Dividing Overhead

September 15, 2002
Pamela Moore, PhD

Physicians are fighting over how to divide overhead fairly. Here are some equitable suggestions.

Thom Atkins, MD, is trying to keep the discontent that's brewing at his practice from bubbling over - and he isn't alone. Physician groups across the country are feeling just-below-the-surface tensions or are experiencing outright civil war. The problem?

No one believes they are getting a fair shake when it comes to sharing overhead costs. And that can lead to serious trouble.

Atkins, a family physician with Sutter Medical Group in Elk Grove, Calif., and medical director for clinical information for Sutter Medical Foundation, is trying to approach the issue proactively and urges other physicians to do the same because, he says, problems having to do with splitting costs "have been more fully defined in the past couple of years." Discussions about overhead are now part of every contract negotiation. Worse, Atkins adds, "nobody has an easy answer" for dividing costs up fairly. He fears a bigger breakdown in his group.

"It can get bad enough that physicians actually leave [a practice]," confirms Bruce Johnson, an attorney for Denver-based Faegre & Benson, and a physician compensation consultant with the Medical Group Management Association (MGMA). "I've worked with several groups where there is a subset of doctors who feel the plan isn't fair and are seriously considering going elsewhere."

So what are physicians to do in order to keep their practices together and everyone on fair financial ground? There are some basic overhead formulas in use that can help settle some of the anxiety.

At the same time, it's important to recognize that the concern about overhead is "cyclical," according to Johnson. In the 1980s, when reimbursement was significantly higher, it wasn't so important to know who was paying what share of the practice's expenses. But thanks to current economic conditions, in the first half of 2002, says Johnson, "there were a whole lot of groups that were going, 'Holy cow!'" when they took a close look at their overhead costs. In short, shared overhead troubles are going to be a recurring trend that will surface and retreat with the shifts in the healthcare economy.

Pay and productivity decline

The most significant of economic shifts for physicians this year was the 5.4 percent cut in reimbursement from Medicare and other payers. Couple that with rising overhead costs (according to the MGMA, the cost of running a practice has gone up 50 percent since 1990) and it's no wonder once-amiable partners are at each other's throats. Everyone's piece of the pie is getting smaller, and more of what would otherwise be your income is likely to be flying out the door to cover costs.

The financial pressure, and the resulting feuds about how to fairly share overhead, might only grow worse next year. Medicare is expected to cut reimbursement another 4.4 to 5.7 percent in 2003, unless Congress acts to change the way the Medicare fee schedule is calculated.

Also aggravating the situation are the increasingly diverse goals and work styles of physicians. There was a time when a male-dominated, workaholic generation of physicians all put in the same long hours. These days, more women are entering the workforce; many of them opt to work part-time. A survey by the American College of Physicians and American Society of Internal Medicine revealed that 12 percent of female family physicians held part-time jobs, and 37 percent of female pediatricians worked part-time at some point in their careers. A full 21 percent of female pediatricians work part-time right now.

Herein lies part of the problem among Atkins' group. More Sutter physicians are opting for part-time work, and full-time physicians are starting to resent paying what they consider an unfair percent of the overhead costs of the group. After all, why should they subsidize the lifestyle choices of their colleagues? "Physicians who are working full-time feel like they are supporting the part-time physicians," Atkins says.

And it's not just the women who are forcing changes in the reimbursement landscape. "We used to be able to say there were a lot of female physicians trying to balance motherhood and work. ... Increasingly it's not a female thing," says Marshall Baker, a management consultant with the Physician Advisory Group in Boise, Idaho. "The contemporary physician, by and large, is not going to put in the 90- to 100-hour work week his predecessors did. Many of them have recognized that there is life after work."

Indeed, according to a gender-neutral survey by the American Academy of Family Physicians, 3.6 percent of family medicine physicians work 20 hours or less a week, and more than 25 percent work 40 hours a week or less.

Clearly, the growing movement to part-time work wreaks havoc with overhead. A part-timer most likely can't afford the same overhead as his full-time colleagues, yet he has a desk and a nurse and uses the billing staff, the same as the full-time physicians. And so the resentment grows.

