Physician Compensation Models in Large Medical Groups
Nov. - Dec. 2001
By Jennifer Nelson, Carleton T. Rider, John E. Biermann, and Shawn D. Schwartz
Physician compensation is a major economic factor in large medical group practices. This article examines the physician compensation models of 14 large physician group practices, and identifies significant trends in the methodology of physician compensation and physicians’ satisfaction with compensation models. The pros and cons of the compensation models are also discussed.
Methodology
Telephone interviews were conducted with physician leaders, administrators, and compensation managers of 14 large physician group practices. The practices included in the study participate in AMGA’s annual Medical Group Compensation & Productivity Survey, conducted by RSM McGladrey. Almost all are nonprofit, physician-led, and own or affiliate with a hospital(s). They represent more than 8,000 physicians. (Demographic data is given in Table 1). For this analysis, the compensation models were categorized into three groups:
1. Base Pay/Straight Salary
Base pay is derived from factors such as market data or internal comparison for a defined period. This model may or may not incorporate merit into the base calculation. This category is also defined by the absence of incentive pay.
2. Base Pay Plus Incentive
Base pay, with the opportunity to increase total compensation during the plan period, is calculated on group or individual productivity, academic performance, and professional activities. Incentive pay is earned and paid separately from base pay
3. Production
A formula based on productivity factors such as work relative value units (RVUs), net collected charges, or net operating income is used to calculate cash compensation. The calculation is used to determine base compensation for the next year.
Respondents were asked to describe their compensation model and the process for making global and individual compensation decisions. Seven of the organizations use a production compensation model. The remaining seven use non-production models, including base pay (five), and base pay plus incentive (two). Respondents were then asked to rate satisfaction with their current model using a Likert scale, considering factors such as leadership satisfaction, staff satisfaction, reliability, fairness, clarity, and complexity. Finally, respondents summarized their perceptions of the pros and cons of their current compensation model.
Results: Equal Satisfaction Within Models
The organizations were grouped into the three basic compensation models for statistical analysis to identify significant trends among the models. The most significant finding is that there was no correlation between the type of compensation model and the perceived satisfaction of administrators, medical staff, group practice leaders, and compensation administrators. In other words, no one compensation methodology produced superior satisfaction results in this survey group.
On linear regression analysis, satisfaction with the compensation model was positively correlated with two factors: (1) understanding the pay system and (2) perceived fairness of the pay system (R2 adj. = 69.6%).
Group practice leadership indicated greater satisfaction with production models, primarily because of their perception that production-based compensation models produce superior financial results. It is believed that physicians practicing in production-based models will strive to see more patients and appropriately code for visits, consultations, and procedures, knowing that their compensation and the financial viability of the organization depend on this approach.
Production Systems Increasing
Production-based models are used or being considered by more large group practices than ever before. In our sample, half of the surveyed organizations are true production models, and six of the seven salary models are based on last year’s productivity. Within the production-based models, metrics include work RVUs, custom point systems, gross revenue, net collected charges, and net operating income. Work RVUs are the most commonly used metric among the groups that use productivity data.
Non-Production Models Remain Effective
The base salary models include defined salary range entry and target points and progressions within the range. Base pay is generally derived from survey market data or internal comparison. Progression through the range is determined by a combination of defined and subjective factors. These factors include departmental or institutional financial performance, academic productivity, quality, and patient satisfaction.
The two group practices in this survey that use a base pay plus incentive model use production (work RVUs) to calculate incentive pay. One group practice uses a non-salaried incentive system to modify physician behavior, increase productivity, and contribute to academic productivity. (Pros and cons of the three compensation models are listed in Table 2).
Compensation Increasing
Interviewees report increasing physician salaries at a rate exceeding inflation. Productivity and reimbursement remain flat or, at best, are increasing only moderately.
Specialist Migration
A factor in the compensation increases among radiologists, anesthesiologists, and specialists is the appeal of single-specialty group practices. The compensation for these single-specialty practices has increased even more than that for group practices. Physicians are offered generous pay with little apparent downside. This leaves large group practices struggling with recruitment and pay equity issues. However, the production expectations, financial risk, potential for loss of patient base, and academic interests keep many physicians within large multispecialty groups.
Part-Time Work
The desire for part-time hours is another factor influencing the movement toward production-based compensation models. Adjusting base pay for a part-time physician is difficult when attempting to calculate the “normal” workweek of a physician. Is 60% of 80 hours per week considered part-time? Compensation based on production appears to work best for physicians with less than full-time schedules.
Administrative or “Citizenship” Time
Generally, some administrative or “citizenship” time is expected of physicians and is not a factor in compensation determination. However, significant administrative time is recognized within many organizations and compensated at a separate pay rate. One group practice that uses a production model used a complex system of activity points for agreed-upon nonclinical accomplishments. A certain percentage of compensation is withheld and divided by the total number of activity points. This pool is divided among the physicians on the basis of their productivity in the defined activities.
Discussion
Managing physicians’ compensation is a significant economic factor and a priority for group practice leaders. Administrators and physician leaders invest considerable time managing physician compensation. The debate about which compensation system provides the best outcome continues and leads to frequent, often disruptive, change. As one group practice administrator said, “We have three compensation models: the one we had last year, the one we have this year, and the one we are planning for next year.”
The majority of group practices in this survey use a component of production in the compensation system in hopes of engaging the physicians in improving an institution’s financial performance. Many of the administrators attribute their institution’s financial turnaround to their production compensation system based on work RVUs. Work RVUs appear to be the most commonly used and accepted metrics for measuring performance.
Several organizations are eliminating complex incentive-formula approaches, including variables such as quality activities, teaching, research, and other scholarly pursuits. These formulas were viewed as too time-consuming to manage and controversial to the physicians.
Some of the group practices that use salary-based models are planning or considering moves to production models. However, salary-based models appear to remain most appropriate for academic group practices that retain research and education missions.
Conclusion
Physician compensation is a driving economic factor in large medical group practices. Many medical groups use or are implementing a production-based compensation model in hope of improving the financial performance of their institutions. Work RVUs are commonly viewed as the most effective and fair measure of physician productivity among the organizations interviewed.
Reference
T.L. Brandt, C.R. Romme, N.F. LaRusso, K.D. Lindor, 2001. A Novel Incentive System for Faculty in an Academic Medical Center. Annals of Internal Medicine (in press)
NOTE: Jennifer L. Nelson, M.H.A., M.B.A., is an administrator at the Mayo Clinic, Carleton T. Rider, M.A., M.P.H., is a senior administrator, and John E. Biermann, M.B.A., C.C.P., is director of compensation for Mayo Foundation, in Rochester, Minnesota. Shawn D. Schwartz, M.B.A., FHFMA, is a manager with RSM McGladrey National Healthcare Consulting Group in Minneapolis, Minnesota. Reprinted with permission from the Group Practice Journal. Copyright ©2001, American Medical Group Association, September 2001.
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