No question generates more angst or consumes more discussion for a democratic emergency medicine (EM) group than how much to pay for practice leadership and administration. In the typical democratic EM group, every dollar of proposed leadership or practice management expenditure is challenged and every dollar of approved expenditure is resented to one degree or another.
The Business of Emergency Medicine
Few things cause more angst for EM groups than settling on appropriate levels of administrative compensation
No question generates more angst or consumes more discussion for a democratic emergency medicine (EM) group than how much to pay for practice leadership and administration. In the typical democratic EM group, every dollar of proposed leadership or practice management expenditure is challenged and every dollar of approved expenditure is resented to one degree or another. Even when the issue seems to be settled, everyone knows that it’s only a matter of time until a new need will arise or the underlying resentment will bubble up again to rekindle the debate.
Democratic Group Defined
For the purpose of this article I am defining a democratic EM group as one in which every physician practicing full-time with the group is either an equal owner/partner or on the way to becoming one; where all decisions are made by simple majority vote of the membership; and where there is no buy-in or buy-out for one’s partnership interest other than perhaps for a proportionate share of the accounts receivables.
Emergency Medicine Practice is a Service Business
The comparison of an EM practice to an accounting or legal firm where a group of independent professionals come together primarily to share overhead is erroneous. For one thing, EM cannot be practiced by an individual; it takes a coordinated group of providers to staff a hospital emergency department (ED). For another, the hospital expects the group to provide for the leadership of the ED and for each of the group’s members to follow the same policies and procedures. Finally, the hospital expects the EM group to have enough leadership capability and business sophistication to be a reliable partner in addressing the rapidly increasing pace of change in medical care delivery. EM practice is much more comparable to a service business.
In most multi-million dollar service businesses the owners of the business are distinct from the providers of the services. The value of the service providers is set by the marketplace and there is a reasonably clear demarcation between the work of providing the services and the work of leading and managing the business. Owners are contingently compensated in proportion to the time and capital they risk, and how well the business is managed. The dollars that are left after all service provider compensation and benefits are paid represents the gross margin of the business and must cover the cost of capital, and leadership and management as well as provide for a profit to the shareholders.
In the democratic EM group practice, however, those delivering the services are also the owners. This circumstance blurs the lines of distinction between provider, leader, manager and ownership work, and the relative value of each. This conflation of issues tends to produce a bias in favor of overvaluing provider work (as in the case of GM with UAW majority ownership) and undervaluing leadership, management and re-investment in the future of the practice. Over time ownership work compensation comes to be thought of as an earned part of provider compensation when in fact ownership work is a completely different activity. Caught between these two sets of provider entitlements adequate funding of group leadership, management and reinvestment in the practice tends to get squeezed out in favor of maximizing provider compensation.
To further complicate matters, most democratic EM practices function as IRS Subchapter S corporations and as such pay out all practice revenue on a monthly, quarterly or annual basis according to the formula: revenue net of expenses = provider take home pay + owner distribution. Accounting the practice in this way creates the problematic impression that all of the practice money belongs first to the providers/owners (for the most part the same cohort in a democratic group) and that all leadership and administrative expense is necessarily in direct competition with each owner/provider’s individual compensation. In this circumstance it is easy to see how the provider/owner might say, “that is my dollar you are proposing to take from me to fund an administrative activity that I may not agree is necessary for my (as opposed to my practice’s) welfare.” This point of view tends to be disproportionately held by those relatively uninvolved owners who aren’t able to appreciate the leadership and managerial challenges confronting the practice by sitting in an owner’s meeting a couple of hours a month. And in a democratic EM group, where all owners are equally powerful regardless of their level of understanding of the needs of the practice, all it takes is one individual to keep the debate going or even paralyze the group’s ability to make decisions.
The Need for Clear Business Distinctions
It is much more effective to look at provider, leadership, managerial, reinvestment in the practice and profit as relatively separate issues. Contractual commitments such as those the group makes in an employment agreement with its providers must be honored regardless of other circumstance and these should be market-rate-based. Owners should receive the same clinical compensation as everyone else providing services. Equal pay for equal work should be one of the hallmarks of a truly democratic group. The ownership group should set the provider employment terms and resist the temptation to overvalue provider work because of their dual provider-owner role. Once determined, the percentage of practice revenue allocated to the providers of services can be said to belong to the providers. It is an absolute versus a contingent obligation of the practice. What is left over is termed the gross margin of the practice, which must be sufficient to fund leadership, management, reinvestment in the practice and hopefully a profit distribution to the owners. Profit should be contingent on first providing for appropriate practice leadership and management.
The critical flaw in many democratic EM group practices is that the owner/providers assume that the gross margin belongs proportionately to each of them instead of belonging to the practice! The only part of the gross margin that should be considered as belonging to the owner/providers is the contingent profit margin. The rest is reserved to the practice to be apportioned as leadership sees fit.
It is leadership’s job to manage the gross margin dollars in such a way that both practice performance and profit are maximized. In order to do this they must have the authority to use their deeper understanding of the needs of the practice to decide such things as how much money should go to recruiting versus the Christmas party and how much should be reinvested in the practice to enable it to meet future challenges. If they do this well the contract is retained and the owners receive a profit distribution, and if they don’t, perhaps a leadership change is needed. Tracking the size of the owner distributions is one of a number of useful objective measures of leadership performance. Leaving these kinds of decisions to a Committee of the Whole, where uninformed owners see leadership and administration as directly competing with their compensation, almost always results in starving the practice of leadership, management and reinvestment resources.
In the next installment we’ll discuss the factors that cause the amount of leadership and administrative pay to vary from EM group to another.
Ronald A. Hellstern, MD, FACEP is a principal and senior consultant with Hospital Practice Consultants, LLC in Dallas, Texas.