Physician Compensation Models: Big Changes Ahead

Career Resources articles posted on NEJM CareerCenter are produced by freelance health care writers as an advertising service of the publishing division of the Massachusetts Medical Society and should not be construed as coming from the New England Journal of Medicine, nor do they represent the views of the New England Journal of Medicine or the Massachusetts Medical Society.

January 2011

Career Resources Editor’s Note: Health care reform is changing the traditional ways in which physicians are reimbursed. Employment is shifting from private practice and partnership arrangements that have relied primarily on fee-for-service reimbursement to institutional ownership of physician practices and the use of incentive bonus plans based on quality, production, and utilization metrics. Payment models run the gamut, from withholding compensation until physicians meet objectives to bonus-only models with payments made once objectives are met. Regardless of which models emerge, there will be improvements in physician reimbursement for previously lower compensated or uncompensated services, quality, and coordination of care.  — John A. Fromson, MD 

As with the health care delivery landscape, economic realities and policy changes are reshaping the way doctors are paid. 
By Bonnie Darves, a Seattle-based freelance health care writer 

The emergence of health reform and a burgeoning arena of physician and hospital payment reforms are spawning a new crop of buzzwords and ways of paying physicians for their services. Most industry watchers agree that the fee-for-service (FFS) system is on its way out because it primarily rewards volume with only minor attention given to high-quality care or acceptable patient outcomes.

Although FFS’s replacement hasn’t been developed, the movement toward a new payment model has begun. The way physicians are compensated will evolve as pay-for-performance programs mature and the Centers for Medicare and Medicaid and commercial payers proceed with medical home pilots, ACOs, global or bundled payments, and episode-of-care reimbursement. Practices and hospitals that participate in such pilots will likely revise compensation to reflect the changes in reimbursement and revenue flow that occur when organizations assume the task of allocating funds to physicians.

On the plus side, health reform is expected to translate into improved physician reimbursement for services poorly compensated or uncompensated previously, improved quality, and better care coordination. However, some physician organizations are understandably concerned that payment reforms, as well as compensation structures based on them, could have problematic consequences.

In the American Medical Association’s (AMA’s) recent report, “Pathways for Physician Success Under Healthcare Payment and Delivery Reforms,” author Harold Miller, executive director of the Center for Healthcare Quality and Payment Reform, cites one example. If separate services are bundled into an episode or combined for the purposes of a single payment, physicians’ payment may then depend on the number or cost of services other providers deliver. Likewise, physicians could be docked for poor quality care delivered by another physician.

Although it’s unlikely that the emerging payment models will directly affect physicians’ paychecks in the next year, that change is surely coming, predicts Benjamin Isgur, director of PricewaterhouseCoopers’ Health Research Institute. As reimbursement changes and ACOs and other models move into the marketplace, physicians should expect compensation model adjustments. “There is a lot more tinkering with these incentive mechanisms now,” Mr. Isgur reported. “Over the next two to four years, step two will be that as reimbursement changes, how employed physicians are compensated will change as well. But how do you develop the right mix between salary, quality, and patient experience incentives? That’s very [present in the minds of] hospital executives.”

Internist and infectious disease specialist Ardis Hoven, MD, chair of the AMA’s board of trustees, who frequently speaks on health and payment reform, urges physicians to educate themselves about current payment systems and participate in reform developments.

“Participation in ongoing quality improvement initiatives that help physicians collect data is an important first step as our system begins to explore transitioning away from a strictly fee-for-service model,” Dr. Hoven said. “The AMA will continue to provide physicians with information and educational resources on evolving payment and delivery models that aim to optimize quality patient care.” She cited the AMA’s Physician Consortium for Performance Improvement, which develops evidence-based clinical quality measures for use at the point of care. Many of those measures have been adopted in public and private health programs such as Medicare’s Physician Quality Reporting Initiative.

As the brave but uncertain world of health reform unfolds, what can physicians heading into initial practice opportunities or making a move to new ones expect in compensation models? Changes occurring now are mostly subtle, but there’s greater focus on quality incentives than in the past, suggested Jeffrey Milburn, a consultant with the Medical Group Management Association who focuses on physician compensation and financial management.

“The models we’re seeing appear to stress quality, production, and utilization incentives in the larger practices and integrated systems,” he observed. “Usually, these incentives amount to 5 to 10 percent of the base compensation, and some are set up as reward or risk only.”

