Choosing a physician 
compensation plan

By David H. Glusman, CPA

Published August 2008

A well-crafted physician compensation plan is essential for promoting commitment and cooperation among physicians and for the overall success of the group. Conversely a flawed plan can lead to internal conflict that consumes time and energy that otherwise could be devoted to strategic tasks.

The growth in the size of group practices and their increasing management sophistication is changing the fundamental characteristics of physician compensation arrangements. The 1980s and 1990s were characterized by a variety of compensation arrangements that ranged from pure productivity-based systems to arrangements that favored shareholders or subspecialists within a group

The salary plans from this era also included very complex arrangements. Some factored in administrative duties, call coverage, honoraria and other responsibilities or revenue-producing activities. Others provided additional compensation for referrals to ancillary services, or the number of new patients and consultations.

Many complex compensation plans proved to be unwieldy in practice because of the work involved. More importantly, they were criticized for being subjective or unfair, and from a management perspective many promoted physician self-interest over a group culture.

Today, the compensation arrangements used by group practices are simpler and more standardized. The majority of plans still incorporate measures of productivity in some way. Productivity may be measured as gross revenue (before operating expenses), net revenue (after expenses) or in relative value units (RVUs), Medicare’s measure of physician work performed. Generally, there has been a decline in counting ancillary service referrals or other indirect services in a physician’s productivity.

Productivity measures may be applied in different ways. In the simplest form, a minimum threshold may be set and full compensation awarded to a doctor if that level is met. In other cases, a doctor’s compensation may be related to his or her revenue or RVUs generated. When productivity is based upon revenue, net revenue is commonly the productivity measure because it reflects the funds available after overhead expenses. The value of using RVUs over net revenue is that this measure is not subject to the administrative or political complexity of allocating overhead expenses to a physician, and discards the vagaries of different insurance coverages.

Pure bonuses are not as common as they have been in previous eras; however, they are still used in special situations. Bonuses are often difficult to measure and administer. For example, a doctor may criticize the data used to calculate the bonus, or may argue that extenuating circumstances prevented the bonus from being earned. Increasingly, physicians would rather see bonus dollars built into their guaranteed compensation, as opposed to being held out as an uncertain, subjective year-end addition.

Bonuses may be used with new physicians. Signing bonuses are a recruitment tool that is used in competitive specialties. A signing bonus may also be used to overcome a special situation with a specific physician the group is interested in hiring. The value of a signing bonus is that it is a one-time payment, not built into annual compensation. New doctors may also be offered a productivity bonus. It encourages them to work hard from day one, and from the doctor’s perspective it’s an opportunity to get something extra. However, a productivity bonus for a new doctor can backfire and taint the individual’s attitude toward the group if it is not realistic and attainable.

While subjective bonuses are fading from group practices, they still exist in other environments. Bonuses are more common in situations involving pay-for-performance programs, and when physicians are employed by hospitals or academic practice plans. Integrated provider networks and physician organizations such as IPAs or large multispecialty groups may have bonus arrangements that reflect the terms and performance requirements in their P4P contracts. The IPAs that participate in the nation’s largest P4P program, the Integrated Healthcare Association, have such bonus arrangements. The P4P bonuses are paid at the group level, and each IPA sets bonuses for individual physicians based upon its own policies and procedures.

The bonus arrangements in the compensation plans of hospitals and practice plans may be based upon productivity, quality measures, patient satisfaction, administrative responsibility, achievement of specific objectives or citizenship. Citizenship is a measure of the extent to which a doctor is a team player.

An alternative to compensation plans that incorporate productivity measures is an equal salary plan. Under this type of plan all shareholders are paid equally, regardless of subspecialty. Salaries are also uniform for employed physicians or new physicians on track to become shareholders. The equal pay model can be found in single specialty practices. For example, it exists in radiology groups with traditional "flat film" diagnostic radiologists as well as CT and MRI specialists, even though the individual revenue generated by doctors in the group varies significantly. One justification for this model in radiology is that the group’s revenue is basically the result of an exclusive contract with its hospital. Another justification is that the workload and schedules for diagnostic radiologists are more onerous than those of the subspecialists.

The equal pay model exists in other specialties such as cardiology, and one justification here is that general cardiologists are largely the source of referrals to subspecialty cardiologists. A general cardiologist who sees a patient for chest pain often refers patients on for stress tests, electrophysiology or diagnostic catheterizations.

The justification for an equal pay arrangement from a management perspective is that it promotes the idea that the group is one organization, not a confederacy of individual doctors.

The possible downside to the equal pay model is that it presumes all physicians are equally skilled, equally productive and equally motivated. High producers have little long-term incentive and low producers may be allowed to coast along. Nonetheless, many single-specialty groups adopt this model on the premise that all services, even low ticket services, are necessary within a full-service practice. Other management tools and measurements are needed to maintain everyone working together.

In contrast to the equal pay model in single specialty groups, the compensation plan for a multispecialty group must provide reasonable salaries for each specialty. Base compensation levels in multispecialty groups are usually based upon physician salary surveys. From there the compensation plan may adjust compensation levels based upon local market conditions.

The key to success for multispecialty groups is to have an objective basis and accurate external data to determine base salaries for each specialty. In addition, compensation plans in multispecialty groups must have policies and procedures that are consistent across all specialties. Arrangements that vary by specialty are likely to generate criticism and resentment among physicians.

The structure and level of retirement benefits should not be overlooked in compensation plans. The most common approach is to provide a consistent benefit for all physicians and employees. Beyond that, it is up to each individual physician owner to make additional contributions or set up alternative retirement accounts. Another alternative seen more commonly in some smaller practices is not to have any retirement program, or to have the retirement benefit to be considered part of compensation.

There are many approaches to compensation plans for group practices but there are certain characteristics that cannot be overlooked. First and foremost is a policy of fairness and consistency. A compensation plan that is based upon objective data and reasonable policies and procedures applied uniformly to all physicians will be understood and accepted by physicians who are important to retain in the group.

Second, minimum compensation levels must approximate average or reasonable compensation in the group’s marketplace, for its type of practice. For example, academic practices may have lower salaries than private practices.

The general trend in physician compensation has been to simplify and standardize policies and procedures, but there is a new frontier and new challenges. Historically compensation has been based upon productivity; however, quality and efficiency measures are slowly working their way into payer reimbursements and eventually they will filter down to individual physician compensation.

Payers and purchasers are using quality and efficiency measures to tier physician networks and in their fee schedule negotiations with practices. If or when this trend takes hold, physician compensation plans will need to incorporate these types of measures.

David H. Glusman, CPA, DABFA, CrFA, CFS is a principal in the certified public accounting and business consulting firm of Margolis & Company.