How To Create A Simple Bonus Incentive For Mid-Level Providers

In today’s post, we’re talking about incentive bonus plans for mid-level providers. 

Specifically, I’ll show you a simple method you can use to calculate an incentive bonus based on collections.

If you’re a physician owner hiring a new mid-level provider, or if you need help restructuring a new compensation plan, this one’s for you.

Let’s get started.

Rising demand calls for better compensation

Mid-level providers, such as nurse practitioners and physician assistants, are in high demand. 

In fact, they’re currently among the fastest-growing segments of the healthcare workforce.

The growth of mid-level providers exceeded yearly estimates by 7%  according to one survey. 

Similarly, actual increases in base pay continue to outpace expectations. In 2018, the projected average increase was 3.2% compared with an actual average increase of 4.8%. 

All this can put pressure on an organization’s staffing budget. Especially when mid-level providers make up a significant portion of your team. 

Physician owners need to think critically about how they structure compensation plans for mid-level providers.

Why you should include a bonus incentive

Mid-level providers are well aware of their high value in today’s job market. 

Consequently, recruiting, retaining, and engaging top talent requires a more competitive approach to compensation than your standard salary or hourly position.

A bonus incentive is a great way to hire and motivate the best candidates.

According to The Physician Assistant Life, half of full-time PAs receive a bonus of $6,000 or more. This is in addition to other non-salary benefits such as compensation for professional development, health insurance, liability insurance, and profit-sharing contributions.

Characteristics of a successful bonus incentive

In my experience, successful bonus incentives share the following characteristics:

Profitable for the practice

You can’t pay out a bonus that you can’t afford. Plain and simple. If you’re going to offer a bonus incentive, you must know how much the practice can afford to pay.

Objective measurements

Base the bonus on data, not on feelings or the subjective opinion of the owner. A fair bonus incentive should clearly outline what metrics must be met.

Simple and easy to understand

Finally, your incentive bonus will only be successful if both parties understand how it works. Things get messy when the formula gets too complicated. This causes people to question if the incentive is fair.

Example bonus incentive

From my experience, most bonus incentives are either based on the mid-level provider’s collections or work RVUs. 

In today’s example, I’m choosing to use collections.

Step 1: Figure your direct costs

The first step is to figure your direct costs for the mid-level provider.

This includes their base salary, payroll taxes, and any other benefits that you will include in their contract.

Description	Calculation	Amount
Base salary	$50/hr x 2080 hr/year	$104,000
Payroll taxes	7.65% of salary	$7,956
Profit sharing	3% of salary	$3,120
Malpractice insurance	$1,500 per year	$1,500
Continuing education	$1,000 per year	$1,000
Other benefits	$500 per year	$500
Total direct costs		$118,076

Step 2: Calculate your operating expense ratio and profit margin

Your operating expense ratio is equal to operating expenses divided by net receipts.

Operating Expense Ratio = Operating Expenses / Net Receipts

This ratio will vary widely depending on your specialty.

For example, according to statistics compiled by the National Society of Certified Healthcare Business Consultants, pediatric groups average 65.8% general overhead while emergency room physicians only average 44.3% general overhead.

To calculate the ratio for your practice, sum only the operational expenses that are incurred throughout the year. Exclude any expense that is the direct costs of other providers.

Things like rent, utilities, administrative staff salaries, maintenance, equipment leases, legal and accounting fees, and supplies are all examples of operating expenses.

Operating Expense Category	Annual Amount
Rent	$120,000
Utilities	$10,000
Administrative Salaries	$750,000
Clerical Supplies	$50,000
Clinical Supplies	$180,000
Maintenance	$25,000
Equipment Lease	$50,000
Janitorial	$15,000
Legal and Accounting Fees	$35,000
Billing Fees	$45,000
Other	$40,000
Total	$1,320,000

Now let’s assume the practice collected $2,000,000 in net receipts for the year.

In this case, the operating expense ratio would be:

Operating Expense Ratio = 1,320,000 / 2,000,000 = 66%

This tells us that for every $1.00 of collections the practice spent $0.66 

From here we can also calculate the operating profit margin.

