A business case for physician extenders in an orthopedic practice?
Orthopedic Business Review
written by Will Kurtz, M.D.
November 22, 2020
No futuristic healthcare tech themes this week. Just good, old-fashion, blocking and tackling in orthopedic practice management. If you are not an orthopedic surgeon or running an orthopedic practice, then this article will not be relevant to you.
Back Story:
Prior to Covid, my practice, Tennessee Orthopaedic Alliance (TOA) had 62 physicians with ~22 physician extenders (PAs & NPs) with 15 different PE contracts. When Covid shut down our business in April, we realized how disparate our physician extender (PE) contracts were. Some extenders had guaranteed salaries while others had production-based compensation. We needed to simplify our PE contracts, so I contacted other OrthoForum members to learn about other orthopedic practices’ PE pay formulas. I received responses from 15 orthopedic groups. The following discussions are lessons learned from these 15 other orthopedic practices and multiple TOA board meetings on this topic. These opinions are mine and do not necessarily reflect the opinions of my practice.
If every provider in a practice is busy and at the same level of productivity, then issues like PE compensation and PE overhead are unimportant. However, when providers are at different stages in their career and at different levels of productivity, these issues matter.
How the payment formula may influence a PE’s behavior?
There are three variables that may determine a PEs behavior in their orthopedic practice.
Is the PE sponsored by a physician(s) or the practice?
Is the PE’s compensation a fixed salary or a bonus based on their collections?
Does the PE spend more time in surgery or clinic?
We will discuss the implications of each of these possibilities.
Practice-sponsored PEs
When a PE is sponsored by the orthopedic practice, all physicians cover that PE’s direct expenses and equally share the PE’s profits. Practice-sponsored PE often work in the practice’s urgent care clinics and/or after hours clinics. Because the revenue is shared evenly, the orthopedic providers in the practice typically do not refer many paying patients to this PE because the orthopedic provider will make more money seeing the patient themselves. Since the overhead costs and profits are shared evenly among physicians, the calculation of the PE’s overhead is irrelevant.
Physician-sponsored PEs
When a PE is sponsored by a single or a small group of physicians, these physicians cover the PE’s direct expenses and keep some or all of the PE’s profits. These physician-sponsored PEs will often work along side a single physician and may follow that physician in both the operating room and clinic. The sponsoring physicians often are the busier physicians in the practice and need help to efficiently provide care to their patients. Since the PE’s profit is usually distributed to the sponsoring physician(s), the sponsoring physician(s) will typically refer paying patients to their PE which means the PE are often busy.
Hiring a PE to assist a busy orthopedic physician is always financially beneficial for the sponsoring physician and can be financially beneficial to the practice since increasing the practice’s total collections can lower the overhead percentage for all physicians. But when is it more beneficial for the practice to hire another physician instead of hiring a PE for a busy surgeon? That is a tough question that we will try to answer a little later. In short. when an orthopedic physician works hard and develops a great personal brand, then the practice should support and encourage that physician and allow them for hire a PE as a rising tide can float all boats.
There are two situations where a physician-sponsored PE can be harmful to an orthopedic practice:
Physician’s personal ancillary
Increased internal competition.
Some orthopedic physicians can make substantial money from their PE to the point that the PE becomes the physician’s own personal revenue stream (i.e. personal ancillary). In some situations, these busy physicians may argue that their PE should pay a lower overhead and thereby increase the physician’s revenue. If the PE’s overhead is substantially lower than the physician’s overhead, then the sponsoring physician could make more money by referring the patient to their PE even though PEs typically reimburse 20% less than a physician. When a physician sponsored PE pays below average clinical overhead, the practice’s other physicians can be harmed by paying more than their fare share of clinical overhead. For this reason, orthopedic practices should charge the same overhead on clinical collections from PEs and physicians. Overhead on a PE’s surgical collections is different for reasons discussed below.
Increased internal competition can happen when any physicians’ clinics are not completely full. If every physician’s next available appointment is weeks away, then there is no potential for increased internal competition, but as Covid has shown us, few orthopedic practices are immune to a recession. Physician-sponsored PEs can “open the funnel” for that physician by allowing that physician and their PE to collectively see more patients than their partners. This could be as simple as having the PE see all of the physician’s post op patients, so the physician has more time to see new patients. Opening the funnel is more obvious when the PE has their own clinics that directly compete for patients with the practice’s other physicians. However, taken to its nature outcome, increased internal competition will lead all physicians to hiring their own PEs not necessarily because they need the help but to ensure that they are getting their “fair share” of new patients. This situation can become an arms race and toxic to the practice’s culture as well as increase the practice’s overhead. It can also make it hard for new physicians to build their practice when the established physicians hire multiple PEs to capture all of the unassigned patients for themselves.
