Finance: How to Pay Your Doctors

December 15, 2008

Few things in medical practice can cause as much rancor as the development of a new physician compensation plan. Divvying up limited revenue bruises egos and leads to charges of unfairness - especially in oncology, with its numerous subspecialists of varying income expectations. Better know how to do it right.


“Say what? You want how much? You have to be kidding!”

Have you had a conversation like this before? Has anyone in your practice challenged the equity of your compensation system? Perhaps it’s time to update your plan.

The list of tasks that truly strike fear in the hearts of practice managers is relatively short: major building projects, a new billing or EMR system, practice mergers, and physician compensation plans all tend to create stress due to their potential complexity and proclivity to cause internal problems.

There are few issues in practice management more likely to create internal tension and disruption as the subject of physician compensation. An effective compensation plan is one of the foundation blocks for a successful practice. A good plan will address - and hopefully balance - both physician and practice objectives. A bad one will cause rancor, tension, and allegations of unfairness.

Oncology groups have a special challenge in developing compensation plans because of the nature of the specialty. Most oncology groups include multiple subspecialties, each with its own economic peculiarities. How do you draft a compensation plan for a single practice whose physicians bring in widely varying amounts of revenue while also incurring varying costs?

Here’s a primer for understanding compensation plans for oncology practices.

It is frequently said that no two compensation plans are exactly alike. Indeed, each plan ultimately reflects the culture of the group and the personality and expectations of the physicians. Yet almost every compensation plan has certain common elements. Because of this, plans can be built from a basic foundation of primary concepts and then fine-tuned to meet the individual practice objectives.

Building a compensation plan

The process of building a good plan is as much art as science. Sometimes you can just build a spreadsheet to illustrate the concept, present it to the physicians, vote to accept it, and life goes on. Unfortunately, this doesn’t always work. There may be physicians who don’t think the plan is “fair,” or there might be perceived winners and losers. This can lead to an endless stream of spreadsheets and physician meetings while everyone is trying to find a plan that is perceived to be fair - or at least equally unfair. Constructing a good plan goes beyond endless and increasingly complex mathematical models.

Many practices have compensation plans that are well thought out and meet practice objectives. A good plan is frequently evaluated and adjusted when found not to be meeting practice objectives. Experience has shown that building an effective compensation plan that meets most, if not all, physician and practice objectives comes from a series of steps:

First, understand your own objectives. The ability to recruit and retain physicians in a practice is a critical objective. Other common objectives include improved productivity, expense control, quality improvement, practice growth, and almost anything else that is strategically important to the practice and can be influenced by the compensation plan.

Evaluate your current plan in relation to your objectives. Are the physicians basically happy with the plan? Is it perceived to be fair? Do the physicians understand the plan? Can they explain it? How does compensation compare to available survey information?

Correlate your objectives to the plan components. For instance, if an objective is to increase physician productivity, a plan component might be to track individual productivity and compensate in a direct relationship to productivity. An-other objective might be to control expenses. Allocating direct and/or indirect expenses to physicians or a department is one method to encourage expense control. A plan can have multiple objectives and have a combination of individual productivity and expense allocation incentives. The possible combinations are almost infinite.

Ideally, the physicians or a physician compensation committee will be involved in the process from the beginning. They need to agree the basic objectives are appropriate, and that the plan components designed to address the objectives are relevant. In other words, try and find overall concept buy-in before individual compensation numbers start clouding the issues. If agreement can’t be reached at this point, it may be worth backing up and reviewing and adjusting objectives and plan components until there is a reasonable level of consensus.

Build financial models to see how the plan will work under different circumstances. Throw in physician production at different levels and possible expense variations. Use this information to demonstrate how the plan works. Use theoretical examples to attempt to reduce individual anxiety. Realistically, the physicians will be looking to see where they are anyway. Try and obtain consensus at this point.

Next, share actual compensation change impact information with the physicians. They must understand that almost any change to a compensation plan will affect most everyone to some degree. Make clear that there is a finite amount of money available to pay the physicians. If one physician gains under the plan, another loses. Obviously, large negative changes will be met with resistance. Major changes should be adequately supported by logic and/or survey benchmarking information.

Finally, reach a decision to accept the plan. If the groundwork (objectives and concepts) for the plan has been properly presented and accepted, final agreement is usually easier to obtain. Sometimes you need to be creative about implementation of a new program. For instance, phasing in a program over a period of months or even a year or two might make it more acceptable. Another idea might be to offer a physician operational assistance to increase productivity if he is transferring from a salary-based to a productivity-based compensation formula.

So far we’ve talked about the process of developing or building a fairly generic compensation plan. Now let’s address the inevitable variables that make each practice plan different from others.

Plan complexity

One of the primary principles of developing a physician compensation plan is to keep it as simple as possible. Simplicity makes it easier to understand and administer. Unfortunately, in today’s complex healthcare environment it isn’t always easy to have a plan that meets the simplicity principle. Following is a list of some of the issues that tend to contribute to plan complexity:

  • Single versus multispecialty practices.

  • Practice ownership.

  • Number of locations.

  • Number of physicians, as well as their ages, gender, and level of experience.

  • Revenue sources, including ancillary services.

  • Definition of a full- and part-time physician.

  • Nonphysician providers.

  • Administrative services performed by physicians.

  • Call requirements.

  • Expense control issues.

  • Practice profitability or lack thereof.

