Physician Compensation – A Review of Your Formula, and Some Changes, May Be in Order

As healthcare reform is now upon us, and with a shift in the environment from fee-for-service to quality incentives, it is important that your physician-compensation formula has been carefully reviewed. This article will serve as a tool to review some of the more common compensation formulas that are available, what changes are occurring in today’s marketplace, and some considerations on how to attract younger physicians.

It is clear in today’s marketplace that there is no one-size-fits-all approach to physician compensation. There are myriad formula structures to choose from, which are then typically tailored even further for use in a particular practice. The most basic of all of these formulas is a straight-salary formula. This approach is typically used in a hospital setting, or as a guaranteed salary when recruiting a new physician. The question with these agreements is: how are profits from the practice distributed?

Another approach that is not utilized very often in our geographic region is an equal-allocation formula, whereby all profits of the practice are shared equally by all owners. What makes this formula so difficult in execution is that all physicians really need to be on the same page with how much they work and are able to contribute. It doesn’t take long for one physician, who may be producing more for the practice, to not feel that they are being adequately compensated. For this, the whole approach can fall apart. Where this formula can be beneficial is in a practice where all owners see a similar number of patients, but are reimbursed by a broad range of payers. The benefit is that the doctor who is seeing most of the Medicaid patients is compensated equally with those that are being reimbursed by private payers.

A third approach that is gaining some traction across the country, that we haven’t seen much in our area to date, is a relative value unit (RVU) approach. This is a formula derived from the premise that compensation is non-monetary based, being driven by consumption as opposed to production. The physician’s compensation is driven by the time and complexity of a visit or procedure, as opposed to how much money was collected for said visit. This approach tends to be fairer when multiple payers are involved and when there may be a lot of administrative time required of the physician.

The final and most popular approach is a production/incentive-based model. While there are different ways that these can be structured, the ultimate makeup is the same. Once the compensation pool has been established, a factor of an individual physician’s production is applied to determine how much is to be allocated to them. Some of the other factors that are often considered in these formulas include the allocation of direct and indirect costs, ancillary revenues, and administrative duties.

Healthcare reform and Obamacare are at the forefront of most discussions these days. What is important to note is that some of the concepts that are now being introduced have been in development for years. The whole concept of quality reimbursement really began to take hold in 2006 with the Patient Quality Reporting System (PQRS). What followed was the EHR incentive program that was part of the American Recovery and Reinvestment Act of 2009. Most recently was the Patient Protection and Affordable Care Act of 2010.

While the production-based formula may be the most popular of the different compensation techniques, changes in the current landscape may necessitate these agreements to be revisited. The reason for this is that a production formula is generally based on a premise that you are compensated based on how much you are able to bill. What is changing in the medical environment is that most payers, Medicare included, are starting to shift to a payment structure based on quality, not production.

So what does this mean for your compensation formula? Essentially, compensation may need to move to more of an accountability-based approach, as opposed to production-based. Are your physicians meeting the set quality standards of the accountable-care organization or patient-centered medical home you have aligned with? Are patients receiving an appropriate level of care, and satisfied as a result? While such a formula is more difficult to set up as compared to a production-based formula, it is a factor that may need to be considered by every medical practice going forward.

Attracting young physicians continues to be a difficult task in our geographic region. As has been the case for years, many young graduates seem to be drawn to the larger markets that are in our backyard, such as Boston and New York. As such, it is vitally important to be as clear, open, and honest as possible when negotiating a position for employment. Additionally, having a stagnant compensation formula that is not rewarding to the physician based on the current reimbursement structure may be a deterrent in your recruiting process.

While these physicians understand that the overall compensation formula is likely non-negotiable, they do want to understand how the formula will impact their future earnings stream. It is necessary to show them how the formula works, and what their projected earnings may be based on historical, achievable data. As many formulas are production based, it is important to include a minimum compensation guarantee for year one, and possibly year two, while they ramp up their patient base and productivity levels. A well-defined and transparent compensation formula may be your greatest bargaining chip in the early stages of these negotiations.

Once there has been general agreement on the overall structure of the compensation plan, it now becomes time to be flexible with those areas where there is room for negotiation. Student-loan forgiveness is common in many newer associate-compensation plans, as is a sign-on bonus and relocation fees if the physician will be moving to the area. Ultimately, a willingness to listen and consider their demands may be the difference between a failed negotiation and welcoming your newest employed physician.

From the 1990s through today, we are seeing a dramatic shift in reimbursement impacting each medical practice in the area, particularly over the last six or seven years. In order to continue to be profitable and attract new, qualified physicians to your practice, it may be time to start thinking about reviewing your physician-compensation formula.