In order to protect against increased internal competition, an orthopedic practice needs to monitor which providers care for the unassigned patients (i.e. patients who request an appointment with the next available provider) and ensure that each provider is getting an equal distribution of unassigned patients. An unassigned patient is a reflection of the practice’s brand which has been created and nurtured by every physician in the practice. A requested patient (i.e. patients who ask to see a particular physician) is a reflection of the physician’s personal brand which has been created by years of high quality, low variance, patient care by that physician. When one physician builds a strong personal brand and receives lots of requested patient referrals, the other physicians should not complain about their partner’s success. At the same time, no physician (with a good or bad brand) should be allowed to capture more unassigned patients by saturating their practice with their PEs.
As patient volumes have dropped through this Covid crisis, many orthopedic clinics are operating at a zero sum gain. One physician’s PE is often another physician’s lost revenue. The increased patient access created by PEs may not create new revenue for the practice, but merely transfer revenue inside the practice from one provider to another (i.e. zero sum gain).
Salaried PEs
When a PE’s compensation is a fixed salary, the PE does not increase internal competition. Salaried PEs are not incentivized to see more patients to the detriment of the practice’s other physicians. Salaried PEs usually do not schedule return visits with themselves to increase their collections, but instead refer appropriate patients on to the physicians in their practice. Salaried PEs often see patients when no other provider is available like urgent care, weekends and after hours. They also see patients that providers are uninterested in seeing (low acuity problems, certain payers, etc.). These salaried PEs will typically act in the best interest of the practice by capturing patients who might have otherwise received their care at the local ER. Salaried PEs tend to be practice-sponsored. The potential downside of salaried PEs is a potential lower incentive to work hard which could decrease revenue for the practice. The potential upside of salaried PEs is that they are more willing to provide care in settings that do not generate substantial revenue like after hours clinics and unproven satellite clinic locations. Salaried PEs are therefore less likely to increase internal competition since they are less likely to be in the same clinic at the same time as a physician.
Production-Based PEs
When a PE’s compensation is production-based, the PEs may increase internal competition in the clinic setting. Production-based PEs will often try to see more patients to the detriment of other physicians in the practice. These PEs may schedule patients for a return visit with themselves and be less inclined to refer patients on to the physicians in the practice. Production based PEs will want to work the high revenue producing clinics which are the same clinics coveted by physicians. Therefore, production based PEs will often be in clinic at the same time as other physicians which leads to increased internal competition. The potential upside of production based PEs is that they are motivated to work hard and generate lots of revenue. The potential downside of production-based PEs is they may be unwilling to work at less productive times/locations and may increase internal competition through their desire not refer patients and work alongside physicians.
Surgical PEs
Surgical PEs do not increase internal competition in a practice. A surgical PE acts as an extension of their surgeon. Patients do not request to see surgical PEs for surgical care. A surgical PE can not take a patient to surgery, and their collections from assisting in surgery are additive to the practice and not harmful to any other physicians in the practice. Granted, not all surgical cases reimburse for the PE’s services, and certain bundle programs might negate the benefits of billing for the PE’s services. However, as a whole, surgical PEs can increase collections and more than pay for the “lifestyle” benefits of having another set of skilled hands in the operating room. Surgical PEs are addictive to the practice and not zero sum gain.
Clinic-Based PEs
Clinic-based PEs can increase internal competition in an orthopedic practice. Patients can receive all of their non-operative, orthopedic care from a PE. A clinic based PE can initiate treatment and have patients return to see them in clinic. This ability to act independently allows clinic-based PEs to “open the funnel” and thereby increases internal competition. The revenue brought in by clinic-based PEs may be additive to the group or zero sum gain. If the PE was not in the practice, would those unassigned patients have been seen by another provider in the practice or would they have gone to a different practice?
Delivering care in a clinic setting costs an orthopedic practice more than delivery care in a surgical setting. An orthopedic practice does not have to pay the hospital’s facility and employee cost, but does have to pay the rent and employee in their clinics. Both clinical collections and surgical collections require revenue cycle management (i.e. a central billing office to collect the insurance payments) which usually costs about 8%. Therefore, the overhead cost to deliver clinic care is usually 55-60% while the overhead cost to deliver surgical care is 8%.
