Physician Compensation in RHC's

One of the most complicated aspects of being a rural health clinic is the treatment of physician/owner's compensation for cost reporting purposes.    Sole proprietorships and partnerships are reimbursed based upon the value of the services of the physician owners.  The amount claimed has no relationship to the amount actually paid to the physician.  For example, if the value of the physician services is determined to be $250,000 and the physician is only paid $120,000 during the year; the full value of the physician services of $250,000 is an allowable cost on the cost report.  The value never has to be paid in cash to the physician to be an allowable cost.  This principle only applies to sole proprietors and partnerships.  Corporations must pay any allowable compensation to the physician owners within 75 days of year-end for the expense to be an allowable cost on the cost report.

Since 1996 the value of the services provided by physician/ owners in rural health clinics has been based upon the number of visits the physician treats in the cost reporting period.  For example, if the physician had 10,000 encounters during the year and the Intermediary allowable cost per encounter was $33.14 per visit; the allowable cost on the cost report would be $331,400; without regard to the actual amount paid to the physician in a sole proprietorship or a partnership.  

Riverbend Government Benefits Administrator in Chattanooga, starting using this system in 1996 and is the source of the allowable compensation per visit in the first row on the following table.  We have inflated the values by the Medicare Economic Index to produce the values in the subsequent rows.

Many rural health clinics convert to a corporation based upon advice of their lawyer or their CPA .  A corporation does provide some protection of personal assets as well as  additional fringe benefits, retirement funding, and certain tax advantages.  One of the most common errors that rural health clinics make is to convert from a sole proprietorship to a corporation without considering the reimbursement impact that this conversion has on reimbursement  We're not saying don't do it; just keep in mind that the conversion could have some reimbursement impact and you should call the person preparing your cost report before you make any decision.