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AAOS Now

Published 9/1/2015

How Do Practices Split Expenses for Overhead?

AAOE survey findings

Recently, the American Association of Orthopaedic Executives (AAOE) surveyed members about how offices split overhead and revenue. According to Jerald T. Forrester, MBA, FACMPE, president and CEO of Steindler Orthopedic Clinic, in Iowa City, the results were “not surprising.”

In his summary of the results, Mr. Forrester noted that the one-day online survey drew 101 respondents, primarily from groups with 10 or fewer physicians. “Overwhelmingly, most groups pay according to a 100 percent production model; more than 60 percent of the respondents used this method,” he reported.

Among groups that paid on a production-based system, nearly three out of four allocated all revenue generated by a physician’s personal professional production to the physician. Expenses, however, were not shared equally in two-thirds of the groups responding.

Allocation of expenses (fixed, variable, and direct) was mixed. “Being that it’s difficult to list all the possible iterations as choices in this survey, the open responses showed there was a level of fixed, variable, and direct expenses in the ones that noted this. But, the mix was likely different than the choices offered,” he noted.

When asked about allocating any direct expenses to physicians, most practices allocate expenses for staff who report directly to the physician and for certain types of medical expenses (high-cost injections for which reimbursement is also allocated to the physician).

“Compensation within a medical group—particularly within an orthopaedic practice—will determine the culture that is fostered within that group,” wrote Mr. Forrester. “If you incentivize higher production by more compensation, the result will hopefully be that you will have doctors who work more and harder. If you allocate a certain level of expense as ‘fixed’ or equal, you will get doctors who understand they have to produce at a certain level to cover that initial cost. If you allocate variable expenses to providers, they will start paying more attention to things like overtime, spillage, utility costs, and supply usage. If you allocate direct expenses to providers, you will see them pay more attention to the benefits they sign up for and the amount of contributions they are willing to make.

“Therefore, it is logical to say that allocating a specific level of fixed, variable, and direct expenses per provider will incentivize the right type of behavior, while allocating revenue to the one who produces it and ancillary revenues to all will promote increased production and motivate the doctors to expand their ancillaries in a specialty where that is at a premium.”

For more information on the AAOE, visit www.aaoe.net