In Thoughts on Salary (part 1), I began with a discussion about the issues that impact an employer’s offer, the use of salary surveys and how RVUs are used to describe physician productivity. In this post, I will provide additional background on the compensation models that might be offered in an employment agreement.
Older Compensation Models
For this discussion, I am going to take a historical perspective to compensation for physicians, starting with the earliest models and moving to the more recent models.
The earliest models were generally one of the following:
Net Income. This is the same model that any individual service oriented entrepreneur uses today. Compensation is simply the difference between collected revenues less the expenses of the business. A professional (whether physician, interior decorator, or yoga instructor) collects income for services, pays for associated expenses (marketing, insurance, staff, rent, etc.) and takes home the difference as salary.
This model is still used by solo practitioners and small groups. And some physician groups use a version of this method in which individual expenses are tracked, group expenses are shared using a formula, and take home pay is the difference between collections and the individual physician’s share of expenses.
In many of these groups, a certain percentage of earnings is held back for future investments or unforeseen costs. Some hospitals have used a version of this as well, but an estimation of expenses (sometimes called the allocation of expenses) must be used because the actual costs for support departments (like human resources, risk management, etc.) in a large organization cannot easily be attributed to an individual physician.
Fixed Salary. This method is very simple and is commonly used by non-profits and governmental agencies. The employer simply pays a fixed salary for the physician to work a set number of hours per week. It is also used when groups wish to employ physicians not on a partnership track, especially in specialties in which shift work is most common (emergency medicine, anesthesiology, hospitalist, etc.). This is also commonly seen with physicians working in nursing homes or with hospice organizations and other non–profits.