Productivity Pays

July 15, 2004

Reimbursing by productivity is increasingly popular but has its cons

There are almost as many ways to reward physician performance and control practice overhead as there are physicians. Many medical groups have found success by combining pay for productivity with equal sharing of certain practice revenues and expenses.

These mixed models for physician compensation are not new. What's new is that more medical groups that once found harmony through sharing practice income and expenses equally are adding productivity pay to the mix.

The factors pushing many groups to reexamine their income distribution methodologies include the familiar economic pressures: flat or declining reimbursements and rising practice costs, especially malpractice liability insurance premiums. But other issues -- internal and external to the practice -- also can spur the leaders of a medical group to review and revise how they distribute practice revenue.

The addition of a part-time physician, a senior partner's desire to slow down the pace of practice before retirement, expansion of services or sites, and workforce shortages that are raising starting salaries for certain medical specialists are among the factors leading more medical practices to revise their compensation formulas. As they do, compensation experts say, the solution is often to put a greater portion of physician income at risk based on productivity.

"When the pie gets smaller, for whatever reason, people pay a lot more attention to how to split it up," says Will Latham, president of Latham Consulting Group in Charlotte, N.C. In other words, money, or rather the lack of it, changes everything.

Growth that leads a practice to add a new physician may cause current partners to take a new look at their compensation plan, says practice consultant Laura Jacobs of The Camden Group in El Segundo, Calif.

"Groups that I've worked with over the past year especially, are quickening the pace of going from equal share plans to putting some of the physician pay at risk," says Jacobs. "As the physicians get older or start recruiting new people into the group, the dynamics in the practice start to change and all of a sudden the comfortable egalitarian method of dividing everything equally doesn't work anymore."

Mixing it up

Mixed pay plans combine productivity-based rewards with elements of either a base salary or an equal sharing of expenses and income, Latham says.

The practice can base the measures of productivity on:

  • gross charges,
  • collections,
  • net charges,
  • relative value units (RVUs), or
  • a combination of those measures.

Gross charges are popular and simple because they are a good proxy for what work was done in the practice. The disadvantage is that gross charges do not reflect what the practice actually collects from patients and payers.

Collections are another popular choice used in physician pay formulas because they reflect the money that a practice actually receives. Latham cautions that since collections reflect contractual adjustments by payers, using this figure may make it feel like the practice hands out physician bonuses based on payers' fee schedules, which can undervalue some services. Basing physician bonuses on collections also can penalize the physician who handles more indigent patients or patients covered by less desirable payers.

Basing productivity pay on net charges -- gross charges minus contractual adjustments -- may seem like a good alternative, but doing so also can cause physicians to get more or less credit for their work based on what a payer deems it's worth.

Many consultants recommend RVUs as the fairest measure of physician work, but the downside is that RVUs require more sophisticated tracking mechanisms than many practices have.

Latham suggests that for simplicity's sake, physicians select one of the above measures for the basis of productivity measurements. Some groups, however, try to account for the inherent weaknesses of these various measures by combining them, such as basing the productivity bonus on a combination of net charges and collections or on net charges and RVUs.

You get what you pay for


Many groups dip their toes into the waters before plunging in by putting just 10 percent or 15 percent of physician pay on a productivity basis at first, says Jacobs. However, most groups eventually move to a bonus amount that equals between 40 percent and 60 percent of physician pay with the remainder comprised of a base salary or equal split of revenue minus expenses, she adds.

Latham points to management science research indicating that on average at least 25 percent of a person's pay has to be based on production before they will alter work behaviors significantly. But bringing productivity into the mix doesn't necessarily mean there will be more production -- or money -- for everybody.

Latham recalls the plan developed by a recent client -- a single-specialty surgery group in the upper Midwest. The five-physician group's experiences point out the benefits and hazards of changing the way physician bonuses are distributed.

The group, located in a smaller city where managed care had not yet come to dominance, split revenues and expenses on an equal-share basis.

However, as reimbursement and overhead pressures mounted, the partners noticed that one of the physicians produced charges at a significantly lower rate than the other four. On an annual basis, the fifth physician's production accounted for just 10 percent of the practice's annual gross charges.

The practice's partners agreed to shift from an equal share format to a system that mixed productivity pay and equal sharing. Specifically, the practice subtracted practice expenses, including contractual obligations, from gross collections and then distributed half of the remaining amount to all physicians on an equal share basis (20 percent to each). The other half of the net collection amount was divvied up based on each doctor's individual collections.

