equipment, Office Supplies & Equipment, Lease, Marketing, Malpractice Insurance, and Postage, to name a few. Corresponding to each is a designation of "equal," "production," or "specific," indicating how that expense is allocated.

All physicians benefit about equally from using office supplies and equipment and from marketing efforts. The use of medical supplies and equipment, the office space (lease), and postage tie closely to the dollars of revenue produced by each physician. And if all physicians are responsible for their own malpractice insurance, no one is burdened by one partner's problem, or benefits by sharing the cost with one physician who has a less expensive premium than the others.

In general, the Allocation of Expenses must be fair to all partners, taking into consideration their unique situations, motivating partners to produce, inspiring them to minimize expenses, and allowing a degree of freedom to practice as each physician desires.

Managing change

Let's look at some twists and turns that will cause a practice to allocate expenses differently. Suppose a group has seven physicians, one satellite office, and a procedure room with a special piece of equipment. Only two of the physicians work in the satellite office and only one uses the special equipment. Under these circumstances, the office lease category might be broken into two lines - "main" and "satellite," allocating the expenses to the specific physicians who work in each office. Likewise, expense categories for office lease, medical supplies and equipment, and marketing might be separated for those expenses associated with the special equipment and the cost of marketing the related procedure.

A common catalyst for practices to change the Allocation of Expenses is a change in a single physician's practice. For example, when a physician changes to part-time, his or her partners may feel that sharing the cost of office space on a production basis is no longer fair. After all, if one partner is not using the space full-time to produce revenue, the other partners are picking up a higher proportion of the expense. In this case, it would be fair to change the allocation of office lease from production-based to equally shared. With this change, the other partners might not care how much the other physician works.

Once the physicians in a practice all agree on the Allocation of Expenses, it should be fairly stable - it is not an agreement that should be discussed and changed at every partnership meeting. The goal is to have all the partners look at their pay and bonus checks and say: "I believe that I am fairly compensated for what I contribute to the practice."

We (physicians and their advisors) have enough battles to fight in the medical delivery system. Partners need to be united and it is difficult if one physician feels he is not being compensated fairly because he's covering someone else's expenses. Having a good Allocation of Expenses agreement in place and changing it when necessary generally achieves the goal of fair compensation all around, and helps avoid disagreements and discontent.

Paul Angotti is president of Management Design, LLC, a company that helps physicians to establish and maintain financial and operational control of their practices. He can be reached at angotti@management-design.com or editor@physicianspractice.com.

This article originally appeared in the September/October 2002 issue of Physicians Practice.