As the owner of a medical practice or clinic that employs additional doctors as associates you are required to determine the right revenue strategy that will cover your costs but also keep those doctors engaged in your practice. In the majority of situations, the revenue strategy is based on a flat fee percentage of the associate’s billings earned each month. The rate applied to this billing varies significantly depending on the type of practice and income expectations of the associate.
While this methodology is still the most common and is relatively simple to implement it does pose certain risks to the clinic as costs can increase without a matching increase in the revenue per procedure. In addition to this, the percentage fee compensation package doesn’t necessarily motivate the associate, where possible, to earn extra revenue or focus on performing high dollar procedures. As a result of these downsides, some additional reimbursement strategies are starting to show up in the medical space. Two of these strategies are as follows:
Declining fee basis
Declining fee basis – in an effort to encourage associates to bring in more revenues individually which in turn creates more revenues to the clinic, a declining fee structure can be considered. This fee structure starts at a normal rate to ensure the clinic receives sufficient revenues to offset the costs of clinic operations and then decreases to a lower rate to encourage the associate to generate additional revenues. For example, if a clinic determines that total costs of operations for an associate are $17,500 a month and that most associates will generate $50,000 in revenues monthly they could consider the following fee structure:
- 35% of first $50,000 in revenues earned in the month
- 20% of excess revenues earned in the month
20% may sound high if the initial costs are covered by the initial payments, but this 20% is needed to cover some of the variable costs of the additional procedures performed by the associate and would include a profit portion for the clinic as it is the owners of the clinic that are taking on the risks of ownership, managing the staff and operating the clinic.
Fee per use basis
Fee per use basis – this basis is similar to a rental model and can be used for both associates and non-associates alike. In order to implement this model a clinic needs to have a full cost analysis prepared to determine the cost per use of equipment and rooms including an allocation of fixed and administrative costs. Once this cost is determined, the clinic adds an amount for profit to determine the appropriate rate to charge. The most common spaces to use this will be private operating rooms or clinics operating specific machinery like MRIs, ultrasounds and lasers. The benefits of a fee per use model is that the clinic can earn revenues from any doctor in need of a room or a service and ensure each rental is profitable.
The two revenue methodologies discussed above are only a couple of potential methodologies that clinic owners can use to generate additional earnings, many other methods and combinations of methods can be considered to optimize the earnings potential of the clinic. In addition to revenue methodologies, clinics should also look closely at machine utilization, space utilization and cost optimization as methods to increase the profitability of the clinic. As an added benefit, the increased revenues or decreased costs will create a more valuable clinic when you decide it is time to sell.
If you have any questions or if you would like assistance in preparing these applications, please contact your Welch LLP advisor.