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Physician Compensation Formula

There's a lot of truth in the old adage: the compensation formula that makes everyone equally unhappy is the one most likely to succeed. If you yearn for more than being "equally unhappy" about how your pay is computed, it's important to understand a practice's compensation system before you join it.

After reading this article you will know how to:

  • Understand common compensation models used
  • List methods for calculating practice expenses in compensation formulas
  • Identify non-production measures used in some compensation models

View related pearls

If you are a solo physician, compensation formulas may not be foremost in your thoughts — and why should they? What's left in the bank account after practice expenses is what you pay yourself. For most physicians, however, compensation may be the most important consideration about their current practice, or the one they would like to join next.

Compensation formulas are complex and, at times, nearly inexplicable. It's no wonder that they trigger consternation from physicians and administrators alike, and are a leading reason that practices disintegrate. There's a lot of truth in the old adage: the compensation formula that makes everyone equally unhappy is the one most likely to succeed. If you yearn for more than being "equally unhappy" about how your pay is computed, it's important to understand a practice's compensation system before you join it.

Private practice
For a private practice, compensation typically falls under one of these models:

Equal salary. The profits of the practice — collections minus practice expenses — are distributed equally to all physicians, regardless of their individual contributions to the practice's revenues. The most common arrangement for single specialty practices, equal salary obviously works better for the physicians who contribute less (since they are rewarded at a higher level than they otherwise would have received in a "free" market). Advocates of this model point out that it benefits a practice by ensuring that physicians are payer-blind and, thus, more apt to focus on the quality of medical care than production.

Distribution by productivity. Taking the opposite tact of the equal salary formula, other practices create a model that facilitates payment based on production. It may be a so-called "eat what you kill" model, where expenses are subtracted from each physician's collections, and the remaining money is distributed to each physician based on their contributions. Or, there may be a base salary for all physicians, with a percentage of each one's total compensation based on their own collections, patient volume, or other metrics related to the work they performed.

Advocates say this model encourages physicians to perform work that is beneficial to the practice. Plus, the more work that is performed, the greater the practice's ability to budget for building an appropriately sized but efficient infrastructure. If that infrastructure helps physicians produce more, the practice's profits can be higher with more to distribute to physicians.

In a private practice, it's important to recognize that expenses play a significant role in compensation. Whether you're sharing the profits or allocating them based on production, the expenses must be applied to the revenue before income is distributed. Otherwise, you can distribute more than you actually have in the bank account — and that leads to real trouble, fast.

If you are looking at joining a practice, assess its infrastructure — employees, managers, facility, supplies, and so on — and how the expenses of that infrastructure are allocated among physicians. You may find yourself burdened with part of the cost of your colleague's three nurses, or perhaps by a decision to buy a special piece of equipment for a partner. Sharing expenses certainly need not be a negative factor, but it pays to work in a practice that has some level of checks and balances to ensure that the infrastructure is not only reasonable and appropriate, but also structured to fairly assist all of its physicians.

One of the major trends for physicians is employment, a migration away from the traditional private practice model. Benefits include a reduction of administrative duties — and perhaps a shelter from the challenges of the current reimbursement environment.

Regardless of the employer — a large medical group, hospital, health maintenance organization (HMO) or an insurance company — it's vital to assess the proposed compensation arrangement carefully. Although there may be a little wiggle room, increasing numbers of physician employers are establishing standard compensation formulas, which means that it may not be possible to negotiate adjustments to the framework.

Although the models may vary, here is an overview of common compensation models for an employed physician:

Straight salary. This compensation model features a flat payment — typically paid monthly or bi-monthly. "Straight" usually means that the compensation does not vary based on patient volume, quality indicators or other factors. Of course, while simplistic in nature, the key is whether you're happy with the proposed amount, and whether there is an opportunity for that salary to be adjusted from year to year. Historically, a guaranteed salary was the norm for employed physicians but most employers have migrated away from this model in search of compensation formulas that can appropriately encourage productivity, quality or other outcomes.

