Thoughts on Salary (part 2)

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.

piggy-bank-1595992_1280Older 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.

Strengths and Weaknesses of Older Models

The strengths of these models are fairly self-evident. The Fixed Salary model is very simple to explain and implement. The Net Profit model is more complicated in terms of tracking and allocating expenses, but is seen by many physicians, especially those that are entrepreneurial, to be the most fair, rewarding physicians with the largest practice, the most visits, generating the most collections, with the greatest salary. However, this model sometimes appears to foster competition between associates for patients, focusing on the performance of highly reimbursed procedures rather than office visits or over-booking in order to maximize the flow of patients, sometimes at the expense of a good patient experience.

Productivity Models

  • Salary Plus Visit Threshold. For this model, employers wanted to take advantage of the inherent incentive to work harder and generate more billings if additional effort and work will result in higher compensation. After one or two years on a fixed salary, the physician may be given the opportunity to earn additional compensation by increasing the number of patient encounters. If the salary was set to the MGMA median for a given specialty and geographic location, then there may be a target that is set at the corresponding median MGMA visit volume for that specialty. If the physician exceeds that, then the compensation increases in the form of yearly or quarterly bonuses, based on a dollar amount per visit above the threshold.
  • Salary Plus RVU Threshold.  In part because a bonus based on visits might tend to encourage only frequent, brief visits, and would not reward physicians doing additional highly complex visits and procedures, RVUs have been increasingly used to calculate productivity bonuses. Some employers fix the salary for the first year or two, and then begin to use a model that rewards the physician for generating more worked RVUs. Under this model, let’s say the salary is set at the MGMA median of a hypothetical $240,000 for the first two years. And assume that the median worked RVUs for a physician in that specialty runs 6,000 wRVUs per year. An employment agreement might state that at the beginning of the third year, the paid salary will drop to the equivalent of $220,000 per year. However, the physician will be paid an additional $40.00 per wRVU for each wRVU generated in excess of 5,500 wRVUs. As you can see, if the physician generates 6,000 total wRVUs, then she will be paid exactly the same salary. However, if additional wRVUs are generated, then more compensation will ensue. This model encourages taking on more visits (working additional days, extending office hours, etc.) AND documenting more thoroughly so that coding can be more accurate. An alternative under this scenario would be to leave the base salary the same and just pay bonuses for productivity over 6,000 wRVUs.
  • Salary Plus Collections Threshold. A similar approach can be used setting a collections threshold rather than an RVU threshold, with a percentage of the collections above the threshold being paid to the physician. This was more common when insurance plans were paying usual and customary fees and billing was fairly straightforward. With the billing and collection process so variable in some organizations, and the risks associated with increased prevalence of indigent population, this appears to be less popular with physicians.

Strengths and Weaknesses of Productivity Models

As noted above, the primary strength of such a model is to encourage more clinical activity, and better documentation and coding, resulting in enhanced revenues to the organization, some of which can be used to cover the additional compensation. There are many potential weaknesses or pitfalls to such systems, in my opinion, some of which include the following:

  • The employer must increase resources to track and report the productivity measures. Physicians want regular feedback on their progress, and want it in a timely manner. They will want to know how the productivity is being measured. If using the wRVU threshold approach, they will want regular reports on their productivity and someone to answer questions if their wRVUs don’t seem to be tracking the way they think they should.
  • If the productivity threshold is seemingly unattainable, the physician will stop trying to meet it and will not pay any attention to this matter.
  • Some physicians seem to become obsessed with increasing their income by increasing volumes or RVUs to the point of competing for patients, over-booking their schedules and neglecting patient satisfaction.

Quality Models

  • Hybrids. Recently, with the growing interest in demonstrating and achieving quality goals, employers have started to include quality measures in their compensation plans, usually as a supplement to any productivity bonus that might exist. These types of bonuses are easiest to implement when there is clear linkage between the quality metrics of the employed physicians and a monetary benefit to the employer. For example, conceptually, if a large physician group will receive additional payments as a result of high satisfaction scores or reduced readmission rates, it would seem possible to reward physicians for achieving such outcomes, and some organizations have begun to implement such models.

Strengths and Weaknesses of Quality Models

To the extent the quality models also include productivity measures, they will be subject to those limitations. In addition, these hybrid models also create challenges such as:

  • Selecting the quality metrics: Who will select them? When will they be determined? Will they change regularly? These issues come up because as quality measures are achieved, in an effort to create ongoing quality improvement, new measures must be adopted over time. Employers must often deploy significant resources to measure and report internal quality metrics.
  • Payers are not all reimbursing for improved quality, and payers tend to select different quality metrics on which to base bonus payments. Also, while the physician employee wants to be reimbursed as close to real-time as possible, payments from payers experience significant delays between the close of the fiscal year and the results of quality measurement being reported and associated payments being delivered.
  • When there are multiple bonus criteria, each of them may be of such a small percentage of income that they become ineffective in keeping the physicians’ interest or affecting their behavior.

In Closing…

You’re not going to be given a choice of compensation model when being offered a position. It is important, therefore that you understand the model being offered and the pros and cons of working within that model. You also want to be sure that the employer has the systems and human resources in place to provide the data needed under the model it is offering. If it is using a complex model with multiple incentives, it is especially important that the employer has the ability to measure and report the metrics in a timely manner to its physicians.

In my next post, I am going to present salary and productivity data from a recent MGMA Salary Survey. I will walk through the process that an employer might follow when creating an offer of employment using the Salary Plus RVU Threshold model using a detailed example involving the specialty of Internal Medicine.

Disclaimer: I am not an attorney and I do not provide legal advice. My role is to provide education and coaching to physicians to help them find a great job and avoid costly mistakes as employed physicians. I strongly recommend that every physician entering into an employment agreement, or any contract, engage an experienced local attorney to assist them in their negotiations.

About johnjurica

Former Senior VP and CMO writes about physician leadership.
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