What that means, Mr. Milburn explained, is that employing entities might use compensation “withholds” until physicians meet the objectives. That’s a model he doesn’t agree with because it’s inherently negative, but it’s one that’s taking hold in some large organizations. On the other end of the spectrum, progressive organizations are focusing on the positives. “Some employers are using bonus-only models, with reward only and no risk.” In those arrangements a hospital system may fund the bonus by giving physicians 90 percent of the potential sum until they meet certain objectives, at which point they’ll receive all of the bonus compensation.

The trend toward employing physicians and devising multifaceted bonus structures has gained even more impetus in the past two years, as hospitals move toward tighter alignment with or even full ownership of physician practices. Although that model gained steam in the early 1990s, it all but disappeared a decade later when it proved a deterrent to productivity.

Incentive plans, regardless of how they’re structured, are becoming more prevalent in part because of the movement toward employment and away from private practice partnership–track models, noted Peter Cebulka III, director of recruiting development and training for Merritt Hawkins & Associates (MHA) in Atlanta, Georgia. “Compensation models are a very hot topic now because of this growing trend toward employing physicians. Since 2006, we’ve seen a 43 percent drop in income guarantees,” Mr. Cebulka reported, referring to the compensation model frequently used to bring new physicians into established medical groups (see below).

MHA data also shows a decline in salary-only compensation and loan forgiveness and a sharp rise in salary plus–bonus models. Interestingly, even mid-career physicians making a move are opting for salaried employment with bonus options, Mr. Cebulka noted. “Experienced doctors who’ve run their own practice for years are seeking employment just as frequently as residents and fellows, but for different reasons,” he observed. “The residents and fellows are seeking salary plus bonus because they don’t feel capable of running a business in today’s complex medical and economic environment. The experienced physicians are capable of running a business, they just don’t want to anymore.”

These trends are revealed in findings from a May 2010 focus group of residents and fellows conducted by the national physician-recruiting firm Cejka Search in St. Louis, Missouri. Nearly 82 percent of the 150 physician participants rated produ4ction incentives as important or very important and 78 percent preferred that model to salary only or income guarantees. Only 6.5 percent preferred income guarantees, while 15 percent were drawn to salary-only positions.

“Generally, salary only is a turnoff. In conversations with hundreds of physicians every week, our consultants report that candidates are not interested in a straight salary, but a base-plus-production option. With many in debt, they want the opportunity to earn more than just a flat salary,” reported Lori Schutte, president of Cejka Search. “However, if productivity models are viewed as an attempt to manipulate physicians into working more, yet possibly paying them less, they will opt for a more secure model, thus salary only becomes more attractive.”

The era of physicians being able to choose from a reasonable variety of compensation models will likely end, Mr. Milburn predicts, if structures such as ACOs and episodes of care become predominant care–delivery models and payment based on outcomes, not services, takes hold. Physicians may also have to get used to assuming some of the financial risk their employing entities have traditionally absorbed.

“Newer doctors coming in will still receive the base compensation rate that they negotiate, I think, at least for a few years. However, whoever hires and pays them ultimately will want to switch to a compensation model that reflects how they’re reimbursed,” Mr. Milburn said. “We won’t see this tomorrow, but it will evolve over the next few years — and then employers will jump on this model.”

Understanding the Basics
Physician compensation models may vary considerably in their structure and weighing of individual components, and are expected to evolve in the coming years in concert with health reform-associated payment changes. However, there are a few basic arrangements on which most compensation methods, outside the solo practice environment, are based today. Below are brief summaries of physician compensation models and their perceived upsides and downsides.

Salary with Production and/or Quality Bonus: Hospital/Health System Employed or Private Practice

The salary-only model once common in academic centers, government practice settings, and some health maintenance organizations remains prevalent in some settings but is gradually giving way to structures that combine a base salary with a bonus based on the physician’s productivity, performance on quality metrics, or increasingly both.

In the hospital or practice setting, physicians’ production-associated compensation will be based on either net collections, gross billings, patient encounters, or relative value units (RVUs), a unit of measure that reflects the time, effort intensity, and technical skills required to perform a particular service or procedure. RVUs are classified as either total RVUs or work RVUs, with the latter more commonly used in compensation models. A perception of RVUs is that they’re not affected by a practice’s charges or collections, which means that two physicians performing the same service generate the same number of RVUs. (RVU schedules are published by Medicare.)