The good news is, there are some standard models for dealing with overhead costs: sharing them equally, dividing them into cost centers, and a combination of the two. The model you use depends on your objectives - and the obstacles you face.

Share and share alike

Models that divide costs equally reinforce the sense that all physicians in the group should work as a team. "That doesn't just let them off the hook," says Deborah Walker, a compensation specialist with Boehm Walker Associates in Surfside, Calif. This way, the team is accountable for controlling costs as much as possible - everyone pays the same toward whatever the practice spends.

The idea is wonderfully simple, but it falls apart fast if team members don't, in fact, see themselves as playing on the same team. And it's easy to stop being a good sport when it's your salary that's down for the count.

One way to quiet the rumblings may be a well-matched compensation formula. If everyone splits overhead evenly, but the highest producers still take home a larger paycheck, they may be less likely to complain. As Bob Siegert, a general surgeon at All Saint's Medical Group in Racine Wis., sees it, "What you pay in overhead doesn't make a bit of difference. It's what you take home that matters."

Siegert looks at overhead as percent of total revenue, but not everyone will agree with that global view. As Johnson points out, to some physicians overhead is simply "what I don't get." Both perspectives are right, and the two are not easily reconciled, making equally shared costs impossible for some practices. The reality is, the physician who sees every dollar going toward overhead as a dollar out of his pocket won't want to pay a penny more than he himself spent.

You use it, you pay

At the other end of the spectrum of solutions is the full-fledged cost center approach. Each physician (or each practice site or specialty subgroup) becomes an individual cost center, each one paying only for what it spent.

This seems the ultimate in fairness, but cost centers can also be an administrative and political nightmare. "You need an administrative structure to track every cost," Walker points out. "It's much more difficult to track, say, four books than one." Practices do manage this, but those considering it should realize that cost center models may actually increase administrative costs, even if those costs are divided ever-so-fairly.

More importantly, "you have to be very careful when you set up cost centers because there are so many haves and have-nots," Walker adds. Imagine a multispecialty group that is broken into specialty-based departments and tracks costs for each. The surgeons will love it; their generally higher reimbursement rates make it easier to keep a positive bottom line. But the family practice and internal medicine physicians in the same practice will surely be losing money.

Siegert says he used to see this phenomenon when he worked in a 30-physician group. "The [orthopedists] were always saying they pay too much of the overhead, but without the primary-care people what [do they] do? ... They're reading a lot of magazines."

But like the model that divides costs evenly among members of the group, cost centers don't work for everyone. Walker has seen groups go through the trouble of setting up cost centers only to go back and institute "tithes" that essentially force the better-paid specialists to support the lesser-paid physicians - the very thing the group was arguing about to begin with.

Mixed model

There is a happy medium between sharing all costs "even Steven" and divvying up the practice into cost centers. Think of it as a combination of the two approaches. As in the first model, the physicians in a group share fixed costs evenly. Fixed costs are those that stay the same no matter how much they are used, such as rent or staff salaries. However, variable costs - costs that change based on usage, like supplies - are assigned to cost centers, based on who used what. In most practices, fixed costs account for about 85 percent of the costs; staff alone generally account for 50 percent of all costs, based on an analysis of MGMA's annual Cost Survey. Because the cost centers are only concerned with the 15 percent of costs that are variable, they are easier to manage than under the full cost center solution.

Like the other models, this combination approach to overhead needs to be paired up with a common sense compensation plan and some group-specific tailoring. Walker describes this example: A practice compensates its physicians according to their gross revenue; the more they bring in, the more they take home. One physician in the group decides to hire a nonphysician clinician to work only with him. As a result, his productivity and compensation skyrocket. So it's not really fair for the entire group, under the combination overhead model, to pay for that extra clinician. "If one provider gets the benefits of the productivity, he should also pay for those costs," such as the new staffer's salary, says Walker.

Build your own model


Indeed, while these three types of overhead plans work for many groups, larger or more complex practices may have to think more creatively for the right solution. After all, "what's fair to one group may not be fair to another," says Walker.

Virginia Drone, executive director of Alton Multispecialists in Alton, Ill., had to think fast when specialists in her group started to resent paying higher-than-market overhead to support the primary-care physicians in the group. The practice is evenly divided between specialties and primary care.

