The New Models for Physician Compensation

There is little doubt that physician compensation is becoming more of a critical issue for private practices, hospitals and physicians who are evaluating either existing or new employment opportunities. Ongoing payment reform and consolidation in health care is forcing practices to face the reality that they may have to reconsider the way they compensate their physicians.

Practices risk becoming less profitable and losing their competitive edge if they do not understand and consider the new physician payment models. Many such models are already being offered by hospitals that are actively recruiting physicians through direct employment and medical practice acquisitions. Practices that do not offer attractive compensation models will likely find it difficult to retain their existing physicians, costing the practice real money in terms of lost revenues, higher recruitment fees, increased legal fees, increased training costs, and lost referral sources.

The more common models seen today include those that offer straight salaries and those that are based on productivity. Productivity models reward for volume, either based on collections and, in recent years, based on Relative Value Units.

Straight salaries are becoming a dying breed, as practices are finding it difficult to pay guaranteed salaries in light of decreased reimbursements and higher administrative costs. Conversely, while productivity-based models incentivize physicians to work hard and maintain a certain patient volume, they do not address the real goals practices will have to meet in the future.

The primary characteristic of the new models is to reward high quality and low cost care instead of high volume of services. These types of models align the goals of medical practices and their physician employees with the goals being put out there by Medicare (e.g., Accountable Care Organizations) and commercial payors (e.g., patient-centered medical homes).

Put simply, if all employees in a practice, including physicians, are incentivized to meet these goals, then the practice has a higher probability of being successful in the end. For these reasons alone, new models are increasingly being accepted and implemented.

Practices should start thinking about transitioning to compensation models that incorporate strategies designed to meet the new patient care accountability standards, retain existing physicians and stay competitive in their physician recruiting efforts. These models should encourage and incentivize physicians to be more accountable for:

New models of physician compensation

• Patient outcomes, e.g., the quality of care.
• Overall patient satisfaction, e.g., patient satisfaction surveys.
• Administrative responsibilities, e.g., EMR implementation, practice compliance policies.
• Physician recruiting, e.g., speaking at conferences.
• Serving on committees, both internal (for larger practices) as well as outside organizations.
• Practice marketing efforts, e.g., to develop new physician referral sources.
• Mentoring young physicians who are new to the practice.

Change is difficult and it takes time, especially when it will most likely impact the earnings of physicians in a practice, some positively and some negatively. It is vital to get buy-in from the physicians (both owners and employees) and to communicate that these changes are not being driven by the practice, but by much larger “forces;” namely third-party payors and a consolidating health care landscape. It is equally important to reinforce that maintaining the status quo may not allow the practice to remain financially viable and independent.

In implementing these changes, practices need to start directing financial rewards to those who are actively involved in the practice, not just those who provide patient services. Many practices are starting to use “point systems,” whereby a portion of a physician’s compensation is based on the physician’s involvement in both clinical and non-clinical aspects of the practice.

Practices are also establishing partner tracks early on, which can include either an equity buy-in down the road or profit-sharing only. A partner track incentivizes physicians through a sharing of profits, which can provide for greater earning potential. Depending on the specialty, in most cases an equity buy-in is paid for with “sweat equity”

Implementing these changes

— not much money is paid up-front. The partner track:

• Encourages physicians to become more involved in the practice.
• Offers an exit strategy for senior partners (including for a partner disability).
• Gives physicians a greater voice in determining the direction of the practice.
• Encourages physicians to stay with the practice for the “long haul.”
• Provides for the sharing of financial risk (can be a positive or negative).

Practices should consider using outside consultants and advisers who can help implement these changes. Consultants act as facilitators of change, a mediator for the physicians, especially when it comes to the sensitive area of physician compensation. They typically include practice management consultants who specialize in physician compensation as well as other business and financial advisers.

A health care attorney well-versed in regulatory compliance matters, including Stark and related ancillary revenue-sharing issues, should also be involved in the process.

What to do today

Practices should begin evaluating their existing physician compensation structure to see if it continues to be financially viable and equitable among the physicians in the practice. They also should be evaluating the financial benefits, or costs, associated with alternative models. The evaluation process should always incorporate a long-term strategy to retain and attract top physicians.

Employed physicians need to understand what compensation models are being offered in the marketplace, as well as the inherent risks associated with each. In the end, for both practices and employed physicians, education is paramount. It is essential to stay current and start planning for the changes we continue to see in health care every day.

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 email 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.