A busy clinic PE will usually collect more revenue than a busy surgical PE. A clinic PE will have more patient encounters than a surgical PE. Clinic PEs get reimbursed at about 80% of a physician’s rate for clinical work. Surgical PEs get reimbursed for some but not all surgery cases and at about 10-30% of a surgeon’s rate. PEs and/or sponsoring physicians can maximize their revenue by increasing the PE’s time in clinic. Therefore, the nature tendencies for PEs is for them to slowly migrate to a more clinical setting.
Hiring a new physician vs. a PE:
When a practice is saturated with patient demand, is it more beneficial for the practice to hire a new physician or a PE to assist a current physician? This decision can not be made by the potential sponsoring physician. The sponsoring physician will always advocate for hiring their own PE because they will benefit financially more for hiring their own PE as opposed to hiring more competition for themselves. What factors should the practice consider in making this decision?
Is there even a clear need for another provider (physician or PE)?
Is the sponsoring physician in high demand or is the practice in high demand?
What are the ages of the current physicians in the practice?
Is there a shortage of physicians taking call and/or rounding?
Do the physicians want to be in the operating room or clinic more?
Will the physicians in the practice work the after hours and weekend clinics?
The need for another provider can be established by looking at wait times for clinic visits and surgeries. A practice needs to be certain that the sponsoring physician is in high demand and not just trying to compete with his/her partners for patients by opening up their funnel. If the physician increases their access with a PE, does that increase total patient visits to the practice or just take patient visits away from another provider?
The decision about when to hire a physician vs. a PE was counter-intuitive to me. In short, if every physician is busy, then the practice should hire another physician. If only one physician is busy, then the busy physician should hire a PE. Let me explain. If only one physician in the practice is booked out for months, then that physician is obviously in great demand. Increasing that physician’s efficiency may increase the practice’s total collections because some patients will be deterred by the long wait and go to another practice. At the same time, since the other physicians at that practice do not have a long wait, there is no unfulfilled patient demand, and a new physician would likely struggle to become successful.
If a majority of the physicians in a clinic are booked out for months, then there probably is some unfulfilled patient demand in that geographic area. The practice should hire a new physician(s) to fill that demand or move a physician from a less busy location to the busier location. In other words, open clinics slots can be an indication that the geographic area may be saturated with too many physicians, and a new physician may struggle to become successful. Even though the practice with open clinic slots should not hire more physicians, it can still make sense to hire a PE for a busy physician. When a physician has a PE, the practice needs to ensure that the physician and PE are not collectively seeing more unassigned patients than the other physicians. The practice may limit the number of unassigned patients seen by the physician and/or PE or not allow the PE to see any unassigned patients.
The practice needs to consider the age distribution of their physicians when considering hiring a physician vs. a PE. A practice should attempt to keep a well rounded age distribution of physicians with a third of physicians below the age 45, a third of physicians between 45 and 55 and a third of physicians over the age of 55. Primary care physicians often refer their patients to orthopedic surgeons that are the same age as them. When a group gets top heavy, the younger primary care physicians may stop referring patients to that orthopedic practice.
While no practice should hire a physician solely to help take call or round, the practice needs to consider how repeatedly choosing to hire a PE over a physician will affect the physicians who take call. Allowing an older physician who is no longer obligated to take call to hire a PE instead of the practice hiring a new physician who would take call will affect the physicians who still have call responsibility. The practice may consider requiring sponsoring physicians to take call to rectify this problem.
Orthopedic physicians will often say, “I make my money in the OR and therefore want my PEs to do clinic so I can operate more.” While some physicians can make more money in the OR (i.e. spine surgeons), most of the time I hear this argument from physicians who wants to open the funnel and capture more patients for themselves to the detriment of their partners. Again, this scenario requires the practice to track unassigned patients and equally distribute them. Recent changes to CPT codes being enacted in 2021 will mean most surgeons will make more money seeing patients in clinic than doing surgery.
When a practice has difficulty staffing less desirable clinics, the practice may consider hiring PEs to improve after hours and weekend access. When analyzing the OrthoForum data for 2018, I discovered that physicians in practices with a higher PE to physician ratio typically made more money per physician. However, this increased revenue with more PEs seemed to be more of a correlation than a causation. Practices with more PEs tended to be the only orthopedic practice in town and operated more urgent care clinics.
How other Orthopedic Practices handle PE pay formulas:
Among the OrthoForum practices that responded to my inquiry, I found there were five types of PE pay formulas: 1) Salaried and Shared, 2) Physician sponsored PEs with same overhead as physicians, 3) Physician sponsored PEs with lower overhead than physicians, 4) Physician sponsored PEs with different overhead for surgery vs. clinic, 5) Physician sponsored with line item overhead.
