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Hey, y’all, welcome back to another episode. Today is a business episode. I am taking a little departure from my EOS journey series because we are just implementing the model, doing our L10 meetings, and chugging along, and we don’t have another big day coming up for a while.[00:01:00] Today, I’m talking about the reasons that I do not like the percentage payment model. You probably know there are two different payment models. There’s paying employees hourly versus a percentage of collections. I’m going to talk about why I really don’t like the percentage payment model.
Before I get to that discussion, I, of course, want to invite any of you who might be interested in some group coaching to check out The Testing Psychologist Mastermind Groups. It looks like our beginner group and our advanced group are full for the next cohort. So recruiting for that Intermediate group; that’s for solo practitioners who have mastered the basics but are now overwhelmed and drowning in your practice, and you’d love to put some better systems in place to get your life back. You can go to thetestingpsychologist.com/consulting and schedule a pre-group call.
All right, let’s talk about payment models.
Okay, y’all, I am back, and here we are talking about payment models. I’m actually not going to go into all of the details about the different payment models. I really just want to talk about why I don’t like the percentage payment model.
Why is this important? Well, what you pay your employees in a group practice is quite important. I’ve talked about the target payroll percentage- the target amount that payroll should eat up out of your gross revenue. And if you get that wrong, it can go really badly.
Payroll is the single largest [00:03:00] expense in your practice most of the time- the single biggest line item in the budget. So if you mess it up, you can get into some trouble. And a lot of practices do mess it up in some form or fashion, usually by starting out paying people too much, but that’s not always the case. Sometimes it’s just not having a great idea of what works best for the practice.
The ultimate goal is the sustainability of the business, right? I hear people saying, well, I want to pay my employees the best I can to help retain them. And if you’re paying them so much that the business is not sustainable, then you haven’t done anyone a favor because then everyone’s out of a job. But I digress.
Let’s assume that you have dialed in your payment structure, but you’re wrestling with whether to [00:04:00] do hourly or percentage. So, what are those exactly?
Well, hourly is just like it sounds but it also includes salary in my mind. A flat hourly rate is basically where employees or contractors are paid by the hour that they work. You could have different rates for clinical versus administrative time. You could have one overall rate. You could have a different rate for supervisory time. You can do it however you want, but the premise is they are flat hourly rates that correspond to a given service.
The percentage model on the other hand is when you pay your employees or contractors a percentage of collections or revenue. You’ll often hear talk in Facebook groups or just in the community among practices or among folks looking for a job, what [00:05:00] percentage do you pay? That can serve as a measuring stick of sorts though. I don’t think it’s a great one.
All right. Now that we have the basics, let’s dive into the pros. I would say the pros for the percentage model. I don’t want it to be all bad.
I think there are some pros to the percentage model. Again, if we’re talking about a percentage model, this would mean that a clinician gets, say 60% of collections from the work they do. 60% of the income brought in by the evaluation that they do. There’s a range always, but let’s just say 60% for the sake of an example.
So what are the pros of a percentage model?
Doing a percentage model does protect you from fluctuations in insurance reimbursement or theoretically in private pay, reimbursement. The main concern here is [00:06:00] that insurance reimbursement will go down for some reason. I think we’ve all heard those horror stories about insurance panels that choose to reduce the reimbursement rate from year to year. Sometimes that can be pretty substantial.
And so if you are running an insurance-based practice and you pay on a percentage model, that can protect you because, well, if you’re collecting $100 an hour from an insurance company and you pay your clinician 60% of that, well, they get $60, but let’s say that insurance panel reduces the rate to $80 an hour for some reason, well, all of a sudden that $60 per hour if it was a flat rate is quite a significant chunk, right? So that’s a huge percentage of the overall collections. So if you’re on a percentage model, then the $80 an hour turns into $48 an hour and you [00:07:00] keep your percentages, which will help with budgeting and financial forecasting in your practice.
Another way that the percentage model can be a little better is that it might be easier to calculate payroll in the sense that you can run a revenue report for a given clinician and then just do a simple calculation of that percentage. You calculate a percentage of that revenue, and then there you go. I think that it’s similarly easy with an hourly rate, but it might just be a little bit simpler if you’re doing a percentage model. It’s just one calculation.