  • Practice culture.

  • Physicians’ personal issues.

  • Payer mix.

  • Availability of data upon which to base a fair compensation formula.

  • Government regulations.

The list can go on forever. There are many factors or moving parts that can influence a compensation plan and may need to be addressed in the plan development.

Oncology issues

Oncology practices have their own set of unique and not-so-unique issues that may need to be addressed. Oncology practices are likely to be, but are not necessarily, single-specialty. Single-specialty practices usually have simpler compensation plans. But in oncology, single-specialty is a misleading term because of the propensity for subspecialties such as surgical, gynecological, radiation, and even pediatric oncologists within a “single-specialty” practice.

All of these physicians are oncologists, but the earning power of oncology subspecialties varies widely - from $200,000 to $450,000 at the median level, according to a recent national survey. Obviously, an equal profit-split compensation plan wouldn’t work in such a group. It would be impossible to recruit and retain higher-earning specialists.

Another compensation factor might be related to the allocation of revenue and/or overhead from oncology practices with a variety of services. How will infusion center revenue or profit be allocated? Should a practice with multiple subspecialties that includes radiation oncology split the profits or the expenses from the radiation component? Should the entire practice pay for the equipment if all of the revenue and profit go to the radiation oncologists?

Another objective for oncology practices that is more important than most other specialties is cost control for inventory - especially drugs. Expensive new medications and treatments make drug-management a critical factor in managing an oncology practice. This is even more important now that the reimbursement changes under the Medicare Modernization Act of 2003 (MMA) have placed significant negative pressure on profit margins. You should consider a compensation plan that encourages physicians to meet payer formulary and authorization requirements.

For instance, payer payment denials might be charged back (in whole or in part) to the ordering physician, assuming the physician knew (or should have known) that payment was doubtful.

The MMA is only one of the government-related factors that affect oncology practices. A variety of government regulations, many of them confusing and overlapping, can impact your practice. The applicable rules are dependent upon the practice setting or structure, health and ancillary services being provided, and a variety of other factors. Tax-exempt, charitable, or educational organizations, for example, are subject not only to Stark and anti-kickback laws, as all practices are, but also to regulations relating to the appropriate use of tax-exempt assets.

These regulations are too complex to be addressed here. Since oncology practices are more prone than the average practice to be involved in ancillary investment and/or hospital-related activities, the best recommendation is to have an experienced healthcare attorney review and approve the final physician compensation plan if there is any possibility that government regulations may apply.

Developing the plan: A case study

With so many complex problems, it helps to break them down into smaller parts. These parts can then be addressed and hopefully put back together into a comprehensive plan.

For example, suppose your practice needs to increase profits - the objective - in order to increase physician compensation. Profits are increased by increasing revenue, reducing expenses, or both. One way of increasing revenue is to increase physician productivity. You first need to determine how to measure physician productivity. Depending on the specific situation, common measurements are gross charges, collections, and work RVUs. Each methodology has its pros and cons. Once a measurement is determined, it can then be built into your plan.

The second objective in this case is to reduce physician-controllable expenses. Educating your physicians on the expenses they can influence and assigning those expenses to them can go a long way toward encouraging physicians to make economically sound operational choices. Utilization of an RN versus an MA for clinical support, for example, or selection of less-costly medical supplies can be factored into a formula that affects physicians individually.

To pull the parts together in this example, individual physician revenue (collections) will be assigned to each physician. Direct expenses that are controllable by the physician plus other practice overhead expenses will be deducted from the revenue, resulting in profit that will be assigned to the physician. The last step might be to calculate available cash for distribution and distribute to physicians based on their relative share of total profits. All plans must be fiscally responsible for your practice to survive.

Will it work?

It isn’t a good idea to roll out a new or revised physician compensation plan without testing first. In fact, most physicians won’t accept a new plan without seeing how it will affect them individually. Running prior-year performance through the new plan is one way to do this. Physicians can see if they are winners or losers. As indicated earlier, a first step should be to get all the physicians to agree to the concept principles before they see actual numbers. If the new plan develops significant differences in comparison to the old plan, you may want to make adjustments before presenting to your physicians. The reality is that you have to sell it to the physicians.

Another test of an existing or proposed plan is to compare the individual physician compensation, adjusted for productivity and/or practice profitability, against readily available physician compensation survey data. Possible sources include the Medical Group Management Association, American Medical Group Association, the Hay Group, and Sullivan Cotter and Associates.

These and other surveys all have differences that relate to the size of sample data, available data, specialties surveyed, methodology of gathering data, etc. that affect the results. Blending data from different surveys is one way to smooth out some of the differences.

A good physician compensation plan can be compared to a retirement plan. You don’t just build it and forget it. Frequent evaluation and adjustments may be needed to ensure that your plan is meeting your objectives. Comparison to industry survey benchmarks and solicitation of physician feedback can go a long way toward the proactive management of a well thought out plan versus reactive crisis management.

Jeffrey B. Milburn is an independent consultant with MGMA Health Care Consulting Group and senior vice president of Colorado Springs Health Partners, a 90-physician multispecialty practice. Milburn has been in practice financial management and payer contracting since 1980, and has a special interest in physician compensation plan development. A former MGMA Board member, he currently serves on the MGMA Survey Advisory Committee.

This article originally appeared in the April 2008 issue of Your Best Practice: A Practice Management Supplement for Oncologists and Hematologists.