Reviewing your physician compensation plan.

Physician compensation is a sensitive issue that should be approached with caution and objectivity.

Physician practices usually attempt to distribute funds in a fair manner. However, at times, unequal distribution occurs and, if unintentional and unintended consequences result and are not addressed in a timely manner, they will have a divisive impact on the practice.

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Physician compensation review should be a standard, recurring task by the practice, preferably coincident with the group's annual operational and financial planning process.

Compensation tends to be the most contentious and divisive issue within a physician practice as factors such as resource consumption, staffing, personal lifestyle, practice habits, physician specialty, payer mix and quality all have to be taken into consideration.

Additionally, as the sole producers of revenue, physicians not only desire to maximize their incomes, but they need to generate sufficient funds to ensure that the practice remains viable and that the necessary investments are made in staff, physician recruitment, training, information systems, equipment and facilities.

Here's a look at two typical compensation models:

* Private Practice Model -- Physicians who have experienced the dynamics of private practice are very familiar with productivity-based compensation. A private practice physician's compensation is limited only by his/her ability to generate and collect revenue, and control expenses. Successful private practitioners are constantly trying to raise revenues and reduce expenses in order to increase their personal incomes. While enjoying unparalleled freedom to direct all aspects of their practices, private practitioners are also exposed to all of the risks associated with owning a business. If revenues decline or expenses increase, the physician's compensation will immediately decrease.

* Employment-Based Salary Model -- With the rise of large group and hospital-owned practices, increasing numbers of physicians have become employees in an effort to achieve a degree of income stability. Traditional compensation models for employed physicians include a high base salary that provides the physician with income stability, but may reduce the incentive to contain costs or strive for high productivity.

Legal issues

Anti-kickback statutes and Stark regulations prohibit physicians from referring Medicare or Medicaid patients for the delivery of a range of designated health services to entities with which they have a financial relationship.

Included in the list of designated health services are clinical laboratory services, radiology services, inpatient and outpatient hospital services and several other services. Recently promulgated regulations may increase scrutiny of compensation arrangements within physician groups.

A violation of the Stark Law may result in severe financial penalties that could include fines, loss of Medicare and Medicaid reimbursement and exclusion from participation in those programs. Fortunately, the Stark Law provides for several exceptions including an exception for compensation arrangements that meet certain standards.

To qualify for an exception, a compensation arrangement must, among other things, be consistent with fair market value, promote financial viability of the organization and further the legitimate business purposes of the parties.

The challenge in designing a physician compensation system is to balance the various countervailing forces. The desire to provide physicians with a degree of compensation stability, and reward high productivity and quality, must be balanced with the need for organizational viability and compliance with federal regulations including appropriate documentation and coding.

The basics

The primary objective of a physician compensation plan is to ensure that physicians act as if they have a personal investment and financial stake in the success of the medical group. This is obvious for private practice groups. In employed and/or salaried situations, it is easy to lose perspective between productivity, overhead expenses, collections and compensation.

Subject to certain constraints, physicians should be compensated from a pool that remains after all expenses of the business are paid. The amount available for distribution should be allocated based on a combination of individual productivity, consumption of practice expenses, certain quality and collaborative benchmarks and rewarding group behavior.

Although there are a lot of inputs into distributing income from the practice's operating margin, the group should strive to keep the formula as simple as possible. At a minimum, the following components should be factored into developing the compensation formula and calculating the distribution of the operating margin.

* Attract and retain quality physicians

The compensation model must provide for a level of income that is competitive in the market in order to attract and retain quality physicians.

* Provide personal and organizational incentives

The compensation model must provide incentives that reward physicians based on their individual level of performance. In addition, the model must provide incentives for contributing to the high performance of the organization as a whole.

* Promote organizational viability

The compensation model must promote the viability of the group by encouraging the efficient utilization of resources such as staff, supplies and physical space. The model must also ensure that physician compensation is appropriate and not considered excessive according to legal and regulatory guidelines.

