How Will Declining Reimbursement Affect Physician Compensation?

August 19, 2011

As physicians seek to escape reimbursement risk, a fair question to ask is whether the current compensation models will insulate them from that risk.

Hospitals use a variety of models to compensate physician employees, including:

• Fixed salary (often with a potential productivity or profitability bonus);
• A portion of the net earnings for an individual physician or a “pod” of related physicians; or
• Productivity-based (typically calculated on a $/wRVU basis).

The fixed salary model prevailed during the wave of physician hiring in the 1990s. Negative results from that model caused today’s hospitals to focus on net earnings or productivity-based models.

As the threat from the sustainable growth rate formula has increased, so has physician interest in hospital employment. As physicians seek to escape reimbursement risk, a fair question to ask is whether the current compensation models will insulate them from that risk.

Compensation Based on Net Earnings

The net earnings model is based on revenues and expenses. This model, therefore, would be directly and immediately affected by reimbursement cuts. There are potentially mitigating factors, though. This model is most often used for primary-care physicians. Healthcare reform’s focus on primary-care physicians makes it unlikely that their reimbursement will be cut significantly, if at all.

On the other hand, a specialist should consider a variety of factors to assess a net earnings-based compensation offer, including the likelihood of cuts to the specialist’s most frequently-performed procedures.

Productivity-Based Compensation

The productivity-based model is most often used for specialists. Compensation under this model is determined by the number of wRVUs a physician generates multiplied by a per-wRVU rate stated in the employment agreement. Reimbursement cuts should not change the number of wRVU associated with any procedure. The essential analysis, therefore, is whether and how the rate - the number of dollars per wRVU - might change during the employment term in response to reimbursement cuts.

Typically, the initial dollar amount assigned per wRVU is based on specialty- and location-specific per-wRVU compensation survey data reported by MGMA, AMGA, and/or Sullivan Cotter. The rate may be fixed or subject to periodic review against then-current market survey data. If fixed for a lengthy period (e.g., for a 5-year initial term), then the physician has rate security for 5 years. If subject to period review (e.g., annually or bi-annually), then the physician and hospital face the risk of a change in the rate. This risk can be mitigated by creating a “risk corridor” - language that limits a rate increase or decrease by more than x percent following each review.

Does a fixed or variable rate benefit the hospital or physician? An unscientific survey of experts confirmed my personal opinion that it is virtually impossible to predict. Fixing the rate for 5 years based on today’s survey values does not clearly benefit the hospital or physician because market compensation might go up or down during that period. This might seem counter-intuitive given the likelihood of reimbursement cuts. At least four factors, however, will very likely cause survey-based compensation rates not to vary with reimbursement cuts.

First, there is no direct correlation between year-to-year Medicare reimbursement rates and physician compensation. This is not surprising considering the variety of factors that affect physician compensation and that a decreasing number of physicians are compensated pursuant to a method (like net earnings) directly tied to reimbursement levels.

Second, greater competition for fewer specialists should maintain “price pressure” on hospitals. Physicians in demand will likely see little, if any, correlation between their compensation and reimbursement rates.

Third, even if there were a correlation between reimbursement rates and compensation, it would take years for a substantial reimbursement cut to “show up” because survey reports are typically based on compensation data that is, on average, at least a year old.

Fourth, the increasing prevalence of hospital employment and the nature of hospital employment compensation should mitigate the effect of any correlation in the survey data. If most physicians in a specialty were owners in private practices, then one would expect the compensation reported in the surveys to be very sensitive to reimbursement levels. Considering the sea change from private practice to hospital employment and the prevalence of non-net-earnings-based and multi-year fixed productivity-based models in hospital employment, one would expect the survey data to demonstrate even less correlation to reimbursement levels.

In conclusion, depending on a physician’s specialty, hospital employment can provide a relative sense of clinical compensation security under any of the typical models. In addition, if the method to determine per-wRVU compensation is sound, then a physician should not be too concerned whether the per-wRVU rate will be fixed or vary with future market survey data.

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