Often, you will see a percentage model in pay upon payment arrangements, by which I mean, clinicians aren’t paid until the practice gets paid. And so, if that’s the way that you go, there’s potentially less risk. If you don’t [00:08:00] get paid from clients, then you’re not necessarily bound to pay the clinician. It’s not like those always go hand in hand, but they tend to. That’s an auxiliary benefit, I suppose, if you are doing a percentage model is that it often comes with that pay upon payment arrangement.
Those are a few pros. There may be others. If you are running a practice that does a percentage model and you love it, and I didn’t mention one of the pros, then certainly reach out and let me know.
Let me talk about the reasons that I do not like the percentage model.
Let’s take a break to hear from our featured partner.
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All right, let’s get back to the podcast.
First of all, it actually does a disservice to us and to the employee because it makes it very hard to compare offers or know how compensation compares from setting to setting.
60% of collections at one practice can be very different from 60% at another practice. If you are collecting a$100 an hour from an insurance panel or private pay or whatever, 60% is $60, but if you are a private pay practice or in a unicorn of an insurance situation where you’re getting paid, say $300 an hour[00:10:00] or even $200 an hour, then 60% of that is all of a sudden, that’s $180 compared to $60. Simple math here. I’m just spelling it out.
If people are shopping around comparing job offers and all they get is a bunch of percentages, there’s really no way to know what those percentages actually equate to in real life unless the practice is willing to provide detailed information about collections, reimbursement, private pay rates and things like that. Some practices might, but I know a lot of practices that prefer to keep a little bit of opacity around the finances.
Another reason that I don’t like it is that it doesn’t work in practices where insurance reimburses less for testing than for therapy. Here’s why. Let’s say, and I see this a lot around the country actually, where [00:11:00] a given insurance panel will reimburse $120 per hour of therapy but $100 per hour of testing; degree notwithstanding.
I’ll add that little detail that there may be master’s level folks in the practice who make $120 per therapy hour or get reimbursed $120 an hour rather, and then doctoral level psychologists doing testing getting reimbursed $100 an hour. There are layers here, of course. This is a generalization but that does not seem fair because it does not take into account experience and licensure. That puts the insurance panel in the driver’s seat and really pins you into a corner in terms of how you pay your clinicians. I suppose you could always adjust the percentages, but then you get [00:12:00] into, okay, why is someone making a higher or lower percentage than another? You need to figure out how to justify that.
So it doesn’t work well in practices where again, insurance reimburses less for testing than for therapy, because otherwise, who would do testing aside from just love of the craft when they could do therapy and make more money doing it?
Another reason is if rates or insurance go super high relative to the standard of living, again, for whatever reason, it can inflate clinician wages a little bit. Theoretically, your gross revenue would be going up at the same rate, but I don’t know that that’s a good thing necessarily that clinician wages then get artificially inflated relative to other settings.
Another reason, I’m just going to keep going here, [00:13:00] and this is a tough one for me, is that it treats all clinicians equally independent of experience or licensure, et cetera. So if everyone is getting reimbursed at say 60%, then that again, I think does a disservice to folks who are maybe more experienced.
Now again, you can have a tiered system where you do a lower percentage for newly licensed folks, then a higher percentage as they get more experience. You can do that, certainly. I just think that all else being equal, if you’re just paying everyone a flat percentage, which I hear a lot, it doesn’t, what’s the word, respect, it doesn’t validate, doesn’t honor the different levels of [00:14:00] experience, particularly those with more experience. Or on the flip side, you might get, again, pinned into paying folks with less experience more than you should.
All right. Now, another couple of reasons that I think are actually super important.
The first one is that we have so many examples of how the mental health industry seemingly operates independently business-wise than many other businesses. That’s my first point here under this last section is, business-wise, where else do you see this model? Where else do you see someone being paid a percentage of overall revenue? I would say, virtually nowhere. I did a search. I tried to find other industries that do this and really couldn’t find many. Maybe they’re out there. I would [00:15:00] love to hear from y’all if I’m missing something here.
