This past month my associate had to remake a denture for a patient. He just made this denture the previous month. Now there was a second lab bill. Since the patient doesn't pay for the second lab bill, who do you think should swallow that extra cost, me as the owner or should the associate pay for the second lab bill?
And yes I know I should be paying on collections, not production. But that’s the arrangement we had, I just took over his practice and when I was associating with him he paid me 40% of production as well.
When we structure the compensation of an associateship agreement we always have the lab (whether 100% or some partial %) come off the top (prior to the computation). A short math example will show why:
Lab taken off the bottom line:
$10,000 -- Monthly Collections per Assoc.
<$500> - refunds or reductions (varies)
_______
$9,500
X 35% - Compensation % (varies)
_______
$3,325 - Calculated Compensation
<$450> - 50% of incurred lab bill
________
$2,875 - Monthly compensation
Lab taken off the "top":
$10,000 -- Monthly Collections per Assoc.
<$500> - refunds or reductions (varies)
<$450> - 50% of incurred lab bill
________
$9,050
x 35% - Compensation % (varies)
_________
$3,167.50 - Calculated Monthly Compensation
As you can see from the illustration, it is rather advantageous to the Associate to have the Lab, and/or rework (if they are going to be required to cover it, which should be spelled out in the associateship Agreement) be reduced prior to the computation - to the tune of $292.50.
Your math is the way it is because in the 2nd example you've only charged the assoc 17.5% (35% of 50%) of their lab instead of 50% as in the first example.
IF the employer wants to charge the same % of lab as the employees comp, say 35%, example #2 should look like this:
$10,000 -- Monthly Collections per Assoc.
<$500> - refunds or reductions (varies)
<$900> - lab bill (100% mind you)
__________
$8,600
x 35% - Compensation % (varies)$
__________
3,010 - Calculated Monthly Compensation
IF the employer wants to charge a different % lab compared to comp, say charge them 50% of the lab & pay them 35% of their NET collected production then your example #1 is right on.
This post first appeared on DentalTown.
Send your questions to Tim Lott, CPA, CVA at tlott@dentalcpas.com
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