by Art Saunders

Most medical practices, independent and hospital-owned, exclusively weight their physician incentive programs on the productivity of the physicians. Their income distribution formula (IDF) will pay more to those physicians who see more patients, produce more revenue or work relative value units (wRVUs), or have higher collections from their services. Unfortunately, the result of these productivity-only based plans often creates an individual approach to care delivery, when a group approach is far better.

This article explores some options for expanding a physician IDF in both independent (single specialty and multispecialty) and hospital-employed medical practices. It will discuss compensation for “good citizenship” and for call coverage as well as other responsibilities of physicians.

First let’s look at some principles of physician compensation plans.

• Total physician cash compensation should contain all of these components:
  • Base pay
  • Short-term incentives
  • Long-term incentives
  • Other cash compensation
• If a plan focuses solely on individual production and leaves few incentives for an individual physician to devote time to the betterment of the health system, hospital, and/or medical practice, it gets production without concern for the organization.
• If a plan is indexed solely to physician compensation derived from survey data, it typically produces unacceptable financial results for the medical practice’s operation.
• If a plan is not linked to patient satisfaction and managed care utilization, it may be detrimental to maintaining long-term relationships with individual patients and/or payers.
• There is no IDF that will work everywhere. The life span of most formulas is 3-5 years, with annual “tweaking and tuning” often necessary.
• The compensation plan’s linkage to a well-thought-out business plan is vital.

Typical goals of any physician compensation plan are:

• Attraction
• Retention
• Motivation
• Fiscal responsibility
• Competitiveness
• Internal equity
• Reward quality and efficiency of care

If a medical practice’s IDF does not address these principles or goals, it is just a matter of time before issues will arise—issues that can be very disruptive and distracting, and issues that can destroy the group.

So what IDF formulas will we see in the future? First, let’s look at those formulas being phased out and why:

• Percentage of gross charges
  • When fees are raised, physicians get an automatic raise and a medical practice can’t determine fees strategically without altering physician compensation.
  • More than ever before, there is little relationship to a medical practice’s fees and its cash collections. Cash collections are determined by the payers and the patient mix.
• Straight salary
  • This creates the working retired.
  • 100% of collections
  • It rewards the individual only and physicians may desire the ability to select their patients based on payer.
• Linked to survey data
  • It removes flexibility required because of local situations and market compensation levels.
• Fixed and variable cost allocation, particularly in multispecialty groups
  • While cost is critical to the success of the organization, reducing spending on infrastructure needs (e.g., technology) in favor of maximizing physician compensation could be deadly in the future.
  • Physicians really don’t have much say in the cost of operating a medical practice. With strong management, a realistic and current budget, and care delivery protocols in such areas as individual physician staffing levels (e.g., nurses) or number of exam rooms per physician, cost allocation does not benefit the organization as much as it did in the past.

In the future, we will see incentive formulas designed with these metrics in mind:

• Tiered productivity 
  • Higher producers receive more of what they produce assuming some economies of scale are the result of the higher productivity.
• Tiered productivity plus organizational goal achievement
  • Higher producers receive more of what they produce assuming some economies of scale are the result of the higher productivity.
  • Plus they receive an organizational profit bonus (organization achieves budget).
• Site profitability bonus
  • It is primarily based on achievement of a budget but not on pure profitability of a site.
  • Geographically dispersed coverage is essential so medical practices can retain patients; physicians working in satellites need to have incentives to operate as efficiently as possible while ramping up their productivity.
• Good citizenship
  • Can physicians working together in a small group, a department within a multispecialty group, or as employees of a hospital system adhere to group behaviors and required activities? Incentives in these areas may be required to ensure compliance.
• On call coverage
  • Traditionally part of being a physician and not paid separately, this has changed to address lower or no reimbursement when physicians spend time on call. Today call schedules are not always equal and certain physicians are covering more call than their partners, and payment for call is becoming more common.

Let’s further discuss these future trends and examine workable formulas. First, it is important to understand an incentive for productivity will almost always drive the performance of the medical practice. But it need not be the only incentive for a successful medical practice.

