A Fresh Look at Physician Compensation Packages

As hospitals and large healthcare networks increasingly offer attractive employment packages to doctors, a growing concern among practice owners is whether they will be able to continue to retain and attract the top doctors in their field. This has triggered many practices to re-evaluate their existing compensation packages to make sure that they remain competitive and attractive. Specifically, practice owners are considering the following:

• Offering or revising their productivity-based bonus structure.

• Offering profit-sharing (without equity).

• Offering current or future equity in the practice (a "buy-in").

In addition, if a practice provides ancillary services, some of which may be considered designated health services (DHS), practices are reviewing their compensation policy as it relates to DHS revenues.

Productivity-Based BonusesWith the continuing trend of decreasing reimbursements and increasing costs, practices are finding it harder to continue to offer compensation that is disproportionate to a physician’s productivity. Practices can no longer afford to pay excessive compensation to senior doctors in a group, for example, simply because they are “senior” doctors.

With reduced operating profits, compensation needs to be tied to some level of productivity, whether it be professional charges, collections, patient encounters or relative value units. Deciding on what productivity metric to use depends on a number of factors, such as the number of physicians and the type of specialty.

Profit-Sharing (Without Equity)

Another form of compensation that is becoming increasingly popular is offering profit-sharing without equity. With this structure, physicians are offered a share of the practice’s profit, which is in addition to any productivity-based bonus.

Here what’s most important in establishing, up front, what expenses are considered “normal” operating expenses in computing the practice’s profit. For example, how much additional compensation are physicians entitled to if they also provide managerial and/or administrative services to the practice? And what is the policy for amortizing, or writing off, equipment or office renovations? By establishing the specifics of a profit-sharing arrangement, in writing, expectations can be managed and future disputes avoided.

Offering a "Buy-In"

While offering equity, or a “buy-in,” in a practice is nothing new, the most significant difference today is that established practice owners are establishing a “partner track” early on. Practice owners see this as a way to not only to retain top talent, but also as a means to achieve long-term succession plans.

For this reason, owners will include the specifics of a partner track in their recruiting efforts, such as putting down in writing exactly what is expected of physicians as they strive to attain partner status. What levels of productivity need to be maintained? What administrative roles do physicians need to perform? What type of marketing effort is expected? Are published articles or speaking engagements required? What about recruiting efforts? And perhaps most important: What is the expected timeframe for a physician to become a partner?

DHS Revenue-Based Compensation

As part of developing a comprehensive compensation structure, it may also be necessary for practice owners to review the group’s policies for allocating revenues generated from designated health services. While the full list of services that are considered DHS are available on the Centers for Medicare and Medicaid Services’ website, some of the more commonly recognized DHS services are diagnostic services, such as X-rays, MRIs, and lab work. Physicians also sometimes refer to DHS services as “ancillary services.”

As a greater number of practices establish ancillary services as a way to generate new revenues, it becomes critically important that these revenues, if also considered DHS, are properly allocated among all physicians in the group. CMS specifically prohibits compensating physicians based on the value or volume of DHS, with certain exceptions. Practices need to decide, up front, and put in writing, how they will compensate physicians for DHS.

In the end, as recruiting for physicians becomes more competitive -- and losing physicians to hospitals and larger healthcare networks become commonplace -- having a competitive and attractive physician compensation plan is no longer an option for practices. Those that do not address these issues will find it increasingly difficult to retain and recruit for top doctors.

Lee Ferber, CPA, is a senior member in GMSL’s Health Care Group, a division of Gettry Marcus Stern & Lehrer CPA P.C., a New York-based accounting and consulting firm. Mr. Ferber specializes in new group formations, mergers and acquisitions, partner/shareholder agreements, succession planning, physician-hospital arrangements and developing physician compensation models. He can be reached at (516) 364-3390 ext. 206, or via e-mail at lferber@gmslny.com.

Mr. Ferber is a proud member of the National CPA Health Care Advisors Association. The HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide solutions to the accounting and financial needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com.