Physician Compensation Models: The Basics, the Pros, and the Cons
Published: Oct 18, 2011
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.
Career Resources Editor’s Note: Upon completion of training most physicians will enter practice with significant educational debt loads, will face skyrocketing medical malpractice insurance premiums, and will be starting families as well as professional careers. These financial obligations make equitable compensation all the more essential. Consideration and understanding of the intricacies of the specific compensation model offered by the prospective employer is crucial. Even more important is whether a job is one the physician truly feels will contribute to his or her professional development and provide satisfaction and enjoyment.
— John A. Fromson, M.D.
By Bonnie Darves, a Seattle-based freelance health care writer.
Compensation models have become less complex than they were in the 1990s, but it’s important to know the basics when evaluating practice opportunities.
For most young physicians who are choosing their first practice opportunity, selecting among compensation plans isn’t likely an option. Contract terms may entail some room for negotiation, but compensation models are well established for most medical groups, hospitals, and large managed care organizations.
The good news is that the complex physician-compensation structures of the early and mid-1990s, when managed care was prevalent, have been largely abandoned. During that period, income was based on numerous factors beyond billings or revenues. These included such difficult-to-quantify items such as corporate citizenship, committee duty or governance responsibilities, and patient satisfaction.
“Compensation plans in the 1990s were very complicated, and included such things as participation in the group and patient satisfaction, which involved very complex formulas. Today, they [models] are moving back to a focus on productivity, efficiency, and the amount of dollars a physician brings in,” says David Cornett, regional vice president of client services for Cejka Search in St. Louis, Missouri.
Today, most compensation models are primarily based on either a salary or a net- or gross-revenues basis, with some type of bonus or incentive component. Most income packages new physicians are offered are determined primarily by regional market factors and compensation surveys conducted by organizations such as the Medical Group Management Association, the American Medical Group Association, and the American Medical Association, among others.
“Ninety-nine percent of the time, compensation will be consistent with the marketplace. That’s the bottom line,” says Hobart Collins, a principal with the Medical Group Management Association in Englewood, Colorado. Although some contract terms regarding time to partnership, work schedules, or incentive structures may offer some room for negotiation in markets where certain physician specialties or services are in short supply, Hollins notes, most young physicians should expect their compensation to reflect what other physicians with comparable skills and experience will earn. For that reason, in selecting an opportunity, physicians should focus less on the compensation model and more on whether the position is a good fit.
“It would be a mistake to make a decision based solely on the compensation model. Look first for the right opportunity — clinically, professionally, and personally,” Collins says. “Physicians should remember that the groups they join all will have arrived, after years of discussion, at the compensation plan that works best for them.”
These days, physicians are not likely to see wide variations in compensation structures. The prevailing model now is a salary or net-income guarantee with a potential bonus or incentive add-on, says Mark Smith, executive vice president of the national recruitment firm Merritt Hawkins and Associates of Irving, Texas. “Compensation has never been so simple, and the vast majority of physicians starting out will be compensated with a salary plus a bonus or incentive of some type,” Smith says. “So the issue for comparison purposes becomes: What is that incentive or bonus, and when and how does it kick in?”
Jennifer Shu, M.D., a New Hampshire pediatrician, discovered early on that the way an incentive plan is structured is more important than the fact that it’s available. When she accepted her first job out of residency in San Diego, she was offered the opportunity to earn up to an additional $10,000 a year provided her billings exceeded a certain amount at year-end. The problem was that the higher earnings were unrealistic.
“The bar was set so high, it wasn’t humanly possible to [earn] the incentive payment,” Dr. Shu, a former board member of the American Medical Association’s Young Physician Section, recalls. “Until you get into the practice setting and figure out how many patients you can see and still provide good care, it’s hard to know whether the incentive plan is realistic.” Now in her eighth year of practice, Dr. Shu urges physicians who are offered incentive plans to request details about how the plan works in practice — not theory — and whether young physicians have actually received incentive payments.
Collins explains that the bonus or incentive in any event is likely to be “of modest potential” for the first and second years of practice, as most groups hope to merely “break even” on the newly hired physician in the first year.
Despite the move toward less complexity in compensation models, some young physicians may find themselves with a steep learning curve when they’re changing jobs or trying to weigh one opportunity against another. Anthony Barile, M.D., an infectious disease specialist in Melbourne, Florida, experienced an eye-opening adjustment when three years ago he moved from his first position with the U.S. Navy to a 100-physician multispecialty practice. “Basically, I went from a position where I was paid according to my rank to one with a very complicated compensation formula,” says Dr. Barile.
Now working under a productivity-based compensation structure (see description below), Dr. Barile is paid 50 percent of his own collections, with the remaining 50 percent earmarked for overhead expenses. He also receives a quarterly bonus based on revenues from the group’s ancillary services, such as laboratory, radiology, and cardiac catheterization services, in a complicated formula that provides a higher percentage of those revenues to partners than to nonpartners. Admitting that it’s taken him nearly three years to make sense of the compensation plan that dictates his earnings, Dr. Barile recommends that physicians ask for a detailed illustration of how the plan works in practice.
Even if there’s little room for negotiating a compensation model or amount, it’s important, nonetheless, to gain a basic understanding of the different prevailing models. Physicians should understand not only how these models are structured, but also how the compensation plan may affect practice dynamics, group-member relations, and long-term earning prospects. Following are common compensation models physicians are most likely to encounter during their job search and each model’s possible pros and cons.
