Increasing Competition Drives Up Physician Compensation

Many markets have seen increased competition as hospital consolidation continues. This trend has driven up physician compensation as doctors leave private practice for the income protection offered by hospital employment.

A recent report by Jackson Healthcare indicates that physician compensation in the U.S. as a percentage of total health care costs is “among the lowest of the major western nations.” According to the report, the amount compensated to physicians in 2011 was 8.6% of the nation’s total health care costs, compared with 15% in Germany and 11% in France.

Those figures, however, don’t seem to jive with a similar report done by the Commonwealth Fund. That report indicates that in 2008, both primary care and orthopedic physicians in the U.S. earned significantly more than their counterparts in the U.K., Germany, Canada, France and Australia.

Will Reiser, MBA, an expert in the area of physician productivity compensation with Halley Consulting Group, can’t account for the two reports’ divergent results, but he is sure of one trend in the U.S.: physician compensation is on the rise.

Influence of increasing competition

Reiser works with clients to develop sustainable models that provide fair market compensation for primary care and specialty physician groups. As such, he says he has seen an interesting trend in recent years with regard to the upward direction of physician compensation.

Hospital consolidation has increased competition in many markets, thus driving up compensation for physicians who are leaving private practice for hospital employment.

“Competing hospitals are battling for the employment of various primary care physicians and specialists within their market area,” Reiser explains. “The pressure to employ those primary care practices and to win out over the competing entity obviously drives up that compensation.”

As added evidence, Reiser points to results of the American Medical Group Association “2011 Medical Group Compensation and Financial Survey.” According to the survey, in 2010, 69% of medical specialties experienced an increase in compensation, with the overall weighted average increase pegged at 2.4%.

Continuing trend

Reiser sees increasing physician compensation continuing over the next few years while shifts in the health care industry occur. Right now physicians want the level of income protection a bigger entity like a hospital can offer that independent providers can’t.

But the trend won’t continue forever.

“I think what we’re going to see in the next five years as contracts come due, there’s going to be a ratcheting down, and balancing back on line with what revenues can afford,” Reiser says. “At some point the pressure will become so substantial that the various markets or hospitals will need to trim costs and add more rationality to the level of compensation they’re paying.”

Sustainable models

When developing fair and sustainable compensation models, Reiser says there are several key factors to take into account. And with the operative word being “sustainable,” the place to start is by understanding the revenues being generated by the health care entity.

“We need to understand the pool of money that can be distributed for compensation,” Reiser says. “That means understanding what is the reimbursement that we have from all of our various payers; understanding the bottom line specific to the practice. What can we afford to pay? The independent physicians only get what’s available after they’ve paid all their expenses.”

The challenge in toeing the bottom line, at least for the next few years, says Reiser, comes from the increasing compensation hospitals and larger health care entities are willing to pay in order to attract key providers.

“Medical practices may have to pay a premium over what physicians would normally be able to achieve in a private practice setting,” Reiser says. “That’s going to continue driving the compensation up.”