Salary plus productivity bonus. Many employers have established models that include a base salary plus a potential bonus based on productivity. The bonus is an incentive that may be based on a multitude of factors, but productivity is by far the most popular. Most common is the "relative value unit" or RVU. There is an RVU tied to each of the 7,500-plus CPT® codes used to describe (and bill for) professional services. When examining one of these plans, first determine whether the bonus is based on the total RVU, or only the "work" component, one of the three elements that constitute the total RVU. (The other two elements are practice expense and malpractice; the work RVU is intended to measure the physician's time, intensity, effort and technical skills.) Because the RVU accounts for the level of services — a 99214 has more RVUs than a 99213, for example — it's arguably a better model than a count of patient encounters. A bonus based on RVUs allows you to see patients without being concerned about the patient's insurance coverage.

Salary plus incentive. As the reimbursement environment moves further from fee-for-service, employers have responded by incorporating other factors into physicians' bonuses. These include peer review, patient satisfaction, involvement in committees or other administrative duties, often referred to as a "good citizen" bonus, and the results of participation in quality programs such as the federal government's Physician Quality Reporting System. Some practices are even creating and monitoring their own performance metrics, which range from turnaround times for returning consult notes to referring physicians to the rate of unnecessary hospital readmissions.

Joining as a new physician
If you are joining a practice and feel that you understand the compensation formula, look next to see when and how it kicks in. For many practices, the newcomer starts out on a salary. Typically, this arrangement lasts for the first one or two years. It's wise to seek a greater understanding of the parameters of this initial period, including whether there are any "strings" attached to the salary. These may include application of a baseline for RVU production, or perhaps an assessment of good citizenship based on participation in the practice's various activities, such as serving on a committee.

In addition to practices that employ physicians, many more private practices are incorporating these non-production-based incentives. As the reimbursement environment moves away from paying for volume to reimbursing physicians for value, so too will compensation formulas for physicians, employed or not. Compensation also includes vacation and other leave time, including time spent on continuing medical education (CME), reimbursement for CME expenses and, possibly, a signing bonus. Additional components of compensation include health, life and disability insurance, as well as retirement plan contributions.

Regardless of the package, remember that compensation is just one of many important factors to consider when evaluating a practice opportunity. Geography, family considerations, professional opportunities and practice culture are also vital points to ponder when scoping out medical practice partnership or employment. Regardless of the setting you choose, however, it's absolutely vital for you to understand the nuances of your compensation package.

Pearl: RVU and You

If you are considering a job with compensation based on relative value units (RVUs), understand whether the model is based on the total RVU or the work component only. Also check national survey data for the current median RVU for your specialty, comparing that data to your current experience. Some data will even drill down into geography, practice size, ownership type and other considerations. Talk to colleagues to get a sense of what it will take to achieve the level of RVU production expected under the proposed compensation formula.

Pearl: Surveys Say

Numerous surveys report compensation for physicians. It's worth taking a look at the averages for your specialty on a periodic basis, recognizing that reimbursement varies based on geography. For example, Medscape Medical Group Management Association, American Medical Group Association, Merritt Hawkins, Cejka, Jackson Coker and others publish annual surveys of physician compensation.

Pearl: Giving and Receiving

If collections are a component of your compensation formula, determine what happens to your uncollected revenues after you leave the practice. Because reimbursement is typically received 30 to 90 days after services are rendered, your collections will be coming in long after you leave. Be sure to incorporate the treatment of these receivables in your employment contract. For your benefit, you'll want to be paid as high a percentage of these receivables as you can negotiate.

Pearl: Howdy Partner

Being a partner in a practice has its pros and cons. Depending on how the practice is structured — the type of corporation, or perhaps as a limited liability company arrangement — you may be sharing a significant amount of financial risk. So, in addition to identifying how the practice distributes compensation, get an understanding of your exposure to financial risks. Having an attorney review your contract is money well spent.

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