Straight salary/minimum-income guarantee or salary plus bonus/incentive. Most often seen in large HMOs, academic settings, and large corporate- or physician-owned practices, these closely related models are perhaps the most straightforward, because the income level is set and physicians know how much they’ll earn. When a bonus or incentive is added in, physicians should inquire about how, when, and under what conditions the sum is paid. The minimum-income guarantee, with or without bonus, is the most prevalent model today for new physicians starting out.
Pros and cons: These salary models are essentially worry-free for young physicians, so they offer a sense of security. But without the bonus component, which is usually based on the group’s total earnings, they offer little long-term financial incentive if there is no “ownership track,” and may ultimately either discourage entrepreneurship or support minimum-effort work standards.
Equality/equal shares. This model, considered the easiest from an administrative standpoint, is based purely on economics: after expenses, the remaining revenues are allocated equally among the group’s physicians.
Pros and cons: On the plus side, this structure discourages over-utilization and doesn’t require complex mathematical formulas. The possible downsides are that the model presumes all physicians are equally skilled, equally productive, and most importantly perhaps, equally motivated to work in the group’s best financial interest. That means “high producers” have little long-term incentive and low producers may be allowed to ride on the financial coattails of the more productive physicians. Nonetheless, many single-specialty groups adopt this model on the premise that all services, even those for which reimbursements are lower, are valuable and necessary to a group seeking to operate a full-service practice.
Production- or productivity-based compensation. This model, with its myriad variations, can be fairly complicated. Essentially, physicians are paid a percentage of either billings or collections, or they are paid based on the resource-based relative value scale (RBRVS) units assigned to procedures or patient-visit types. The overhead costs of the practice — both fixed and variable — are allocated among the physicians.
Pros and cons: The possible advantage of this model is that it both encourages and rewards extra effort by individual physicians. In that also lies the potential downside: it can create a competitive intragroup environment that some physicians might not find appealing or that can deter citizenship. The productivity model and relative overhead allocation can also be difficult to manage administratively and politically. “Physicians need to understand their personal objectives. If they’re interested in a very collegial environment, they might not want to be in a group where each physician is paid on his or her own production, because that will be pretty competitive,” says Cornett.
Physicians should also determine whether their earnings in a productivity-based scheme will be based on their billings or on collections. If earnings are collections based, it behooves the physician to determine what percentage of billings the group typically collects, as well as how quickly — or slowly — reimbursement is received.
Patient mix also comes in to the picture in productivity-based compensation, so it’s advisable to inquire about relative percentages of commercially insured, Medicare/Medicaid insured, and uninsured patients seen in the practice, as well as how new patients are assigned. For example, a physician whose patient base consisted primarily of Medicare or Medicaid patients would earn less than a counterpart whose patient base was primarily commercially insured, as Medicare/Medicaid reimbursement tends to be the lower of the two.
Capitation or productivity plus capitation. The concept of capitation — prepaid health care premiums allocated to contracted provider groups for all coverage or specialty-services coverage of a defined enrollee population — became prevalent in the late 1980s and early 1990s. Capitation is still present in certain HMO-intensive markets, such as California, Minnesota, and the Northeast. Translated into a compensation model, capitation involves distribution of health plan payments among physicians in a nearly equal manner or based on some type of formula.
Pros and cons. On the plus side, capitation rewards groups, and in turn those groups’ individual physicians, who deliver cost-efficient, effective care. However, from an economic standpoint, capitation-based income is dependent on marketplace factors and a group’s negotiating prowess, which means that overall income levels may wax or wane from one year to the next. In addition, because global capitation contracts may entail providing all services to a group of patients, a high percentage of catastrophic diagnoses may negatively affect the group’s bottom line, and therefore individual physicians’ income levels.
On a final note, regardless of the compensation model in place at the hiring practice or entity, young physicians should calculate their living expenses and monthly personal budgets based on the compensation amount that is guaranteed. It’s not advisable to count on a year-end bonus, even if it looks likely, because unforeseen factors could affect whether the bonus actually materializes.
Questions to Ask and Issues to Consider When Evaluating Compensation Plans
Determine how the compensation plan works, initially and at different points in time. It is perfectly reasonable for a physician to ask how much he or she will be paid in the first year and in subsequent years. For example, if the first one or two years’ salaries are fixed, and compensation then moves to a productivity basis, ask for details on how the transition is handled and how other physicians have fared in year two or three. The bottom line, Merritt Hawkins EVP Mark Smith says, is that “if physicians can’t determine how much they will earn while they’re brushing their teeth, the [plan] is too complex.”
Inquire about how overhead expenses are allocated. In most cases, newly hired physicians will receive a “grace period” in the first year from financial responsibility for overhead. But those expenses, which could equal up to half of a group’s revenues, may be a significant consideration when the physician becomes a partner or shareholder. “Physicians should ask whether there are any limitations based on overhead,” Smith advises. “For example, if there’s a net-income guarantee of $175,000 and only $5,000 monthly is allowed for overhead, that won’t work well.”
What is the income-distribution methodology for partners or stockholders? Even if the position will be straight salary initially, physicians should inquire about how income is distributed among the group’s partners, and which factors, if any, affect the proportional distribution among individual physicians.
What is the buy-in and how does it work? Since many practice positions involve either net-income guarantees or salaries in the early years, entrepreneurial physicians who desire an ownership position should request the details if they’re considering more than one position. A five-year partnership track may be far less appealing than a two-year track, for example, and the longer route to partnership may mean less long-term earning potential.