Fair Physician Compensation: A Balance of Risks and Rewards

Physicians in all medical disciplines often report feeling as though they continuously do more work for less pay, and data confirm that this is often true. According to the Medical Group Management Association's 2008 Physician Compensation and Production Survey (based on 2007 data), while the median compensation for all specialists had increased 3.16 percent over the previous year, the inflation adjusted figure for the same period was just 0.31 percent. There was a decline in the inflation-adjusted median income of 0.49 percent over the last five years. While neurologists reported a meager 3.49 percent increase in median income from 2006 to 2007, they saw just a 0.62 percent increase in inflation-adjusted median income over the same period. Neurologists have reportedly seen a 5.79 percent inflation-adjusted growth in median income over the last five years.

One important influence on physician compensation is the net effect of practice expenses, which have continued to rise in recent years. Estimates suggest that spending on staff wages, medical supplies, utilities, and other expenses grows approximately four to five percent annually. Another influential factor is malpractice insurance. Premiums in some areas continue to climb considerably from year to year. Cost increases are coupled with continued downward pressure on reimbursement from third-party payers.

In light of these economic trends, practices seek to optimize physician income by establishing compensation models that fairly recognize physician performance and encourage maximum productivity. Compensation models must also consider the needs, contributions, and goals of physicians at various stages of practice, i.e., the new practice partner seeking to grow a patient base and the semi-retired partner, looking to exit the practice within a few years.

For physician compensation plans to be thoughtfully planned and implemented is important. Such plans must benefit the physicians while also benefiting the practice. Fair arrangements should:

• Ensure that individual financial performance is maintained at a reasonable level.
• Align incentives between individual physicians and the group.
• Allow physicians to feel appropriately rewarded for their efforts.
• Create systems to allow physicians to "do the right thing" even when that may reduce practice incomes.
• Field competitive offers to good candidates.

Compensation packages exist across a continuum that is anchored at four primary points. At one end is a standard base salary; at the other is a tiered incentive plan. The four incremental "guideposts" on the reimbursement continuum are:

Base Salary: In a base salary arrangement, the salary is consistent regardless of productivity. This model limits the physicians' risk by placing a floor on compensation levels. However, it provides little incentive for physicians to maintain or increase their productivity. It is often used for early years of new recruits.

Base Salary with Incentive: As the name implies, this model contains both a base salary and a performance-based variable component. The physician is paid a guaranteed level of salary but then receives incremental payments based on overall productivity. This model also limits the physicians' risk, but it provides additional income for productivity above a set threshold.

This approach provides incentives for high producers but may place the incentive out of reach of the lowest producers. It tends to underpay high producers and overpay low producers. It may not provide a meaningful incentive if the base salary is set too high.

Flat Incentive: In this model, the physician is paid solely based on productivity, with no level of guaranteed income. The advantage is that it allows simplicity and predictability for physicians and administrators. However, it does not address coverage of direct expenses and overhead expenses, and it can create competition within groups.

Tiered Incentive: Tiered incentives create higher bonus rates as production increases beyond established thresholds. Its advantages include continuous incentives for productivity improvement and an acknowledgement that higher levels of production occur at lower cost.

However, a tiered incentive plan can have several disadvantages: It can be complex, with multiple thresholds; the threshold levels can be contentious; and it can create strong demand on additional staff to maximize production.

FINDING BALANCE
The above descriptions "define" the various compensation packages in their simplest terms, but it's easy to see where confusion and/or challenges may arise. A key sticking point could be establishing thresholds. Compensation plans, seeking to balance guaranteed payment against productivity-based incentive payments, must in essence balance three key elements:

1. Base Compensation: Income paid to physicians irrespective of their productivity.
   
   
2. Compensation Per Productivity Unit: An amount that is paid on a per productivity unit basis. This amount is multiplied by all or part of a physician's productivity to determine the production portion of his/her compensation.
   
   
3. Productivity Threshold: A level of productivity that must be attained before a given compensation per productivity unit payment takes effect.
   
   

How each practice assigns value to each element will vary not just as a result of the interplay of the elements (generally speaking, the larger the base, the less that can be paid on productivity incentives, while smaller bases tend to come with more generous incentives) but also regional factors and characteristics of the specific practice. In order to provide compensation based on productivity, the practice must establish a method for measuring productivity that is applied to all physicians. Four common measures of productivity are used in medical practice.

1. WRVUs or work relative value units are the best method for measuring productivity, because they allow for a normalized comparison of physician activity within a given specialty. WRVUs represent the only methodology that is both consistent across geography and provides a factor for the intensity of services performed.
   
   The downside to WRVUs is that many physicians do not understand them and/or do not believe that they are a true indicator of productivity. Because CMS uses WRVUs to establish compensation for E/M services, the concept creates a negative association for many physicians.
   
   
2. Collections per physician are another potential measure of productivity that translates to a direct measure of cash inflow. Such a production measure is also aligned with the practice's financial strategy, as it encourages providers to see more patients and bill more services.
   
   A drawback with incentives based on collections is that collections can be affected by payer mix as well as the effectiveness of the billing/collections office, taking some control for his/her "performance" out of the doctor's hands.
   
   
3. Gross charges may also serve as a basis for measuring productivity. Like collections, charges are aligned with financial strategy of the practice. Furthermore, looking at gross charges may eliminate some of the negative impact of poor collections processes on the performance measure.
   
   However, like collections, there is a downside to using gross charges. They are influenced by fee schedules, which can vary widely and are not necessarily representative of productivity or reimbursement.
   
   
4. Finally, a practice could equate productivity with total patient visits. While such a standard is easily measurable and understandable, it is not meaningful for procedural specialties. By equating "productivity" with number of patients seen, such measure fails to identify the "work" associated with certain visits and do not consider the lengths of visits.

WHAT'S FAIR?
Practices seek to offer a compensation plan that is fair to the physicians and encourages optimal productivity. Physicians want plans that they feel fairly compensate the work they do not only in an objective sense but also relative to other practice employees.

Within any given practice, different compensation models may be used for various physicians. For example, new, non-partner physicians could receive a base salary, while partners with large, established patient bases may receive tiered incentives. Alternatively, some practices may use incentives to encourage optimum productivity of non-partner physicians while older partners with limited clinic hours may prefer a base salary that represents more of an ownership percentage of practice revenues.

BALANCING ACT
In the current environment as costs increase, payer reimbursement decreases, and economic demands on patients may lead to less frequent physician visits, it is critical that physician groups develop compensation strategies that reward physicians for increased productivity. Generally, the more risk that is transferred to the physician as part of these plans, the more potential increase in compensation should be available to them.

Craig T. Williams is administer/director for the Departments of Neurosurgery and Neurology at Brigham's and Women's Hospital in Boston and Chair of the American Academy of Neurology's Business and Research Administrators in Neurology Society (BRAINS).