How to define a (mostly) fair compensation plan

A calculated decision

Your practice is changing. It no longer pays for physicians to do more for each patient. Instead, you have to see more patients to make more money. The old way of divvying up the income pot — sharing it equally — doesn’t seem fair any more. What do you do?

According to experts, more practices are moving toward a mix of base salary plus productivity in compensation packages. It is a plan that can work for a variety of practices which operate in virtually any market.

"Under the old system, an even split might have seemed fair," says Andrew Radoszewski, MBA, MPH, a consultant in Orlando, FL. "But now, you can’t compensate the people who bring in more money at the same rate as nonworkers."

With reimbursement continually falling, it’s unfair to connect pay to practice income, says Nicholas Giampetro, Esq., a lawyer at the Towson, MD firm of Giampetro/Levin. "You have to reward for reality, and that is that productivity and efficiency are more valuable than ever."

Even if you are not in a capitated environment, productivity can be a good way to calculate salaries, says Jonathan Edelson, MD, chairman and chief executive officer of Advanced Health Corporation in Tarrytown, NY.

"It helps you get in the habit of demonstrating that you practice quality, cost-effective medicine," Edelson says. "If you do it right, this not only looks good from the inside, but also from the outside. As you move into a managed market — and you will — you will find HMOs appreciate that you have put a program in place that rewards the kind of behavior they want you to have." (For an example of a compensation formula, see chart, above.)

But no one suggests that just because your practice changes you have to change your physician compensation system. Indeed, Giampetro and Radoszewski are adamant that if no physician is complaining, don’t make any suggestions that will lead you into a long and complex process. (For more on what a practice goes through in making a change to physician compensation, see related story, p. 91.) "Even though the practice administrator is critical to the whole compensation planning process, you should never be the one to bring it up," Giampetro warns.

When a physician does raise the issue, however, then your role is to step in and take charge. "You are most familiar with the physician’s concerns and with the financial data. You are in the best place to facilitate the whole discussion," he says. "But beware. In any deal, you will leave someone dissatisfied."

There are certainly as many potential compensation plans as there are practices, and choosing what will work best for your practice can take time — and a lot of number crunching. (For a list of compensation formulae, see story, p. 89.) Jeff Milburn, senior vice president at Colorado Springs (CO) Health Partners, says you should limit the number of formulae you present to the physicians to five or fewer.

Milburn recommends educating the physicians about the choices and outlining the pros and cons of each. For example, a straight salary is easy to administer but does not reward productivity. Using a system based on relative value units (RVUs) is extremely complex and requires a lot of agreement on how many RVUs nonclinical work is worth.

When you have two or three potential formulae agreed upon, then run some numbers using historical data. This allows the physicians to see how a new system will change what they earn. "This can be dangerous, though, because you can be running a lot of spreadsheets if you don’t limit the number of sample formulae," Milburn says.

Radoszewski agrees. "Three is about as many as you can do without getting too complicated," he says. "Then, let the physicians vote." (See box on determining physicians’ compensation, p. 91.)

Be prepared for a fight

There are always arguments during compensation discussions, and you have to be ready for these, says Milburn. "There are issues between the cutters and noncutters," he says, referring to surgeons and other physicians. "And there are issues between the high volume physicians and those who don’t have as high volume. There are people who have outside income and those who don’t. It can get very complicated."

It can get bad enough to hire a consultant or other disinterested third party to mediate the discussion, says Radoszewski.

Hiring someone is no admission of defeat, Milburn adds. "You are only acknowledging the political dynamics of your practice. If it will smooth the process, by all means, do it."

The goal is to make the changes that will make the most people happy and reward the behaviors which are appropriate for your market and your practice. "If that is patient satisfaction and lower costs and utilization, then make sure those things are clear from the formula you choose," says Milburn.