The effects were immediate, says Latham, but they weren't what the physicians were expecting.

"As it turned out, the lower-producing doctor had been doing a lot of the stuff that nobody else wanted to do: seeing more of the self-pay and no-pay cases and handling the more difficult patients who took more time," Latham recalls.

With more of her pay at risk, the low producer in the practice stopped handing so many of the difficult or low-paying patients, which shifted more of that load to the other physicians. In the end, the high-producing physicians made a little more money but not as much as they thought they would, says Latham.

The introduction of productivity caught the group unprepared for another type of behavior change: adverse selection of patients.
"One of the negative behaviors that came into the picture was that some of the physicians started telling the schedulers to only schedule certain patients from certain insurance companies for certain procedures," he says.

All the same, a mix of productivity pay and equal sharing can put a medical group on the path to higher performance -- but physicians should look carefully at their practice's goals, their competitive position in the local market, and how they each approach the practice of medicine and work in general before tinkering with pay and incentive systems.

Consider physician motivation

Few proponents of productivity-based compensation recommend that a medical group's distribution plan rely entirely on productivity, says Latham. Like Jacobs, he suggests setting a target for productivity to represent between 40 percent and 60 percent of physician pay.

"Less than 40 percent tends to be an inadequate reward for the hard workers and might not change the work habits of those who produce less; but more than 60 percent can lead to stronger independent and competitive qualities in physicians that might not support the spirit of cooperation your group needs for everyone to get along," Latham says.

Jacobs says physicians who revise their pay plans should look at:

  • Practice goals. What behavior changes are the physicians trying to inspire by changing the pay formula?
  • Personal goals. Will changing the pay system clash with or support the way group members want to practice medicine?
  • Operational issues. Does the practice have the infrastructure needed to accurately track each physicianÕs production, expenses, RVUs, or other factors that will be used in the pay formula?
  • Cultural issues. Will the shift to a new pay formula fit with the way group members want to relate to each other?
  • Governance. Who is going to review the pay distribution formula and make decisions about physician performance?

Jacobs says that judging performance is where physicians become most uncomfortable, which is why she recommends physicians ease into any pay formula that tries to account for qualitative measures, such as quality, patient satisfaction, and leadership.


"If there's a problem in the practice then, yes, the compensation formula can be a good way to inspire behavior change, but why put in something like measuring quality if there hasn't been much variability between the physicians or it just isn't an issue?" she says.

New physicians, new pressures

Reimbursement, rising expenses, and rivalries over income aren't the only factors that can open up discussions about the physician compensation formula. The arrival of a new physician can add new tensions over how to reward performance, says Brian McCartie, a regional vice president of Cejka Search, a St. Louis, Mo.-based physician recruiting firm.

"The mentality of new physicians is that they want equity and fairness and don't necessarily want the other physicians making money off of them," says McCartie.

Those pressures are heightened in specialties that are experiencing a shortage of new physicians, such as gastroenterology, where in many areas setting up a new practice may be a more immediately rewarding option than buying into an existing one, he says.

A smaller group that has not recruited recently may need to reacquaint itself with what today's compensation plans look like, McCartie adds.

"When we try to get the physician partners to agree on what the new physician's compensation package should look like, the conversation will often uncover other issues about the compensation plan that the physicians think needs more work," he says.

So why not just recruit a new physician who shares the same approach to work and rewards instead of letting the process disrupt the current income arrangements?

"A lot of organizations set the goal for everyone to have the same spirit and focus and work ethic, but that isn't easy to judge in an interview," Jacobs says."A lot of what makes a compensation plan work is how long you've known the person, and plans like equal share are a lot easier when you've been partners for 10 or 20 years."

Robert Redling, MS, is practice management editor for Physicians Practice. Previously, he was senior writer for the Medical Group Management Association (MGMA). During his six years at MGMA, Mr. Redling wrote and edited hundreds of articles on numerous medical practice management topics for the monthly MGMA Connexion, www.mgma.com, and several other print and electronic publications. Before joining MGMA, he was a speechwriter for the American Academy of Family Physicians. He can be reached at rredling@physicianspractice.com.

This article originally appeared in the July/August 2004 issue.