Addressing Compensation for Disabled Physicians at Your Practice

In my last blog, I addressed compensating a physician upon termination if the physician was not allowed to work during the notice period. I emphasized the need for proper planning and drafting to address the various issues.

Another situation requiring appropriate drafting involves how compensation and expenses should be handled for disabled physicians. Terminating a disabled physician immediately is not considered a fair approach, particularly for physician-owners. On the other hand, disabled physicians impact the financial viability of a medical practice. Both sides of this equation must be taken into account when formulating an equitable approach.

A typical productivity approach for physician-owners is to credit the physician with 100 percent of his or her own production and to charge for 100 percent of direct expenses (malpractice, cell phone) and a set percentage of variable expenses (legal fees, supplies) and fixed expenses (rent). This same approach can sometimes also include non-owner physicians as well.

Whether this exact productivity formula is used by your practice, or some variation, when a physician is disabled for a period of time, it’s expected that his or her production will slow and then cease completely if he or she does not return. How quickly this occurs depends entirely on how efficiently the practice collects its accounts receivable. While the disabled physician might be able to put direct expenses on hold, his or her share of fixed and variable expenses still need to be paid; however, if there are no receipts from which to deduct the disabled physician’s share of expenses, the disabled physician (or his or her family) may find themselves forced to cover the expenses from personal funds. Alternatively, the remaining physicians may be forced to cover the disabled physician’s share of expenses, which may pose substantial financial strain.

If your practice compensates all physicians based on a flat salary or shares practice receipts equally, don’t think this is not an issue for you. Continuing to share income or pay a salary to a physician who is not longer generating income is a huge drain on a practice and can create pecuniary distress.

Although this is a sensitive topic to discuss, it is a business issue that requires attention. Some methods to address this concern might include:

1. Limit how long a physician can remain as an employee/shareholder/member before he or she is terminated by the practice. Many practices allow 6 months to 12 months before termination of an owner, even if this is past the point when a disabled physician can afford to cover a share of expenses.

2. Consider distinguishing between “ill,” “disabled,” and “totally and permanently” disabled in your contract. A physician who needs medical treatment or has a car accident might simply need time off. A physician who suffers a debilitating stroke might not reasonably be expected to return at all and immediate termination might be in the best interest of all parties. This will also allow the group to find a replacement physician more quickly to help assure financial and patient-care continuity.

3. Talk to an insurance provider to see what options might be available to limit harm and disruption to the practice and the disabled physician and incorporate appropriate language into your contract. Individual disability policies are also highly recommended.

4. If your contract allows a physician to continue to receive base compensation/equal share of accounts receivable for a period of time following disability, consider an approach that gradually decreases the amount paid based on the length of the absence. For example, you might pay 100 percent the first 30 days, 50 percent the next 30 days, and then cease all payments.

There is no one solution that works for all practices. The method by which physicians are compensated and share expenses must be taken into account by the drafter to find a solution that works best for the practice. Discussing disability and how a practice may be impacted is the first step in finding a fair approach that will not penalize the disabled physician or the practice.

Finally, another significant question is how a physician’s disability should be reflected in severance that may be owed to the disabled physician upon death or termination. This is a topic I will cover in a future blog.

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