Physician Compensation: What’s the Right Formula?

November 8, 2012

In our 2012 Physician Compensation Survey, we asked physicians from around the country how - and how much - they're being paid. Here's what we learned.

Physicians employed in the clinic division of ProHealth Care Medical Associates are accustomed to being paid based on how productive they are. But that's changing - fast.

"We've told our physicians that on an annual basis we will at least reevaluate the physician compensation plan," says Peter Geiss, a nonpracticing internist who is president of the clinic division at the large integrated health system in Waukesha, Wis. "...The way you compensate physicians has to reflect the marketplace you are in, and how you are being compensated by payers."

Already that reevaluation has resulted in some big changes for 110 primary-care and OB/GYN physicians employed in the clinic division. Since July, ProHealth has tied 10 percent of their compensation to patient satisfaction scores and their performance on quality metrics. "As payers begin to move from fee-for-service to more value-based payments ... we will probably put a greater percentage of physician compensation reliant on performance on quality metrics and patient satisfaction scores, and probably, efficiency with which care is delivered," says Geiss.

* (To see the data, check out the details of our 2012 Physicians Compensation Survey here.)

Productivity-based compensation continues to dominate the market, according to our annual Physician Compensation Survey.
But experts say the number of physicians who encounter nonproductivity-based compensation incentives (like the ones implemented at ProHealth) is increasing, as is the total amount of compensation that is being tied to those incentives. "Everybody's beginning to think about what value-based care is going to mean, and so I think that's driving everybody to think about whether or not a primarily productivity-driven [compensation] model creates the right incentives on a go-forward basis," says Mary Witt, senior vice president of national healthcare management and consulting services company The Camden Group.

Here's a look at those physicians who can expect to encounter compensation changes first; how nonproductivity incentives are measured; the pace at which these incentives are picking up steam; and some tips for how you can adjust and thrive when you encounter them.

Taking the lead

Hospital-affiliated practices are taking the lead among practices when it comes to incorporating nonproductivity incentives. But even some larger independent groups are jumping on the bandwagon, says Witt. "There's still, I think, a lot of skepticism in the physician community as far as how things are going to change, but I think people, especially after the Supreme Court decision [on the Affordable Care Act], are beginning to realize it's likely that there are going to be changes, and they have to be able to think about what implication that has for their compensation methodology."

Those changes include the shift from volume-based reimbursement to value-based reimbursement through health reform initiatives like the Medicare Shared Savings Program, Patient-Centered Medical Homes, and other federal and private payer programs.

Still, many private practices are lagging when it comes to incorporating nonproductivity incentives, says Justin Chamblee, senior manager at hospital and physician-practice consulting company The Coker Group. The reason is that insurers continue to base their payments to providers mostly on the existing fee-for-service model.

"If all the revenue that's being generated is based on professional services," Chamblee says, "it takes a concerted effort for the practice to take a portion of those funds and use it to incentivize quality or other related matters. Until there is, what I would call 'third-party' funding from a hospital for certain quality initiatives or from a payer for those types of initiatives - those nonproductivity-type incentives are not as much in play in a private practice as they are in hospital-employed settings."

Testing the waters

Beyond funding issues, there's the problem of how to fairly measure nonproductivity incentives, says William Reiser, vice president of product development and decision support for Halley Consulting Group, a national physician practice-management and consulting firm. "We know that the value of the care, the value-based reimbursement, the quality of care - all of that is very important, but I think we're still struggling within the industry to really define it in a way that makes it fair and equitable to place a physician's compensation at risk based upon that," he says.

For example, limited data-capturing abilities make it difficult for many practices to glean meaningful, reliable information, and therefore, fairly measure a physician's ability to meet certain quality targets. There are also fairness issues when it comes to measuring patient satisfaction. At ProHealth, for instance, "There's some concern [among physicians] about the metrics themselves, especially the patient satisfaction metric," says Geiss, adding that the health system is currently "reworking" its measures to address those concerns.

As a result of measuring difficulties, practices that are incorporating nonproductivity incentives are doing so slowly, says Reiser. "Most start off with a pretty lofty goal and say, 'We want to really focus on quality rather than productivity,' and then when they look at their systems and try to figure out how they will actually measure it, it becomes somewhat problematic," he says. "So they find themselves … deciding to 'test the waters' by putting a relatively smaller amount, maybe 5 percent, at risk for patient satisfaction, because they know that they can put systems in place to measure that and other various quality metrics as well." Overall, says Reiser, currently fewer than 20 percent to 25 percent of practices have tied more than 5 percent of physician compensation to metrics other than productivity.

Measuring value

Of the practices that are implementing nonproductivity incentives, most begin by tying a portion of pay to a physician's patient satisfaction scores, and later, adding quality incentives, says Medical Group Management Association consultant Jeffrey B. Milburn.

To determine a physician's performance on satisfaction, practices often use formal patient satisfaction surveys, says Witt. "Some of them are doing them internally and some are working with outside companies - and then what they're doing is usually putting some percent of compensation at risk, or they're creating a flat dollar amount that physicians will get assuming they meet certain satisfaction targets," she says.

To measure quality, most practices use measures that their larger payers already have in place, such as whether physicians follow treatment protocols for certain patient populations, says Reiser. Others tie a portion of compensation to meaningful use, says Reiser. Indeed, that's how ProHealth is measuring quality, says Geiss. "We measure our physicians' performance against those metrics that the government specifies need to be met in order to get meaningful use payment, and then that's tied to their compensation directly," he says. "It's a way of incentivizing behavior - the utilization of the record properly. We expect that probably a year or two from now we'll be moving to more traditional quality metrics, like performance on diabetes care or hypertensive care, etc."

