A recent study by the American Medical Group Association found that over two-thirds of U.S. medical groups use productivity-based systems to determine at lease half of physician compensation.

Many practices, especially single-specialty groups, are finding that productivity-based compensation models can be more fair and equitable than other models, such as capitation or fixed-salary models.

Healthcare industry consultants also point out that, for some practices, introducing activity-based compensation schemes can also greatly reduce the squabbling and resentment that other compensation systems can engender when it appears some physicians in the group aren?t pulling their full weight.

And, as you might expect when physicians are paid based upon their work output, productivity itself improves, as measured by number of patients seen, procedures performed, and technical services ordered. Analysts also note that when a practice switches to a productivity-based system, doctors who before were careless and inaccurate in their coding, often became masters of CPT coding as it became apparent that effective coding directly affected their compensation.

But production-based compensation might not resolve all arguments about fair pay. Oftentimes the sticking point is how to allocate shared costs, especially fixed overhead costs.

Making a decision to join practice is one of the most important business decisions you will make in your career, so it?s critical that you understand and accept the practice?s method for calculating physician compensation and allocating costs. In this article we offer a brief overview of the various methods employed and their relative advantages and disadvantages.

Most physician compensation plans use some form of productivity measurement in determining compensation because productivity measures are generally reliable and consistent.

Commonly used measures of productivity include:

  • gross charges – the total amount billed by a practice for its services;
  • net revenues or net collections ? the total amount actually collected after adjustments;
  • patient encounters  total patients seen by a physician;
  • Relative Value Unit (RVU) a relative measurement of the amount of work necessary to provide a particular service;
  • Payer mix the type and relative percentages of the sources of practice revenue, e.g. private, Medicare, HMO, etc. – important because of the wide range of ?acceptable charge rates?.

Note that these productivity measurements are commonly used for clinical activities, but some compensation plans may also incorporate productivity measures for non-clinical activities such as referred technical services.

Gross charges reflect the total services billed by the practice at the standard fee schedule rate before any adjustments are made. Gross charges are easily obtained from practice management reports. The use of gross charges within an organization is a reliable and consistent measure of productivity. However it is not useful in benchmarking with other practices because significant variations in fee schedules exist across different practice settings.

Net Revenues or Net Collections reflect the total services billed if the practice uses an accrual basis of accounting – or the total dollars actually collected if the practice uses a cash basis of accounting – over a given period of time after any adjustments such as contractual allowances have been made.

As a productivity measure, net revenues is easily obtained and is a reliable and consistent measure. However, it is significantly affected by what’s known as the payer mix. For example, if one physician in the group sees more patients whose insurance pays the practice less than other insurers for the same services, that physician?s productivity can be adversely affected.

Remember too, that Net Revenues or Collections also reflects how well or how poorly the business side of the practice performs in collecting monies owed to the practice, so be sure to research and become familiar with this aspect of how the practice operates.

To be fair and equitable, a productivity-based compensation system within a healthcare practice must measure and balance the work output of each physician with the total overhead and other shared expenses associated with running the practice.

Factors to value and consider on the compensation side of the equation include:

  • Base physician salary (based on factors such as training, stock ownership)
  • Productivity (based on RVUs, charges, or collections)
  • Marketing efforts for new referrals and patients
  • Medical Pratice Management functions
  • Number of on-call dates
  • Number of hospital visits
  • Patient satisfaction
  • Tenure/seniority

Equally important to a fair system is the equitable allocation of shared practice expenses. There are numerous methods employed for expense allocation and each practice must adopt a formula that works best for their particular work culture.

Popular allocation methods include the following:

  • Share expenses equally between physicians. This works best when all physicians in the group work and generate income on a fairly equal basis;
  • Divide expenses based on individual physician?s net revenues, using a monthly recalculation;
  • Allocate non-individual, group expenses based on each physician?s gross charges;
  • Measure and track non-shared direct expenses for each physician, e.g. a personal receptionist or administrator, additional office space.

Particularly in practices where there is a great variance in physician productivity, it’s crucial to determine the factors that will affect your personal compensation. You also need to understand that, as a new physician, you will be facing a ramp-up period of perhaps a year or more as you build your practice and become a high-level producer for your practice.

No matter what compensation model is adopted by a practice, it is inevitable that not everyone will feel that is completely fair to all, especially when it comes to measuring and valuing work product, and when allocating shared expenses.

The best protection against a productivity-based compensation system creating more problems than it solves is to make sure that all participants understand, agree and accept the measurement and valuation methodologies. It’s also critical that the compensation system be re-visited frequently and revised when necessary.

About the Author:

Wesley D. Millican, MBA, CEO and Physician Talent Officer of CareerPhysician Advisors, LP, and CareerPhysician, LLC, provides comprehensive talent solutions for academic children’s hospitals, colleges of medicine and academic medical centers across the nation. He possesses a longstanding passion for career development of all young physicians and serves as a go to career resource for training program directors and their residents and fellows. In continuing his commitment to the “future of medicine”, Mr. Millican speaks nationally at residency and fellowship programs. His Launch Your Career® Series is a proven resource for today’s residents and fellows and has served as a go to resource for program directors over the last 15 years.