• Profit Margin = 1 – Operating Expense Ratio
• Profit Margin = 1 – 0.66
• Profit Margin = 34%

So now we can say that the operating expense ratio is 66%, or that the practice has a 34% operating profit margin.

We’ll use the operating profit margin going forward with our bonus incentive calculation.

Step 3: Calculate the mid-level provider’s break-even amount

In the world of investing, “break-even” is the moment when the money you earn equals the amount of your original investment.

We’re going to apply the same concept to your mid-level provider’s compensation plan.

As the practice owner, you break-even on your investment when the total direct costs of your mid-level provider are equal to the profits that they generate for the practice. 

Knowing this, we can calculate the level of collections that our mid-level provider needs to produce before they start generating profit for the practice.

Break-even calculation:

• Total Direct Costs = Profits
• Total Direct Costs = Collections x Profit Margin
• Collections = Total Direct Costs / Profit Margin
• Collections = $118,076 / 0.34
• Collections = $347,282

When you hire a new mid-level provider, you expect them to break-even. So if you offer them a compensation package of $118,076 you should expect that they will produce at least $347,282 in net receipts.

At this level of production, the collected receipts will cover the mid-level provider’s compensation package and the operating expenses associated with the collections.

The $347,282 break-even amount will be the minimum threshold for our bonus incentive calculation.

Step 4: Define the bonus payout structure

Now that you know what the collections need to be in order to break-even, you can create an incentive bonus plan for whenever collections exceed this amount. 

For instance, if the mid-level provider’s break-even amount is $347,282 and they generate $375,582 in collections for the year, the mid-level provider has brought in revenue of $28,300 above the break-even amount.

But remember, this doesn’t mean that you’ve made $28,300 in profit. For every $1 you collect, we figured $0.66 went into the operational overhead. So you must first multiply the excess collections by your profit margin.

• Profit = Collections x Profit Margin
• Profit = $28,300 x 0.34
• Profit = $9,622

You have $9,622 of profits that you can split between the owner and the mid-level provider.

The owner should have a return on investment (ROI) on the mid-level’s work. Afterall, you don’t make an investment just to break-even. You invest money to turn a profit. 

The owner physician can be more or less generous with this percentage depending on practice needs and individual goals. For our example, we’ll assume that the owner takes 60% and the midlevel takes 40%. This works out to a $3,849 bonus for the mid-level provider.

Actual Mid-Level Collections		$375,582
Break-even Threshhold		$347,282
Excess Collections	$375,582 – $347,282	$28,300
Professional Profits	$28,300 x 0.34	$9,622
Owner Income	$9,622 x 0.60	$5,773
Mid-Level Bonus	$9,622 x 0.40	$3,849

Collection vs Production

The example I just gave is based on collections. Not production (or “gross charges”).

Which is better?

Well, the advantage of using collections is that you can always be sure the practice can afford to pay out the bonus. 

But a mid-level provider could argue that an incentive bonus based on gross charges is fairer than one based on collections. 

This is because a provider’s collections depend on how well the practice’s billing department performs. 

In essence, her bonus potential is not entirely within her control.

For example, a provider could work hard to generate $373,421 in gross charges, but if the practice’s collection rate is less than 93%, they wouldn’t hit the breakeven mark and miss out on a bonus payment. 

Gross Charges	Collection Rate	Collection	Collection in Excess of Break-even	Eligible for Bonus?
$373,421	90%	$336,079	($11,203)	No
$373,421	93%	$347,282	$0	No
$373,421	95%	$354,749	$7,468	Yes
$373,421	99%	$369,687	$22,404	Yes

For this reason, it might make sense to compromise.

Some bonus incentive plans include a clause that specifies a base-level expected collection rate, say 95%, and includes provisions so that the bonus calculation isn’t adversely affected by a lower rate.

Conclusion

I hope this post helped you understand how to structure a simple bonus incentive.

Now I’d like to hear from you.

Do you have a bonus incentive plan for your mid-level providers?

And if so, is it based on collections? Or something else?

Either way, let me know by leaving a comment below right now.