Now, I know that there are commission models out there in like sales, you will make a commission or maybe a percentage of personal sales, but I see this a little bit different in that our clinicians are not salespeople. They are doing work that they’ve been hired to do. It’s not like they are upselling necessarily based on their performance. So, business-wise, I don’t see this anywhere else.
I think about other industries like software, for example, and the idea that a Google engineer would get a percentage of overall revenue is bizarre or even that they would get a percentage of a product that they were selling. [00:16:00] So that’s something to think about.
To take it a step further, I think just emotionally and psychologically, paying with a percentage model lends itself to the idea that the practice owner is somehow taking money from the employee that the employee would otherwise have access to.
Theoretically, that is true. Everyone has the capacity to go into private practice and make 100% of whatever revenue there is, but when you get into percentages in our industry, I think it just generates this inherent desire on everyone’s part to know why is that percentage higher or lower than another percentage. What does that percentage even mean? It just sets it up right from the beginning and makes it super explicit [00:17:00] this idea that there is 100% of revenue somewhere if that makes sense, and when we split it up into employee percentage versus employer percentage, I think it’s really easy to go down that slippery slope and have employees start to think that business owners are taking money from them. I hear that a lot.
I think this is a really strange concept if you think about it in the context of other businesses. If you try to apply that to a restaurant, a software business, or even other medical practices, it just doesn’t make sense.
Now, I know that we could get into all kinds of economic arguments about the distribution of wealth, [00:18:00] capitalism, and those sorts of things. And I’m not saying those are not valid. The system that we’ve got going on here is largely driven by the employer-employee model.
There are all sorts of cool ways that you can mess with that. You could do a profit-sharing model. You could do a bonus structure. You can do any number of things, but setting it up right from the beginning that we’re doing a percentage model, I think just puts us in a weird conflicted place; puts both people in a weird conflicted place that you’re forced right off the bat to think about how the money is getting split up when I don’t know that it’s necessary to do that.
What do you do instead of a percentage?
Well, I like the flat hourly rate model. The idea behind this is it’s like any other business where you pay your [00:19:00] employees a fair market rate for the service that they provide. So you can get market data from hospitals, from other mental health clinics, and from universities. And you can do this in any number of ways. It could be a flat hourly rate. It could be an annual salary. Like I said, a minute ago, you could include some bonus structure. The idea is that you were just paying a fair wage for the job.
That rate is literally tied into a percentage in the sense that all payroll costs are going to be a component of the overall budget. I’ve talked about how payroll should be about 55% of your overall budget, but depending on the practice, that rate could fall at a very different percentage than people expect. So I don’t [00:20:00] like the idea of a literal percentage. You do have to know what percentage of your budget can go to payroll but you don’t have to make it an actual percentage.
The last thing as you consider this is just to think of it as perhaps doing your employees or job seekers a favor, and that it does allow for clarity and compensation and the ability to compare offers. It allows you to present things very straightforward. It allows other people or job seekers to be able to compare not only private practice to private practice but also compare a private practice to a hospital or private practice to a university when you have an hourly rate or a salary.
Those are my thoughts. I’m guessing there are folks out there who are disagreeing, and I would welcome that. I would love to have a discussion about this, but [00:21:00] this is where I have landed over the past several years through my own practice and talking with others. So if you have some feedback, share it, please. It is firstname.lastname@example.org.
Thank you as always for listening. I appreciate you tuning in for these business episodes. I should be back relatively soon with more EOS content as we move along through the model.
In the meantime, like I said, the Intermediate Practice Mastermind is the only one with openings right at this point. So, solo practitioners who are thinking about maybe hiring some admin staff, feeling overwhelmed, trying to get their life back. This could be the group for you. Group coaching and accountability. I’m the facilitator, and 6 other psychologists. We will hold your feet to the fire, but also help keep you [00:22:00] safe and comfortable while doing it. So if that sounds interesting, check out thetestingpsychologist.com/consulting and set up a pre-group call.
All right, y’all. I will catch you next time. Take care.
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