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* Promote quality service and clinical quality

The compensation model must distinguish excellence in customer service and provide mechanisms to recognize and promote high clinical quality.

* Evolve with industry trends

The compensation model must be flexible enough to evolve and adapt to changes in managed care penetration, market rates of pay, and demand for services without needing to be completely redesigned.

* Simple to understand

The compensation model must be based on simple, easy-to-understand principles. The components of the model must be straightforward and physicians must be able to understand which components they can directly impact in order to affect their compensation.

* Base compensation

Although many practices operate purely on a productivity-based compensation system, there are many instances when a base salary or floor makes sense for the practice. Examples include calculation of pay for time off, regular pay to meet personal expenses, new physician recruits and employed physicians. The base should be set at 40 to 60 percent of a physician's total compensation. The actual distribution of compensation of under the "base salary" method is only sustainable in the long run if the practice generates sufficient operating margin to support established salary levels.

* Production compensation

Production compensation should represent a significant portion of the compensation model to ensure that each physician has the incentive to generate a high level of volume. This component generally accounts for at least half of a physician's compensation and, under some models, represents the entire physician's compensation. Calculation methodologies include use of RVUs, collections, work time, adjustments for payer mix and direct allocation of practice resources.

* Service quality compensation

In order to offer some balance to a productivity-based compensation model, service/quality should be factored into the calculation. Reserving between 10 and 15 percent for this component will offer sufficient incentive for a physician to pay attention to patient satisfaction, appointment access, group collaboration and meeting quality guidelines.

* Cost containment 

The cost containment component is based on how effectively the practice manages non-physician costs. This component should have a 5 to 10 percent impact on each individual physician's compensation. Without an emphasis on cost containment and expense management, it is possible for a physician to create an unacceptable level of expenses in proportion to the revenues generated.

The compensation plan should be reviewed frequently to ensure that its intended objectives are met and revisions are made to ensure the distribution methodology is not adversely impacting individual physicians and the practice as a whole. A regular review of the plan will likely result in perceived winners and losers. The practice's ability to address compensation issues and move forward in a collaborative manner plays a significant role in determining the dynamics and strength of the group.

RELATED ARTICLE: Evaluating Your Compensation Plan

Every compensation plan should be reviewed annually. It is important for the group to determine if market conditions, reimbursement levels and increasing expenses allow the current methodology to remain sustainable. This requires a detailed financial and operational analysis of the practice.

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An effective starting point to determine if your plan is meeting its intended goals and objectives is to perform a Strengths, Opportunities, Weaknesses and Threats (SWOT) analysis of the compensation formula. Following are some ideas that a group can use to perform its own analysis.

Strengths

1. Ability to earn better-than-average compensation

2. Incorporates productivity, resource/expense management and quality into the formula

3. Cooperative, open and collaborative relationship between administration and physicians

4. Formula is not overly complex and can be readily modeled against changes in market conditions

Weaknesses

1. Minimal downside risk for physicians on guaranteed salary

2. Substantial rewards possible for poor expense management

3. Poorer performing physicians have the ability to gain excess compensation from quality and satisfaction components

Opportunities

1. Adjust formula to allow for some sharing of risk for financial performance

2. Demonstrate success in achieving high patient satisfaction to influence reimbursement levels

3. Maintain competitive compensation to allow for continued growth and attraction of high quality physicians

Threats

1. Difficulty in maintaining compensation pool at desired level due to increasing industry-wide expense structure

2. Maintaining high revenues and manageable expenses in a primary care based group

3. Potential for reimbursement backlash if insurance costs continue to increase at an accelerating rate

By Rick Weymier, MBA, FACMPE 

Rick E. Weymier, MBA, FACMPE, is director of clinical consulting and physician services at VHA, Inc., a nationwide network of community-owned health care organizations and physicians. He is based in Irving, Texas and can be reached at 972-830-0298 or at [e-mail].