When physicians are paid more for seeing more patients and therefore producing more revenues, it is common for the entire group of physicians to produce at higher levels (peer pressure). Initial growth of 15-20% or more is not uncommon when medical practices implement a productivity incentive that “has some teeth.”

That means 70-80% of any physician’s income is derived from a productivity incentive. Less than that and the medical practice will most likely have several physicians who pay little or no attention to the behaviors required for them to be as productive as they can be.

The productivity metrics used today are very different than 10 years ago. Today wRVUs productivity formulas are becoming the most common metric because this metric considers volumes and care acuity while being payer neutral. Physicians are paid based on a conversion factor times their work RVUs. An example in family practice could be:

• $40 per wRVU conversion factor (CF)
• 4,000 annual wRVUs produced
• $160,000 annual cash compensation ($40 x 4,000 wRVUs)

The above numbers (CF, annual wRVUs, and annual cash compensation) represent approximate median levels in most industry available surveys.

Second, an additional incentive could be established to address physician behavior by adding another $2.00 onto the CF ($8,000 in the example above). Many groups instead will separate the productivity component from this Good Citizenship component by simply providing an $8,000 (or more) cash payment for this incentive. Examples of the items included in this behavioral incentive could include achievement of the following:

• Medical records charts completed within 48 hours of date of service (e.g., expect 100% compliance)
• Patient satisfaction survey (e.g., attain 85% or better patient satisfaction score)
• Link to Medicare pay-for-performance (P4P) quality measures
• Attendance at meetings
• Community involvement
• Mid-level practitioner supervision

The key to this component is to establish expected behaviors and measurement criteria in advance and track and communicate the results on a regular basis. There should be no surprises!

Third, incorporating the call coverage incentive into the IDF can take many forms. Many medical practices are determining the value of call within their group and again attaching a portion of the CF to the formula.

For example, if a night of call is valued at $300, the CF for family practice may increase by $2, based on one night of call per week, one weekend of call per month as the benchmark for the medical practice. Other family practice medical practices are simply tracking call nights among physicians and paying $300 per night. Trading call nights and monies occurs regularly, and minimum and maximums are established to meet the supply and demand.

This component, as well as the behavioral component, must be affordable and budgeted within the profit structure of the medical practice. It is obvious that higher producing practices have an easier time managing these components than median producing practices because they have more monies with which to work.

In summary, let’s review what sustainable physician compensation programs achieve.

• The cash compensation portion of the plan provides for sufficient incentives to motivate superior performance to the benefit of the individual and the sponsoring organization.
• Individual differences and professional interests among physicians, selected administrative and clinical management efforts are paid separately.
• An individual’s base compensation (or “draw”) may be adjusted upward or downward according to performance.
• The physician compensation “pool” is not immune to the risks of the market.
• Superior performers are well rewarded.
• Physician leadership will administer the plan and manage physicians within the plan.
• Components of the plan may be adjusted from year to year and within specialties to meet market and strategic requirements.
• The plan will be supported by a reliable system of accounting and management reporting.
• Group governance and professional peer review will be integral to the compensation plan administration.

And finally, here are the recommended steps to get started redesigning a medical practice’s IDF:

• Develop clear business goals and objectives; answer the question: “when we are a successful medical practice, we will look like____.”
• Carefully choose an IDF redesign task force representing key constituents to assist in working through the redesign process.
• Consider hiring outside facilitators who are removed from the politics of the medical practice and have experience redesigning physician compensation formulas in medical practices similar to yours.
• Test the financial implications of the various options being considered.
• Implement a dual tracking of any new plan adopted and report compensation to affected physicians under both the current plan and the new plan prior to actually starting the plan.
• Understand continuous improvement will need to occur, including annual adjustments based on market circumstances.

Redesigning physician compensation should be viewed as a key process within the governance and management functions. Time spent will be instrumental in the medical practice achieving its long-term goals.

Art Saunders is a WIpfli partner with more than 25 years of experience in practice profitability management, practice management systems, medical practice operations improvement, and physician compensation.  He can be reached at our Minneapolis office at 952.548.3372 or asaunders@wipfli.com.