Salaried and Shared
I am envious of orthopedic practices that have salaried and shared PEs. Usually, the high producing providers want to collect more revenue through sharing their personal brand with their personal PE and insist on keeping the revenue generated by their PE for themselves. A salaried and shared model creates great cohesion within the practice and allows the practice to utilize the PEs to the betterment of the practice without interference from sponsoring physician(s). It makes staffing urgent care clinics and assigning rounding duties easier.
Examples: Campbell Clinic, Costal Orthopedics, ORA Orthopedics
Physician sponsored PEs with same overhead as physicians:
Many orthopedic practices have physician sponsored PE where the PE’s collections are just added to the physicians collections. The standard physician overhead is applied to both the physician’s and PE’s collections. The physician then pays the PE’s direct expenses (mostly salary and benefits) from the physician’s own money (post-tax dollars). Therefore the PE’s collections are getting taxed at the same rate as the physician’s collections.
If a practice has a fixed and variable component to their overhead, then the additional collections from the PE will be taxed at the variable rate since the physician has already covered the fixed amount of overhead. For instance, if a surgeon collected $1,000,000 a year, they might pay 55% overhead on their $1,000,000 of collections (take home salary of $450,000). If that same surgeon worked a little harder (or hired a PE) and collected $1,200,000 instead, then they might only pay 30% overhead on that additional $200,000 in collections. The physician might take home $590,000 ($450,000 + $140,00) for a new overhead percentage of 50.8%.
Examples: Orthopedic Associates of Hartford, Webster Ortho, DMOS orthopedic, Tulsa Bone & Joint
Physician sponsored PEs with a single overhead that is less than physicians’ overhead:
Some orthopedic practices charge the physician sponsored PE an overhead rate that is lower than the average physicians’ overhead rate. The physicians are the owners of the business and therefore should be responsible for more of the overhead. The physicians also receive ancillary payments where as the PEs usually do not so that may justify why the PE should not pay the same amount of overhead. This “lower overhead” pay formula can be manipulated by sponsoring physicians to the detriment of physicians without PEs, so the practice must carefully consider and protect all parties.
Examples: TOA, OrthoSouth, Hinsdale Orthopedics, Ventura Orthopedics, OrthoVirginia, Illnois Bone and Joint
Physician sponsored PEs with different overhead rates on clinical and surgical collections:
Some orthopedic practices charge PEs a higher rate for clinic overhead than surgical overhead. If clinic overhead is typically 55 - 60% and surgical overhead is 8%, then why should a surgical PE pay the same overhead as a clinical PE. This pay formula incentivizes PE to stay in the operating room which generates new revenue for the practice and prevents internal competition. This pay formula also more accurately reflects the cost of delivering clinic based care. Since surgeons have to do both clinic and surgery, a differential overhead does not matter for physicians. Since PEs can selectively do more clinic and less surgery and thereby make more money, a pay formula with differential overhead helps offset this capitalist tendencies towards more clinic.
Examples: Tennessee Orthopedic Clinics, EmergeOrtho, OrthoArizona
Physician sponsored PEs with line item overhead:
Some orthopedic practices charge the PE and/or sponsoring physician a set amount of overhead for their activities. For instance, the PE and/or sponsoring physician may pay $500 in overhead for each 4 hour clinic.
Examples: Centers for Advanced Orthopedics
In most orthopedic groups, the sponsoring physicians has to cover their PE’s direct expenses. It was difficult to determine from the emails whether most practices charge overhead on the money used to pay the PE’s direct expenses. In many of these examples, it seemed like the sponsoring physician could pay the PE’s direct expenses with pre-tax (no overhead taken from the money to cover the PE’s salary) dollars. It is not fair to other physicians in the practice to not charge overhead on the first hundred thousand dollars or so of the PE’s collections. Overhead should be charge on every dollar that the PE collects, and the PE’s salary should be paid with post-tax and not pre-tax dollars.
Recommendations:
The practice should encourage all clinic based PEs to be salaried and sponsored by the practice instead of individual physicians. This prevents internal competition.
The practice should charge physician sponsored PE’s less overhead for surgical revenue than clinic revenue. This pay formula more accurately reflects the increased cost of delivering clinical care and encourages PE to remain in the operating room which brings in additional revenue and discourages internal competition between PEs and other physicians.
Physicians should only be allowed to hire a PE when they are in high personal demand. If the practice as a whole is in high demand, the practice should hire another physician.
Overhead should be charged on every dollar the PE collects. The PE’s direct expenses (salary) should be paid with post tax dollars.
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