The specialists "started to think they ought to make more, which made the internists think they had to leave because they could not afford it," Drone recalls. "We went through all kinds of machinations to come up with a fair and equitable formula. ... We were afraid the practice was about to blow up."

The group settled on a plan in which all physicians devote 58 percent of their net medical revenue to overhead - up to $250,000 per year. After the $250,000 mark, each physician pays a percent of net medical revenue based on productivity and on benchmarks from MGMA for overhead rates in their specialty. If a physician is especially productive - based on charges, relative value units (RVUs), and actual charges - he pays the lowest benchmarked overhead rate; less productive physicians pay more. The plan strikes a balance between specialist support of primary care - in this case, everyone pays an equal amount up to a certain point - and respect for the characteristics of each specialty.

Other groups require the most productive physicians to pay a greater percent of the overhead balance, figuring they have used more resources and have the income to support it. Alton Multispecialists would rather encourage productivity. In fact, productivity-based models are increasingly common. "There is a strong orientation to do something that is productivity based ... to reward and encourage different levels of production. That's not a surprise as reimbursement drops," Johnson notes. Boosting productivity is one way to keep reimbursement up.

In most cases, the more productive physicians are the specialists who have higher charges and RVUs - not because they see more patients and use more resources - but because they can charge more for their services than can internists.

Make it suit your needs

Drone's group was wise to base its overhead plan on shared ideas about what's important to the group - productivity, in this case. Overhead plans need to reflect the values of the group, whether that leads to a standard approach or an out-of-the-box idea. Form should follow function.

When I hear questions about overhead, the real question is the perception of fairness," Walker says. "It's a question about culture. Is there trust?" She sees the questions as part of the normal "rise and fall of the partnership." The only way to get past it, she believes, is to "ask the tough questions that need to be addressed. Why are you in a group to begin with? What are your goals?"

"What we are really talking about is a group of people negotiating about an emotional, volatile issue - money," adds Johnson. It's a given that everyone wants the plan to be fair; the problem is that not everyone agrees on what fair is. Start working through it by identifying bigger goals. Does the group want to increase productivity? Is the main goal to allow for flexible hours? How is the practice really doing in regard to costs? As Walker points out, "you can't mandate trust." The only way to get the group to agree is to carve a consensus, not to demand compliance. "Ask the tough questions that need to be addressed," Walker says.

Then expect a real, hardball negotiation session. Just like in negotiations between nation states (or doctors and managed-care companies), every physician in the practice may expect to lose something, but they should gain something else in return so that, in the end, everyone can feel comfortable with the plan. "It's the nature of medical groups to cut deals," as Atkins says. Use that tradition to your advantage to resolve cost-sharing disputes, too.

Some very large groups may be able to disregard this plea for diplomacy. "It's a whole lot different to be in a five-physician group versus a 30-physician group versus a 200-physician group," Johnson says. A 200-physician group is often run more like a traditional, top-down business than a true partnership. "It can be more of, 'Here's the plan and if you don't like it, you can find another job.'" Smaller practices need to be gentler with one another.

One tip for keeping the tone diplomatic: "Try to keep the process objective," Johnson advises. "Don't look at the numbers first. Start by reaching agreement about the big picture." Form agreement about what the goals of the group are and only then look at how those goals may financial effect individuals.

Whatever model you settle on, realize that it will probably be a work in progress. "What you develop today will be based on the unique needs and personalities of the physicians today and their reimbursement. ... Today's plan is typically developed to deal with the unfairness of the last plan. And the next plan will typically be developed to deal with the unfairness of today's plan. That's just the way it works," Johnson says. "How to split the pie will be a perpetual challenge. Any time you have diverse interests and diverse goals, you're going to have a level of conflict and a need to find a compromise."

And try not to expect that everyone will be happy at any given time. "I don't know that there is a fair way from everyone's perspective," Siegert says. The best plan will let every physician feel like the negotiated truce will allow them to keep going for the time being - until the next reimbursement cut.

Pamela L. Moore, PhD, is senior editor, practice management for Physicians Practice. She can be reached at pmoore@physicianspractice.com.

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