Compensation Structures in Medical Practices
Three are approximately 120,000 licensed physicians who are actively practicing in the state of California. Health care is a highly regulated, ultra-competitive industry. A medical practice needs the right foundation to succeed—and that includes a well-considered compensation structure for physicians. Here, our Bay Area medical practice lawyer provides an overview of the most common compensation structures for medical practices and discusses some issues to consider.
Whether you are building a medical practice from the ground up or adding a new physician to an existing group practice, it is imperative that you have a comprehensive structure in place for compensation. In California, compensation structures for doctors often fit into one of the following three broad categories:
● Physicians paid based on their own collections: In California, a common compensation structure for medical practice is paying physicians based on their own collections. A pro is that this model incentivizes individual performance—as a physician’s pay is directly tied to the revenue they generate through patient services. However, a con is that it can sometimes create vast disparities among physicians in a group practice.
● Physicians paid a percentage of group collections: Alternatively, some practices adopt a model where physicians are paid a percentage of the group’s total collections. An advantage is that this approach fosters a more collaborative environment, as all practitioners contribute to and benefit from the group’s overall success. A potential downside is that this type of compensation model might diminish the motivation for high performance.
● A hybrid model of physician pay: A hybrid model combines individual and group performance metrics to determine compensation. The structure aims to balance personal initiative with team collaboration. Physicians are rewarded for their individual contributions as well as their participation in the collective success of the practice. However, this type of model can be complex to administer.
What to Know About Federal and State Regulations for Physician Profit Sharing
A physician in California can be compensated, fully or partially, based on profits ensured by a group medical practice. That being said, any profit-sharing arrangement used to compensate a licensed doctor must comply with all applicable state and federal regulations, including the Stark Law and the federal anti-kick back statutes. Here is a basic overview of these regulations:
- Stark Law: Named after Congressman Pete Stark, this is a federal law that prohibits physician self-referral. Specifically, it forbids doctors from referring Medicare or Medicaid patients to entities with which they or their immediate family members have a financial relationship—unless one of the narrow legal exceptions applies. This law aims to prevent conflicts of interest in physician referrals and ensure that medical decisions are based on patient need rather than potential financial benefits for the referring physician. Notably, California has a state-level version of the Stark Law, known as the “California Physician Self-Referral Law.” The law extends the principles of the federal Stark Law to services payable by any source, not just Medicare or Medicaid.
- Federal Anti-kickback Statutes: The federal anti-kickback statute is a U.S. law that prohibits the exchange of anything of value in an effort to induce or reward the referral of federal healthcare program business—including Medicare and Medicaid. It aims to prevent healthcare providers from making medical decisions based on personal financial gain. Violations of this law are considered felonies and can result in significant penalties, including fines and imprisonment, as well as exclusion from participating in federal healthcare programs.
When a group medical practice in the Bay Area sets up a compensation system for its physicians, it is imperative that they do so in a manner that does not run afoul of the Stark Law, the California physician self-referral law, or federal anti-kickback statutes. A business lawyer with experience working with group medical practices can help your company put the right structure in place.
As part of the process for developing a compensation model for a group medical practice in California, it is important to consider the allocation of expenses. Expenses matter to a business as much as revenue generated. Some key factors that must be evaluated include:
● Overhead: Understanding and allocating overhead costs is crucial in any compensation model. These expenses include rent, utilities, insurance, and equipment. Properly attributing these costs ensures financial fairness and transparency within the practice.
● Staffing/managers: Staffing costs, including salaries for support staff and managers, represent a significant portion of practice expenses. Equitable allocation of these costs among physicians is essential for a fair compensation model.
● Practice vs. personal: Finally, distinguishing between practice-related and personal expenses is vital. Personal expenses, such as individual professional development or specific equipment, should be clearly differentiated from general practice expenses.
Lynnette Ariathurai is a business law attorney with extensive experience representing medical practices. If you have any questions or concerns about the right compensation structure for your medical practice, we are here to help. Contact us today for a strictly confidential, no obligation consultation. From our office in Fremont, we work with medical practices throughout the Bay Area.