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The Ins and Outs of Physician Compensation Models

Dec 9, 2022

With only two basic pay models in the industry, physicians have grown accustomed to the status quo regarding compensation. Basic physician compensation models often include compensation calculated as a percentage of billings or collections or based on the resource-based relative value scale units assigned to procedures or patient-visit types. However, in the wake of the Covid-19 pandemic, healthcare is facing one of its biggest challenges in generations.

The pandemic’s ongoing impacts include changes in the acuity of patients, how much, when, and where services are provided, and also fluctuations in the volume of patients that providers see on a routine basis. Thus, it is no surprise that physician compensation has become a hot topic in medical circles, as these pandemic-driven changes directly impact previously existing physician compensation methods.

Medical practices (including those operated, associated with, or owned by hospitals) always seek to obtain and retain top talent, which is a critical factor in the long-term success of any healthcare provider. Therefore, finding a suitable compensation model has become more important and timelier than ever.

All must view effective physician compensation formulas as being economically fair, understandable, easy to manage, and closely aligned with the philosophy and mission statement of the practice or owner.

Thus, it’s becoming increasingly common for owners or practices to tailor their compensation models to meet their specific needs. Among the various methods currently being used are:

Pure Productivity

This model is one of the more popular choices amongst physician practices because it holds each physician personally accountable for their productivity. If a physician is not productive within the practice, they will suffer the financial consequences without affecting the other partners. Likewise, physicians producing significant wRVUs (codable direct patient care experience) are rewarded for their efforts. A disadvantage of the productivity model is that patient sharing is discouraged, with each physician seeking credit for the wRVUs, potentially impacting overall practice performance and even patient care. Additionally, many private physician practices don’t track wRVUs, making it challenging to calculate compensation adequately with this model.

Base Salary Plus Bonus

In this model, physicians receive a base salary plus a bonus if they meet specific targets associated with quality of work and productivity. Additional success metrics may include patient satisfaction, emergency department calls, and the willingness to participate in organization initiatives. Though this model can effectively increase effort and productivity, it can also pose difficulties due to the calculations involved and the need to formulate the proper balances of base salary, productivity, and non-productivity-based targets and incentives. Therefore, regularly reviewing this compensation model is vital to ensure that targets and incentives are reasonable and align with the practice’s overall objectives.

Straight Salary

This compensation model is where a physician is paid a set salary, no matter the quantity or quality of productivity. At times, the model has posed a problem, as physicians have no financial incentive to increase productivity, nor do they have any financial incentive to participate in organizational initiatives. The straight salary arrangement can be an acceptable compensation model if expectations are clear, and the employment contract lengths are limited and not extended if expectations are not met.

Revenue Less Expenses

A standard model in private practice is determining total compensation based on the physician’s share of the entire practice revenue less their share of the total practice expenses. The model incentivizes physicians to reduce costs but does not support the change from fee-for-service to value-based care. Additionally, the model does not provide any financial incentive for participating in organizational initiatives. Proper expense tracking and allocation are necessary when using this model, and it could result in physicians micromanaging the process to gain a semblance of control over it.

Percentage of Collections

Another popular model in private practice is calculating compensation based on the physician’s percentage of collections received by the practice. Due to the Stark law and related rules, which prohibit healthcare providers from making referrals to other organizations or medical businesses in which the provider has a financial interest, paying a percentage of collections for certain ancillary services ordered by the physician is prohibited. As such, many services cannot be included in calculating collections. While data with this method is easier to track than the pure productivity models since it is based on actual collections rather than wRVU calculations, the physician’s payor mix and billing department can be a potential disadvantage when using this model.

Value-based care

The value-based care model incorporates various incentives for meeting the practice’s long-term goals and is based on evidence and results. Employees are routinely rewarded for meeting goals, with specific metrics in place to monitor their overall performance and ensure that goals are met.

With many different physician compensation models, each with its pros and cons, making the right choice for your practice can be difficult. The best method is the one that most effectively meets the goals of your medical practice, partners, owners, and employees.

Are you at a crossroads in deciding? Contact CRI’s medical practice CPAs and consultants to help determine a method that will add value to your practice, meet expectations in the current environment, and prepare for the challenges ahead.

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