Physician practices often have to bring in surgical specialists to work part-time when there are special medical needs. There are referral relationships between generalists and specialists, so it is important to ensure that financial relationships are consistent with Fair Market Value (FMV).
This article identifies three ways that practices engage part-time surgical specialists and discusses the compensation implications of each.
1099 Independent Contractors are physicians who elect to work in a practice without becoming W-2 employees. Patients usually cannot distinguish between independent contractors and employed physicians. The independent contractor works in the practice’s office, sees the practice’s patients, and uses the practice’s support staff. The practice bills for professional services and compensates the independent contractor based on a pre-agreed arrangement. Independent contractors may receive fixed compensation rates, productivity based compensation, or a combination of both. It is fairly common for practices to pay part-time specialists on the basis of some type of productivity bonus system (i.e. 30% to 50% of collections).
Compensation-to-collection rates can vary widely by geography and sites of service. Hiring practices should set compensation rates based on both geographic market factors and the proportion of the specialists’ services that are provided in facility- and non-facility sites of services.
For example, the appropriate compensation payable to a retina surgeon in Seattle, Washington might be 40% of collections for office-based services and 48% of collections for surgical services performed in facility sites like hospitals and surgery centers. Due to geographic differences in reimbursement and cost-of-living adjustments, the appropriate compensation for the same retina surgeon in Anchorage, Alaska might be 50% of collections for office-based services and 58% of collections for surgical services performed in facilities. The overall combined compensation-to-collection rates vary based on the mix of office-based and facility-based services in each market.
Timeshare Leases are arrangements whereunder visiting physicians pay practices to exclusively use office space, equipment, staff, and/or supplies during periods of fixed lengths (i.e., Friday afternoons from noon to 4pm). Under timeshare leases, the visiting physician bills insurance directly for his or her services. The visiting physician concurrently pays the practice for office space, equipment, staff, and/or supplies on a fixed fee basis for each discrete increment of time.
During recent years, reputable office sub-leasing companies like Regus (IWG PLC) and WeWork (The We Company) have published gross margin rates. Gross margins represent the difference between what the sub-lessors charge tenants and what they pay for master office leases and direct operating expenses. These highly comparable arrangements are good market comparable transactions.
For example, a 17% gross margin rate for a sub-lessor would equate to a 20.4% markup rate on the sub-lessor’s direct costs (0.17 / [1.00-0.17]). If your timeshare arrangement includes support personnel, there is also a plethora of market comparable transactions for healthcare staffing margins and markups from public company data, as well as temporary staffing rates charged to the Veteran’s Health Administration by staffing firms.
Management Arrangements typically involve non-physician business people charging a physician for a some combination of administrative services provided by a Management Services Organizations (MSOs). Management arrangements can also be used when one physician practice provides administrative services to another practice or individual physician. The scope of services can vary widely from just billing services to comprehensive “turnkey” management services, including bookkeeping, equipment, supplies, revenue cycle management, support staff leasing, and information systems.
It is a good risk management strategy to fix management fees in advance if the management arrangement is between physician referral sources. Management fees can vary widely depending upon the scope of service from as little as 4% of collections for billing to over 50% of collections if comprehensive services like support staff and office space are included.