Moving toward value

Chamblee predicts that more practices, including smaller private practices, will soon incorporate nonproductivity measures. "What I would expect, more than anything, is that there will be 'third-party funding,' meaning health systems will start partnering with physicians, or payers will start partnering with private-practice physicians, to fund these types of metrics," he says. "Or, simply the participation in [accountable care organizations] or other types of initiatives similar to that will provide the funding to where the practices don't have to carve it out, per se, of their fee-for-service revenue."

In addition, Chamblee says, as value-based reimbursement picks up speed, physician compensation will mirror that trend. "There needs to be direct alignment between the underlying compensation model and the current reimbursement model," he says.

Also fueling the adoption of such incentives is that information with which to measure quality performance is becoming more readily available to practices, says Reiser. "We're getting to the point where nearly everybody has, or will have, an electronic medical record," he says. "There are a lot of folks that are still struggling with implementation of that and using that effectively, and so I think as those issues work through the industry and people become more familiar with the reporting capabilities - the data capturing capabilities of their system - then we'll see more and more people implementing these quality-based metrics much more rapidly."

Success skills

As more physician compensation is tied to nonproductivity incentives, physicians will need to adjust their practice styles to fulfill the measures.

Make your pitch. As soon as you hear rumors of compensation plan modifications, get involved. Ensure you will be measured by metrics that are attainable and applicable to your daily work, says Milburn. For instance, if you will be judged on patient satisfaction, make sure the surveys gauge the perceived level of care provided by physicians, and that they don't measure things like whether it is difficult to find parking near the office, says Milburn. "Try to get measured by metrics that you can obtain and influence individually." That also applies to quality-based incentives, says Chamblee. "Making sure that the scoring mechanisms are as objectively set as possible and are achievable will definitely help [you] and the health system or [your] practice," he says.

Assess the data. To fulfill the measures, it's crucial to understand where you are starting from. Make sure your health system tracks those metrics prior to tying compensation to them so that you can prepare, says Geiss.

Rely on staff. In primary-care settings especially, team-based care is becoming critical. That means it's likely that your patient satisfaction and quality performance will be influenced by other staff members. To encourage them to do their part, consider suggesting that they are incentivized, just as you are incentivized, says Witt. Also, consider whether you can delegate some of your responsibilities to other staff members. That way you can focus more on patient care, and less on administrative details, she says.

Improve interactions. As more compensation is tied to patient satisfaction, physicians will need to spend more time with patients, says Witt. "Physicians need to begin to focus on their interaction with the patient in a much more concerted way than perhaps they had in the past. That involves making sure that they give the patient a chance to talk and get their questions answered, making sure that patients understand what their care plan is and what they need to do to take care of themselves when they leave the office ... as well as [increasing patient] access to care."

In flux

No matter where your practice is in the shifting compensation process, stay on your toes. As value-based reimbursement picks up speed and as the ability to measure nonproductivity-based incentives expands, more of you will see adjustments to your compensation plans.

Keep in mind that those adjustments could - and should - change often, as they should reflect ongoing reimbursement changes. "I think physicians have to recognize the market that they're in, recognize whether or not the compensation formula that is proposed ... reflects the reality of the marketplace in terms of how payers compensate," says Geiss. "They also have to be open to the fact that compensation is going to change, probably rapidly, over the next three to four years, and they have to expect that that's going to occur."

Primary-care versus specialty compensation

In the near future, primary-care physicians may, for once, experience an advantage when it comes to physician compensation increases. "Looking at it on a primary-care versus specialty basis, we would not expect to see primary-care compensation decrease any based on many of the initiatives out there, relative to the Patient-Centered Medical Home or The Comprehensive Primary Care Initiative," says Justin Chamblee, senior manager at The Coker Group. "All of those, in our opinion, will maintain primary-care compensation, if not drive it up. It's much harder to tell on the specialist side of the equation."

Declining compensation

Physician compensation is changing, both in the way it is evaluated, and in how much physicians are paid. According to our 2012 Physician Compensation Survey, nearly 20 percent of you experienced compensation declines of more than 10 percent between 2011 and 2012.

And though physician compensation models are shifting to reflect reimbursement changes (i.e., from fee-for-service reimbursement to more value-based reimbursement), not all physicians will benefit, cautions William Reiser, vice president for Halley Consulting Group. "If you're a large hospital-owned group or an independent group of 50, or 60, or 70 physicians and you're able to negotiate some substantial quality-based incentives, that very well could help balance some of the [reimbursement declines] out," and therefore, balance out declining physician compensation, he says.

But things are less promising for physicians in smaller practices or medical groups. "They may not have the market dominance to negotiate those better upfront rates with their payers," says Reiser. "They also may not have the information systems necessary to effectively track [their performance] and prove their value to the payers, and that's a big piece ... to say, 'We are reducing costs and therefore, we should see more of that in reimbursement.'"

As a result, it's crucial that physicians find new ways to boost their revenue. Read "Four Ways Physicians' Practices can Boost Revenue" for tips on increasing your practice's revenue.

Physician compensation plans - modification tips

As reimbursement shifts from volume to value, physician compensation plans must change. But it can be difficult for practices to determine how and when to modify them. For some pointers on customizing your compensation plan read "Physician Compensation Plan."

In Summary

As value-based reimbursement picks up speed, physician compensation is mirroring that trend. Though many health systems are starting off small when it comes to incorporating nonproductivity-based incentives, physicians should brace themselves for change.

Here's how to prepare:

• Get involved when compensation plan modifications are discussed;

• Make sure nonproductivity metrics are fair, understandable, accurate, and meaningful;

• Gauge your progress in fulfilling the metrics; and

• Spend more time with patients by delegating to other staff members and improving efficiencies.

Aubrey Westgate is an associate editor at Physicians Practice. She can be reached at

This article originally appeared in the November/December 2012 issue of Physicians Practice.