Partnership Status: An Alternative Approach to Medical Group Ownership

Traditional (privately owned) medical groups frequently struggle with transitioning an employed physician to an owner-physician for many reasons. Generally these involve (1) financial maturity of the physician’s clinical practice to a level that can support a sharing of the practice overhead and support a market-competitive salary and bonus structure, as well as the “buy in” cost of an ownership share, (2) the physician’s “fit” with the practice culture, and working relationships with others, and (3) development of the physician’s business acumen and ability to contribute meaningfully to administrative decisions.

A “Partnership Status” program is an alternative to the general model of advancement to ownership, which often occurs after 2-3 years of practice with no “in between” stage, and no opportunity to assess the issues listed above.

Similar to the multi-tiered partnership models used by legal and accounting firms, a Partnership Status program incorporates a class of employment called the “Equity Partner,” a voluntary, non-ownership appointment approved by the Owner Physicians.

This distinction between Owner Partner and Equity Partner provides a structured path to ownership whereby the employed physician is moves to equity status after the second year of employment. As an Equity Partner, the employed physician can (1) share in the excess earnings/bonus (but not distributions) of the practice in the same manner as an Owner Partner, (2) have access to the same management information, and (3) participate in decision-making activities with the Owner Partners in an advisory-only capacity. The Equity Partner shares overhead expenses in the same manner as an Owner Partner.

A Partnership Status Program benefits the existing Owner Partner(s) by (1) reducing their shared overhead, (2) allowing maintenance of control over critical practice decisions, (3) providing time to assess the administrative acumen, judgment and fitness of the employed physician for eventual ownership, and (4) providing a forum for discussion of issues important to the employed physician.

The downside to this model for the Owner Partner(s) is a delay in buy-in revenue from the employed physician. However, this downside is greatly exceeded by the financial benefit of increased productivity by the employed physician who will see a direct relationship between reimbursement and individual work product. In addition, it will result in improved physician morale for Equity Partners who have greater access to information and a forum for their concerns and opinions to be heard.

Where there are a number of Equity Partner physicians, the Partnership Status program utilizes a “Physician Advisory Council” as a means for Equity Partners to participate in management decisions and receive the same financial and other reports as Owner Physicians.

For ease of administration and transparency, it is recommended the Partnership Status Program use a cost allocation model based on the “take home what you earn” revenue model, whereby variable costs are allocated based on a percentage of collections, and administrative costs (those that do not vary with changes in volume) are allocated equally between Owner Partners and Equity Partners. The main differences between the partner classifications are (1) the Equity Partner is not a legal owner, (2) does not buy into the practice, (3) is not entitled to vote on management decisions, and (4) cannot participate in distributions of excess revenue.

The non-owner physician is in an employed status for a (recommended) time of four years. In the first two years, compensation is based on a on a salary plus “bonus over a threshold” system. In years three and four, the physician is an Equity Partner, and in year five may be eligible to advance to Owner Partner.

Although it is recommended that an Equity Partner transition to an Owner Partner after 4 years of employment, the physician may remain in this status for an indefinite period of time; advancement to Owner Partner is at the discretion of the existing Owner Partners. The appointment may be cancelled at any time by the Partner Owners.

The key to success with this program is openness and transparency with decision making and financial reporting. The Equity Partner must be given the documents to understand the administrative and clinical issues associated with the practice, and how individual reimbursement and expense sharing is calculated.

For established medical practices, the benefit of being part of a PHO is primarily in preserving the referral relationships with PCPs who are part of the PHO, as well as preserving market share with health plans that enter into an exclusive, or a “narrow network” relationship with the PHO.

The Cost Allocation Model (see attached example) allocates revenue and expense as follows:

• Owner and Equity Partner revenue is allocated based on individual collections, plus the collections of employed physician(s) who are not Equity Partners and other revenue producing services or personnel. An exception is that any revenue associated with a Stark-related service must be allocated strictly to the percentage of ownership of the Stark service. For example, if only two of five Owners have purchased equipment designated as a Stark service, then only they can be allocated the revenue and expense associated with it, regardless of who produced it.

• Clinical expenses and other costs that vary with changes in volume are allocated as a percentage of Partner Owner and Equity Partner collections, with the exception of Stark Services, which must be allocated only to those who own the equipment.Examples are clinical staff, medical supplies, linens, rental on clinical equipment, office administered drugs, laboratory costs, billing expenses (all billing staff and billing related expenses, collection agency fees), copy costs, general postage, office supplies, and administrative equipment rental.
• Administrative expenses that do not vary with changes in volume are allocated equally to Owner Partners and Equity Partners.Examples are occupancy costs (rent, heat, power, water), IT costs not associated with billing, property taxes, bank charges, administrative staff (Practice Administrator, front desk, scheduling, marketing), property insurance, D & O insurance, marketing/business promotion expenses, staff meals and staff entertainment, legal and other professional fees, rental fees for non-billing copiers, telephone, interest on practice bank loans.
• Personal Expenses (also called non-shared expenses) associated with each Owner Partner and Equity Partner are allocated directly to the appropriate physician.Examples include salary, bonus, FICA/FUTA employment taxes, health and other individual insurance policies, malpractice insurance, automobile expenses.

Prior to the implementation of a Partnership Status program, the following documents should be reviewed and revised as necessary:

• The Owners’ Operating Agreement
• Participating Physician(s) Employment Agreement(s)
• Revenue and expense policies

It is recommended the Partnership Status program be written up in the form of a policy or memorandum to explain (1) the reason for the program, and (2) legal constraints associated with having a non-owner make management decisions (vs. advisory decisions).

The memorandum should also explain the workings of the Physician Advisory Council, its review authority, the reports that will be provided to members, and how appointment to membership is made.

An example of the cost allocation methodology, preferably using actual numbers for one fiscal quarter, with Equity Partner participation, should be developed and furnished to potential Equity Partners to show them how the system will function.