Urging a Balanced Approach to Physician Compensation

Dont be surprised when you get what you value . . . and not what you dont!
Hospitals are acquiring physician practices at unprecedented rates. In fact, for the first time in history the number of physicians in private practice has been eclipsed by those employed by hospitals or health systems (see Figure 1). The motivations behind these acquisitions are many, but certainly one of the most significant beyond the simple financial stress practices are under is the desire to create an integrated delivery system. Having physicians inside a health systems umbrella is a powerful start to aligning incentives and building an entity capable of accountable care delivery. However, this wont simply happen as a byproduct of employment. Physicians, like all human beings, respond to their reward system. The more something is valued through your compensation plan, the more of that thing you will tend to get. Conversely, that which provides no compensation will flounder. It is therefore 80% Physicians paramount that hospitals and 70% health systems think carefully 60% about the compensation plans 50% instituted for employed 40% Hospitals physicians. Quite literally it could 30% mean the difference between 20% success and failure for your 10% integrated system. 0%
2002 2003 2004 2005 2006 2007 2008

Percent of Medical Practices Owned by . . . Source: Medical Group Managers Association (MGMA)

Mistakes of the 90s Still Haunt Us One of the main lessons learned from the 90s was that a significant drop in production usually accompanied a fat guaranteed salary. Thus, in todays round of employment by hospitals and health systems, most compensation is derived largely from production. However, employers of physicians would be shortsighted to think production-based compensation will cure all ills. Every method of financial reward carries with it certain advantages and disadvantages. Like many things in life, the key is to find a proper balance. The legacy of the 90s is still with us today, particularly around the topic of guaranteed salary. This form of compensation became the poster child for hospitals ignorance in managing physicians and, for many, is still anathema today. The premise against a salary for physicians is that once theyre financially comfortable, theyll stop working or at least cut back considerably. Evidence from the 90s supports this, but to be fair adverse natural selection also played a key role. A large percentage of the physicians who made the switch back then were in the twilight of their careers and, even absent hospital employment, probably would have cut

back production. The other group most likely to convert was underperforming physicians. In both cases, the outcome was largely predictable. There is nothing inherently wrong with salary based compensation. I would wager that none of the health system executives reading this article are paid entirely on productivity measures; a significant portion if not all of your compensation is derived from a fixed (guaranteed) salary. So why is it that executives can be trusted to work hard under a salary, but physicians cant? The truth is they can. Getting the results we would expect The old adage in compensation is, whatever you reward you will reap. It is therefore wise to consider carefully what we reward because well get a lot of it. In dramatic reaction to the 90s, it is currently very popular to have employed physician compensation derived entirely from production. Production is often measured by the physician work component of the Resource Based Relative Value System (RBRVS) established by the Centers for Medicare Services (CMS). In this model, the physician is rewarded exclusively for direct patient contact in the clinical setting. Since third party reimbursement (revenue) is also established based on the RBRVS, this method of compensation seems highly logical. However, health executives are often frustrated by physicians apparent lack of willingness to commit time to non-production activities like quality committees, marketing and public relations endeavors, cost reduction initiatives, etc. All very valuable endeavors, but which will take physicians away from income generation. Going out on a limb, I would hypothesize that if health executives were asked to take on additional responsibility and take a pay cut in the process, similar resistance would emerge. We should therefore not be surprised when we concentrate all of a physicians value on one activity that this becomes his/her sole pursuit. Unintentionally we have de-valued all other critically important assets each physician brings to the organization. Rewarding Non-Patient Contact Activities There are myriad ways to compensate physicians for activities outside the patient contact realm. The key is to keep the methodology simple and understandable so its easy for a physician to know when additional compensation has been earned and how much. Additionally it must be set at an amount that is motivating without creating competition for core clinical activities. In other words, balance. If you are compensating patient contact activities on a work RVU or other production basis, then converting other activities into these same units can make sense. For example, each quality meeting a physician attends is worth XX wRVUs (or other unit), where the XX is consistent with the amount he/she could earn in a similar amount of clinical time. It may at first seem daunting to calculate an average units per hour for the clinical setting, but it can actually be quite simple. Using a physicians total annual production, regardless of the units being measured, divided by annual hours worked will get there. Hours worked is a bit elusive, but with just a few minutes of logical calculation, it can be mutually agreed upon.

