Creative with Compensation

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If paying physicians is expensive, replacing them can be downright exorbitant. That’s why group practices are getting more sophisticated about designing physician compensation arrangements that not only set clear expectations, but also take into account physicians’ contributions to the practice—helping to ensure that their doctors will take the money and stay.

Turnover costs

The American Journal of Managed Care reports that physician turnover—including recruiting and losses associated with bringing on a new family practice physician—can run to $250,000 per new hire. “If you blow that hire, it’s going to cost you hundreds of thousands of dollars,” says Jack Valancy, a Cleveland Heights, Ohio-based consultant. Valancy says designing an effective physician compensation program that maximizes retention has less to do with the dollar amount of that compensation and more to do with how that compensation is earned. Is it fair to new docs? Does it encourage teamwork among the physicians? Does it incentivize parts of the practice in which physicians have control, such as patient satisfaction and efficient scheduling, over metrics where they often don’t, such as billing, ancillary staffing and collections? (See the sidebar on p. 52)

“Administrators spend too much time on how much they’re going to pay,” Valancy says. “They come up with elaborate formulas to incentivize everything, but they’re missing the bigger picture.”

Building an appropriate compensation formula that fits your organization’s culture is important, but it can’t be relied upon to maximize retention by itself. At one extreme, administrators construct compensation formulas by which every physician makes a fixed salary. At the other, it’s all about incentives. The key is to design a plan somewhere in the middle that reflects the practice’s values. More important, Valancy says, expectations should be clear up front that the physician will earn more as he or she helps grow the practice and that the physician has a large measure of control over his or her compensation level.

What happens too often is that “physicians don’t understand the job they’re getting into,” he says.

Always have a plan

Typically, new physicians are guaranteed a level of compensation when they’re recruited, says Bruce A. Johnson, a principal with the MGMA Health Care Consulting Group in Englewood, Colo. “Let’s say hypothetically it’s $200,000 a year. If they do it right, the practice will additionally set some performance expectations or targets so the docs’ production has a chance of being where it needs to be.” That will relate things such as patient visits and actual dollars produced to their work schedule, he says.

Additionally, younger physicians are far more accepting of being an employee rather than a partner, which often means severe disappointment for doctors who get to the third year of their practice without reaching certain performance measures. In such situations, “they might have to take a pay cut because of the way the guarantee was set up and they haven’t reached the level where they get incentives,” Johnson says. “It could be that he goes to $150,000 from $200,000, which is very negative, and the senior docs are typically pretty unwilling to guarantee that $200,000 and make you partner.”

As a result, some practices are coming up with pay plans that are non-partner-based. Such arrangements present their own challenges, he says, because one of the benefits of partnership is equality in governance. If the doctor doesn’t have a say in how the practice is governed, the practice must be careful to construct compensation plans that are based on what the employee physician can control.

John Deane, chief executive officer of Southwind Health Partners in Nashville, Tenn., generally works on recruiting and compensation with hospital-owned practices versus standalones, but he says designing incentive plans that align the practice’s interests with the individual doctors is equally crucial in both situations.

“The trick is to align their compensation around the successful operation of the practice,” he says.

A tough market

Timothy W. Boden faces myriad challenges in recruiting physicians to the rural group practice he administers in Greenville, Miss. “The hospitals have historically been involved with attractive guarantee programs that have allowed a competitive salary,” he says. Such programs have provided a supply of physicians to practices like the Kidney Center of Northwest Mississippi, but they don’t make up for the provincial atmosphere and the large percentage of patients who are on Medicare or Medicaid. Other bad news is that beyond the hard cash, the soft stuff—things that bring about job satisfaction—have not been properly leveraged in terms of trying to build loyalty, he says. “It’s kind of a revolving door here. Many do their three years and leave.”

But Boden, who came on as administrator in mid-2004, is trying to stop that revolving door by showing physicians how they can increase their salary and quality of life based on incentives and a transparent compensation plan that gives physicians a measure of control over their salaries. “There’s a long educational process to show them that behavior does matter,” he says. Whether it’s work output, rainmaking, community relations, being involved in quality or administration, he says, profit distribution in a group practice defines and reflects the group culture. “It says, ‘These are the things that are valuable enough that we will pay you for them.’”

Philip Betbeze is finance editor with HealthLeaders. He can be reached at

Performance Incentive Plans

Physician practice administrators can implement plenty of performance incentives to provide job satisfaction for physicians and maximize productivity. But finding the right balance can be tricky. Here are several incentive ideas that will yield varying levels of success, says Jack Valancy, whose Cleveland Heights, Ohio, consulting firm helps counsel physicians on compensation arrangements, among other services.

1. Based on collections: By far the most common form of productivity bonus, administrators should set a reasonable threshold (e.g., the practice needs to break even) before the bonus kicks in. Typically, the practice and physician share profit after that. Weaknesses of this method are that the physician typically forfeits the bonus on accounts receivable collected after employment ends, and new physicians may have a higher proportion of patients with low-paying insurance plans or no insurance coverage.

2. Based on charges: This may be the most equitable incentive, says Valancy. The physician receives credit for all work done, and accounts receivable, payor mix and collections efforts are no longer an issue. Practices can reduce their risk by basing the profit threshold and percent bonus on the practice’s historical collection ratio.

3. Based on relative value units: This method is similar to the charges method in that it removes payor mix and collections from the bonus equation. An RVU is a unit of measurement based on the resources required to perform an individual service or intervention. Practice managers assign a dollar value per work RVU and set the bonus threshold and payment based on the RVUs compiled beyond that threshold.

4. Based on physician practice profits: This is another common way to offer a productivity bonus but is unfair to the physician and may lead to job dissatisfaction, says Valancy, because it measures performance based on variables over which the individual physician has no control, such as practice expenses and patient flow, or poor-performing support staff.




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