“One way for physicians to figure this out and compare practice production-compensation models is to familiarize themselves with national surveys that pinpoint median RVUs, and [request] concrete examples of what has happened in that particular practice,” advised Tommy Bohannon, senior director of recruiting and development training at MHA. Many practices using production-intensive models ultimately require the physicians to convert to compensation based on their individual productivity, usually a year or two into practice.

Quality metrics-based bonus structures is a fast-evolving area that is becoming more complex as care and outcomes data becomes more available. Currently the factors commonly measured, individually or combined are administrative responsibility, patient satisfaction, community outreach, peer review, service quality, and seniority. Today, quality bonuses range from 5 to 20 percent of base salary.

Regardless of the mix of production and quality metrics, most practices use models that ensure the entire income isn’t at risk based on physician performance, Mr. Bohannon explained. “A common arrangement would be that the physician receives a salary each quarter based on the number of RVUs generated in the previous quarter. They might be paid 80 percent of that sum, with the other 20 percent withheld in case you’re less productive next quarter,” he said.

Income or Collections Guarantees

Income- or collections-guarantee arrangements have been fairly common compensation models in medical groups for many years, but are decreasing in use because of regulatory concerns and as some physicians become increasingly reluctant to take on the risk of running a practice and generating revenues.

In income-guarantee arrangements, the hospital or employing practice typically provides an income for the first one to two years, based on monthly income from or collections for billed services. In essence, it’s a subsidy while the physician develops a patient base and builds the practice. At the end of the subsidy period, any sum not paid back to the hospital or group is converted to a promissory note and forgiven over time.

The catch is that these agreements typically require the physician to remain in the community throughout the loan forgiveness period, which could amount to several years.

Triangle or Practice Support Agreements

Triangle agreements occur when a hospital helps a local group recruit a needed physician and subsidizes the group, which in turn pays the physician. Triangle agreements have become more popular in recent years for three reasons: they are more compliant with the Stark laws that govern referrals, reduce a group’s financial outlay, and enable it to take a loss while the physician builds a revenue stream.

Like the income guarantee, the triangle agreement involves a forgivable loan from the hospital and a stipulation to remain in the community — not necessarily the practice — for a certain period of time. Therein lies a potential downside; if the community cannot generate enough patient or procedure volume for the physician’s practice, the physician may not wish to remain there.

“I always encourage both the relocating physician and potential employers to think about the worst-case scenario with these agreements, to have a plan for how that might play out and be addressed,” Mr. Cebulka advises. “The physician needs to feel that there’s a demand for the service they provide, because a patient base in need is what makes a practice.” A potential downside for the group is that it must share its financial data with the hospital providing the subsidy for up to five years.


One of the newest compensation methodologies to develop, incubator models are another iteration of the triangle agreement, in which the three parties (the hospital, the group, and the physician) devise an arrangement to bring the doctor to the community. The physician typically is compensated on a salary plus–bonus plan, and may work as either a solo practitioner or within an existing group’s practice. The idea is that the physician will eventually generate enough revenues to repay the hospital’s outlay.

However, in the incubator model the physician is initially employed by the hospital, not the group, with the expectation that sometime in the future the doctor will either join the group or incorporate as a private practitioner.

In incubator agreements, the physician is not required to remain in the community for any period of time, which may be viewed as a downside for the hospital. The plus for the physician and the group is that both have time to evaluate whether the relationship and practice are a good fit.

“Executive Summary: Physician Recruiting Financial Models”

This recent publication, produced by Merritt Hawkins & Associates, offers a detailed overview of prevailing physician compensation models. It’s accessible at

“Pathways for Physician Success Under Healthcare Payment and Delivery Reforms”
Published by the AMA in June 2010, this document provides a thorough review of the forces shaping medical services payment reform and how these developments may affect physician compensation. Available at no cost to members, an executive summary of the document can be accessed at

“MGMA Physician Compensation and Production Survey: 2010 Report Based on 2009 Data”
Although this Medical Group Management Association (MGMA) survey report focuses primarily on physician earning trends, national and regional, the production section offers a helpful view on a medical groups’ relative structuring of compensation components. Available for review in libraries or for purchase at

“Report on Medical School Faculty Salaries 2008–2009”
This Association of American Medical Colleges report is a potentially valuable resource for physicians pursuing academic opportunities that involve primarily teaching and research, and some or no clinical duties. The report offers details on prevailing salary ranges and income breakdowns for teaching, patient care, or research. It can be purchased at


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