Another method that can be employed is to enhance the units themselves when certain benchmarks are achieved. This can be particularly useful when instituting quality improvement initiatives. For example, a physicians standard compensation is $XX per work RVU. However, if she meets or exceeds all of the defined quality metrics within her control, that rate would be enhanced to $XX plus 10%. This incentive could be an all or nothing proposition, or proportional to the success achieved (60% of incentive payment if achieves 60% of metrics). In the example above, the desired outcome is achieving certain quality metrics. However, the same approach can be employed for other valuable outcomes. Electronic health record implementation (usage), on-time surgery starts, formulary compliance and use of in-system consultants are just a few examples. For some activities, incentives based on a percentage or even just a flat amount are most appropriate. Almost every organization is working hard to control expenses, particularly staffing, so allowing physicians to participate in the savings for areas they control can be motivating or at least lessen resistance to the inevitable personal impact. Group purchasing requirements is another area rife for this incentive model. The keys to any incentive payments are that they are: a) significant enough to motivate, but not so large that it competes with core clinical responsibilities; b) precisely and accurately measureable; c) within a physicians direct control; d) easy to understand and calculate; and e) paid timely to the achievement. Given the heavy regulatory scrutiny on payments to physicians, it is always wise to run any incentive plan through legal counsel for compliance. Were All in this Together In an era of accountable care, coordinating care across the entire health spectrum will become paramount. This will require integration amongst providers beyond levels within most health systems today. If this indeed is the case, perhaps compensating physicians predominantly on his/her own production is antiquated. A very powerful tool to promote group-wide thinking is to pool compensation. In other words, where compensation derived from each individual physician is joined together in a pool, then paid down to the individual on some other basis than simply personal production. For instance, 10 percent is shared equally, with 90 percent paid based on individual production. Another component might be based on quality, either at an individual level or departmental (ie, cardiology together). There are nearly unlimited methods within the pool, the trick is to tailor a balanced approach based on your individual needs and culture. Here again, it is wise to have any pooling method blessed by legal counsel before implementing. As a general rule, such plans can be changed no more frequently than annually and cannot be based on referral patterns. For many physicians and institutions, even the concept of pooling raises blood pressure. The truth is none of us know exactly what the future holds and how healthcare will be paid. We

know for sure quality is entering the mix in some manner. Further, we know that quality can be impacted by myriad points along the healthcare spectrum; it is not controlled by just one physician. The same goes for patient experience and/or satisfaction. Thus, a compensation plan that rewards multiple facets not just one and transcends the individual for the team seems logical. In Conclusion Most hospitals and health systems are acquiring physician practices as part of an overarching plan to better coordinate care. This is a laudable goal, but not one that will happen organically simply because the logo on a paycheck has changed. Specific and intentional strategies must be employed that promote coordination. We further understand that physicians are unquestionably the most influential drivers of quality, cost and patient experience, and that a significant (if not top) motivator of physician behavior is the plan under which they are compensated. All of this should lead us to take great care in developing a physician compensation plan, one that takes into consideration the strategic initiatives of our institution and places commensurate value on each. History is a valuable teacher, but we need to make sure we understand her lessons. Guaranteed salaries are not inherently bad, but one dimensional compensation plans (whether based solely on salary or production) may not create appropriate incentives to take our organizations where we want them to go. Although no one knows for sure where healthcare is heading, we do know that payment for quality (which may include patient experience) is taking on an expanded role. We further know that improving quality and therefore revenue takes more coordination than our current state. It is therefore incumbent on us to develop a physician compensation plan that is both multi-dimensional and flexible. In other words, balance. Joel R Sauer Sauer Consulting, LLC 2819 Dunlap Lane New Haven, IN 46774 (260) 245-1015