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Part IV, In which we look at an example group and provide some benchmarks for guiding your own group’s discussion of administrative compensation.

The question asked over and over at ACEP’s ED Director’s Academy is how much should our group pay for physician administrative time? The answer is, of course, it depends.

For the purposes of our discussion, let’s assume ACME EM Group has a single hospital ED contract at a hospital with 72,000 ED visits. The group has 19 physician FTEs and 7 MLP FTEs to service this volume. Twelve of the 19 physicians are equal owners, 5 are in the equal partnership track, and there are two FTEs of part-time employed physician coverage. A physician FTE works 1,584 clinical staffing hours per year. The collections per visit are $110. Coding and billing cost is $10 per visit so our collection per visit net of billing cost is $100. Of the approximate $8M in annual revenue, the ownership has determined that 78% will go to provider compensation and benefits, including retirement contributions and claims made malpractice insurance coverage. The group is liable for each provider’s tail policy. The group has a very efficient tiered governance structure with the executive committee empowered to make most day-to-day decisions on behalf of the group. The non-leadership owners are relatively uninvolved in the management or support of the practice but we are committed to getting them involved. The ED is an EMS medical control base station and the hospital operates an aero-medical helicopter ambulance program. The group has no aspirations of moving beyond a single hospital and the hospital is not currently pressing them to take on any new initiatives. How much should the group pay for physician administrative time?

[1] 78% of $8M is ~$6.2M. Divided by 30,096 annual physician staffing hours this amounts to ~$200 per clinical staffing hour of work when the MLP leverage dollars are added to physician compensation. At 1,584 hours per year this means the average physician receives total annual compensation of $316,800, including all benefit value, and before any owner distribution. Altogether, $6.2M of the $8M in revenue goes to provider compensation and benefits leaving a gross margin of $1.8M.

[2] At 72,000 visits, according to the rule of thumb of 1 eight-hour leadership/administrative day per week for the first 20,000 visits and 1 additional day for each 10,000 in incremental volume, this contract needs approximately 6 eight-hour days per week in physician leadership/administrative time. Of the 48 hours, 40 would likely be apportioned to a 2/3-3/4 ED Medical Director and a 1/3-1/4 Assistant Medical Director with the 8-hour per week balance going to the group President. 48 hours per week X 52 weeks/year X $200 ≈ $500,000 per year, of which it would be reasonable to ask the hospital to pay 25-33% of the ED medical director and assistant medical director cost since they are providing admin services to the ED and hospital during approximately that portion of their time. The hospital shouldn’t be asked to pay any of the group president’s cost.

[3] An aero-medical director is also needed, but in most cases this cost would be fully paid by the aero-medical program.

[4] The EM group executive committee consists of the president, the medical director, the assistant medical director, the aero-medical program director and one other member elected from the ownership at large. The latter person should be compensated for attending the monthly executive committee meetings at the same hourly rate that he would have made working the equivalent number of hours seeing patients. Estimating 6 hours per month, this cost comes to $62,400. Adding this number to the $500,000 from #2 above, and assuming a hospital leadership contribution of $100,000, gives us a total physician leadership/administrative cost of $562,400 – $100,000 or $462,400. This is approximately 5.8% of total revenue. The range that I routinely see in my EM group consulting with high functioning EM groups is 5-7% of group revenue at this volume level, but of course the percentage will be somewhat higher at lower volumes and somewhat lower at higher volumes.

[5] Optimum practice management at this volume level typically costs in the $6-$8 per visit range. This would include all practice management infrastructure, clerical support, IT and personnel, or in other words all non-physician personnel and general and administrative costs. If your group is spending significantly less than this I can almost guarantee you that you are leaving increased revenue or decreased cost dollars on the table. Of course it depends on how you spend it too. Assuming $7 a visit for this function this is 7% of total revenue.

[6] Assuming that we pay two shifts worth of compensation ($3,200) for quarterly owner meeting attendance and engagement, if an average of 6 owners in addition to the Executive Committee members show up our cost will be $76,800 or ~1% of total revenue.

[7] The cost of capital in a group this size, assuming a contract life of 20 years, would likely be 2-3% of total revenue. Let’s say 2.5% of total revenue.

[8] The cost of funding the group’s malpractice insurance tail liability over ten years of average tenure would be something like 1-2% of total revenue. Let’s say 1.5% of total revenue.

[9] Reinvestment in the practice varies widely but 2% of revenue is a bare minimum for most service businesses.

So to sum up, we began with a 22% gross margin, from which we now subtract:
~5.8% for physician leadership and administrative compensation
~7% for non-physician personnel and practice management
~1% for owner engagement incentive
~2.5% for the cost of capital
~1.5% to cover malpractice tail liability
~2% for practice reinvestment

This leaves approximately 2.2% of the 22% gross margin as a target profit margin for the group. This is relatively slim and many not-so-democratic groups would likely lower the percentage of revenue going to provider compensation and benefits, and raise the target profit margin to the 3-5% range.
Regardless of what your group decides to do in regard to its target profit margin, I recommend not taking it out of physician leadership and administrative time. Doing so is the first step on the road to losing the contract.

Ronald A. Hellstern, MD, FACEP is a principal and senior consultant with Hospital Practice Consultants, LLC in Dallas, Texas.

 

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