Physician Strategy News: January '08
Keys to Effective Physician Compensation
Developing and implementing an effective physician compensation plan for a group of employed physicians is a difficult and complex task. It requires balancing physician expectations about salary levels with the need to compensate based on productivity and overall practice performance. Often these factors result in conflict and can strain your relationships with key providers. The compensation plan must also take into consideration quality measures, the group's culture, and the maturity of the practice. Many of our clients have told us that managing compensation for employed physicians is the most difficult part of their job.
There are a variety of compensation methods that are commonly used today. These include:
- Fixed salary compensation based on market rates by specialty;
- Pure productivity;
- Base salary plus a productivity incentive;
- Base salary plus a productivity incentive coupled with an opportunity to earn additional compensation for achieving quality and service goals.
Measuring performance and productivity are often done using patient charges, Work Relative Value Units, or patient encounters. It is important to use a measure that is available from your practice management system and that is consistent with your goals for the practice. Points to consider about each of these measures are discussed below:
Patient Charges: This approach looks at productivity on a gross basis and does reflect volume. However, charges do not equate to collections and some physicians could try to “game” the system by upcoding or "cherry picking" more complex cases.
Relative Value Units (wRVU's): These are very appropriate measures because they eliminate arguments about the effectiveness of the billing, collection and accounts receivable management function. Work RVU's reflect the work performed by the physician on a CPT code basis. However, there are a couple of issues that must be considered when using wRVU's. First, wRVU's do not equate to cash collections so you need to take this into consideration when paying incentive bonuses. Secondly, the conversion factor used to calculate earnings needs to reflect the reality of practice operations and local reimbursement rates.
Patient Encounters: Again this is a reflection of volume but does not consider the complexity of cases. Work RVU's is a preferred approach if one is thinking of a patient based measure.
Key factors to consider when developing a compensation plan for your employed physicians are:
Compensation Plan Considerations
1. Set clear expectations up front about physician performance and productivity relative to compensation. Explaining that compensation is dependent on productivity will often reduce misunderstandings and conflict later.
2. NEVER set the base compensation level too high. Base salary levels should be set at 75% to 80% of projected total compensation amounts. Total compensation will be a combination of the base and the incentive portion. Remember, it is easier to increase a physician's salary than it is to reduce it!
3. Keep the plan simple and straight forward.
4. Productivity incentives should be calculated each month but paid quarterly. This provides feedback to the physician and keeps them engaged in the operation of their practice.
5. Always include the option to reduce base salaries on a going-forward basis, if warranted, based on performance and productivity.
6. Keep the methodology and plan components consistent for all employed physicians. Base salaries and productivity targets will vary by specialty, but the compensation methodology should be consistent.
7. If appropriate, establish a per physician loss threshold for the practice beyond which bonuses and incentives are not paid. This may vary by specialty and practice, but is essential to avoid paying incentives for practices that are under performing.
8. Sustainability of the plan is critical. Compensation plans that are either biased in favor of the hospital or the physician almost always lead to problems that result in the plan being scrapped in favor of a new plan. This takes time, results in a loss of focus at the practice level, and often becomes adversarial.
9. Strive to create a group culture that considers what it means to be a member of the employed physician group, stressing the advantages and benefits that accrue to physicians members beyond just compensation. This will help to put compensation issues in a broader practice perspective.
It is important to understand that the economics of physician practices do not change just because the doctors are employed by the hospital. In fact, overhead costs will most likely increase under hospital employment. So, it is important that your compensation plan have the flexibility to reward high producers while exerting pressure on physicians that under perform. The best compensation plans are those that mirror physician compensation for independent private practice physicians.
Questions or Comments? Call John Hill at (502) 814-1185.
