Sustainable Income? Understanding the Benefits and Risks of Various Compensation Models

By Thomas Crawford, MBA, FACHE, faculty, Department of Urology, College of Medicine, and affiliate faculty, Department of Health Services Research, Management and Policy, College of Public and Health Professions, and Ellington Jones, MHA student, Department of Health Services Research, Management and Policy, College of Public Health and Health Professions, University of Florida

Thirty-two percent (32%) of physicians “leave to seek higher compensation” (Cejka Search, 2009, “Key Findings”). Unfortunately, resident physicians and early careerists may enter into contractual arrangements with a lack of remuneration insight, which could significantly impact their expected compensation immediately upon employment or shortly thereafter. From multi-specialty groups to partnerships to hospitals, the physician shortage has created a wealth of employment opportunities and an array of compensation models.

This article will highlight the most prevalent compensation models, their advantages, and the potential disadvantages. The nomenclature may change from location to location; however, the premise behind each model and the potential areas of concern remain consistent. 

Employed Model
A straight employment model mitigates the risks inherent in other models by ensuring the contracted salary is guaranteed; nevertheless, depending on the term (evergreen versus a defined period of time), there are two potential pitfalls to be aware of.

An evergreen employment contract continues indefinitely, remaining in effect until either party terminates it. One of the keys to negotiating an evergreen contract is ensuring that cost-of-living adjustments (COLA) are contractually obligated by the employer. For example, if you negotiate a competitive employment contract today that does not include COLA, you risk your base salary eroding under the weight of inflation as a result of not receiving raises in future years.

An employment contract for a defined period of time guarantees salary over the course of the agreement, and like the evergreen contract, COLA and/or annual salary increases should be included. Additionally, pay specific attention to the parameters for contract renewal to ensure that your ending salary will be the baseline for negotiating your next contract. By creating a compensation “floor,” you will lessen the risk of salary reduction. Consider the following example: a pediatrician signs a three-year employment contract for $150,000 per year with a minimum guaranteed COLA increase of 3 percent per year. The pediatrician’s practice grows steadily; however, due to a poor payer mix (insurers, bad debt, and charity care), the group practice loses money on the pediatrician’s practice during the course of the agreement. When the three-year contract is up, the executive director of the group practice begins the new contract negotiations with a base salary of $125,000, because the contract renewal language did not specify an auto-renew and/or guarantee that any subsequent contract would be based on the final year’s base salary, or compensation floor.

The advantage of the employment model is that it mitigates the risks assumed by the other models, and it guarantees a contractually defined salary during the life of the contract. 

Net Revenue Model
Net revenue models generally include a smaller base salary plus a percentage of the net revenue (net receipts minus practice expenses going back to the physician). On the surface, a net revenue model contract may appear to be an employment arrangement with an opportunity for a bonus. However, you need to make sure your base salary is competitive and you are fully aware of the allocation of direct and indirect expenses that might limit your income potential. 

The advantage of the net revenue model is that it mirrors the concept of a private practice in that it rewards physicians for their sweat equity by giving all or a predefined share of the net revenue back to the physician. To ensure this model works to your advantage, you need to fully comprehend how all direct and indirect overhead will be expensed against your practice.

Income Guarantee Model
An income guarantee model generally poses the highest financial risk of all the compensation models because your practice is essentially commenced on a loan. The physician is provided capital as a lump sum or a monthly draw, which acts as a loan that allows you to commence your practice, draw a salary, pay for fringe benefits and, if applicable, offset practice operating costs while you begin seeing patients and generating revenue. Nevertheless, at the end of the income guarantee period (generally one to two years), the loan dollars you have utilized will be applied against the revenue you’ve generated. If by then you haven’t offset/repaid the loan, you could find yourself in debt and in a position of needing to lower your own salary to cover your practice costs and the unpaid portion of the loan. In some instances, the unpaid portion of the loan will be forgiven over time; however, if you decide for any reason to leave your practice before the end of the forgiveness period, you may owe a prorated portion of the loan plus interest.
The advantage of the income guarantee model is that you have the autonomy and flexibility of being self-employed within a private practice with a financial buffer as you begin to build your practice. However, before accepting an income guarantee, you need to produce a business plan that outlines volume projections by payer mix and is supported by a thorough market assessment.

Productivity Model
Productivity models can take a couple of forms. It can look like classic capitation, where the physician is paid a lump sum to care for the patient for a given time period, or it can be in the form of an adapted model, where a physician is paid a preset blended fee per patient visit regardless of the services performed. Additionally, there are numerous similar models that utilize the work relative value unit (WRVU) as a basis for income generation. A WRVU, one of three components of a relative value unit (RVU), is a weighted numerical indicator that reflects the complexity and time associated with a service. A more complex and time-consuming service will be reflected in a higher WRVU and, consequently, a higher payment. Much like the adapted capitation model, a physician may be paid a predefined amount per WRVU generated. The WRVU is commonly benchmarked to determine how productive a physician is, and it might be utilized by an employer to determine bonuses or the following year’s salary (in the case of a hybrid employed-productivity model).
The advantage of the productivity model is that it provides a predetermined reimbursement amount per patient or for the work performed (WRVU), which should be blended or blind to the institution’s payer mix, and it rewards the physician for the number of patients seen and the complexity of each visit. Nonetheless, much like the income guarantee, thorough business planning is required to ensure that you will be able to generate your desired income while maintaining your quality of life.

Conclusion: Why Does This Matter?
Understanding the various compensation methodologies and how they impact income is critical for every physician. Individual physicians’ clinical choices, as well as the impetus to increase or decrease services to patients, are affected by specific financial incentives and the different ways in which physicians are compensated (Reschovsky, Hadley, & Landon, 2006). Ultimately, your contentment with and knowledge of how you’re getting paid for the services you render play a significant role in the quality of the patient experience and the quantity of services you’re able to provide. Lastly, remember: health care is a service industry, and in order to have a sustainable practice, you will need patient volume. This may seem obvious; however, as a fundamental component of your due diligence, you must ensure that there is a market demand for your services. The volume projections should influence your employment model and may be the determining factor in whether you’re able to put down professional roots or leave to seek higher compensation.

References
Cejka Search. (2009). Retrieved from www.cejkasearch.com/Physician-Retention-Survey/2006RetentionSurvey/default.htm

Reschovsky, J., Hadley, J., & Landon, B. (2006). "Effects of Compesnation Methods and Physician Group Structure on Physicians' Perceived Incentives to Alter Services to Patients." Health Services Research, pg 1200-1220 (41:4).