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Pointers on how to divide income among physicians

From 'eat-what-you-kill' plans to incentives for attending meetings, groups are creating new ways to pay

From the November 1998 ACP-ASIM Observer, copyright © 1998 by the American College of Physicians-American Society of Internal Medicine.

By Bryan Walpert

Splitting income among physicians used to be an easy process at Henry Ford Medical Group. The Detroit-based multi-speciality group paid physicians an annual salary based on their specialty and then adjusted it for the cost of living.

Today, however, the group's pay structure is not quite so simple. A few years ago, the group began setting aside a bonus based on the profitability of the system. Then, this past April, it rolled out an incentive plan for its primary care physicians that looks at factors such as the size of their panels and their patient satisfaction scores. This summer, the group began adding additional incentives to reward specialists based on how efficiently they purchase and use high-tech equipment around the office.

For many groups, knowing exactly how to distribute physician pay is more difficult than ever. Physicians increasingly work in large groups, managed care referrals have put a higher premium on primary care providers, and capitated plans are more common. Add egos to the mix and you have a recipe for trouble. "It's contentious because you are dealing with money," said Linda Wendt, principal with McManis Associates Inc., a health care consulting firm in Washington.

Most plans use a variation on one of three basic models: pure salary arrangements that base wages on industry data; equal-share arrangements in which physicians split evenly what remains after expenses; and pure productivity, or "eat-what-you-kill" models, in which physicians are paid for the revenues they bring into the practice minus expenses. A fourth and rapidly emerging model entails a base salary plus incentives, with a risk pool of financial incentives and/or penalties tailored to each particular group.

Paying for effort

Many small groups are already incorporating some form of productivity into their compensation systems. Physicians may keep what they bring in after expenses, or they may receive a share of the total group revenue after expenses based on the revenue they brought in or their share of relative value units (RVUs).

Large groups, on the other hand, seem more likely to base physician pay on industry data and salary surveys. The problem with handing physicians a paycheck with no strings attached is that it can reduce motivation. "A lot of groups don't base pay on any kind of productivity, then they wonder why the physician is not productive," said Sandra McGraw, principle with The Health Care Group Inc., a consulting firm in Plymouth Meeting, Pa.

As a result, practices that have historically paid pure salaries or split revenue equally are beginning to add measures of productivity into their salary plans. Physicians may not always eat what they kill, but their salaries are increasingly being affected by what they bring to the table in terms of charges or collections, or by how much work they do based on such measures as patient visits or RVUs.

Just how much of the total pool of money for compensation should be split between base pay (whether that's a fixed salary or based on productivity) and an incentive pool? It's a judgment call, but consultants say that at least 20% of a physician's pay should be affected by incentives in order to have any effect on behavior.

Groups can incorporate productivity into compensation in two ways: by requiring physicians to meet productivity targets, such as RVUs, to receive a certain base pay, or by withholding a portion of total compensation and paying the amount as an incentive bonus for those who meet or exceed those productivity targets.

Penrose St. Francis Medical Group in Colorado Springs, Colo., for example, is developing a system in which physicians may have to work a certain number of hours and meet monthly billing targets to qualify for their base pay. The 60-provider primary care group might also require physicians to participate on committees in the group and stick to their budgets, explained Kenneth M. Rafal, MD, president of the group. Penrose will pay a bonus to physicians who meet those targets and also exceed a certain level of RVUs.

Experts warn, however, that productivity incentives can backfire. Hamot Health Foundation, a hospital network in Erie, Pa., that employs 30 primary care physicians, guarantees a base salary of about $100,000 for a workweek of less than 28 hours. A physician who works at least 28 hours a week gets an additional $9,000 a year, a number that rises to $11,000 for 30 hours and $15,000 for 32 hours. But practice administrators realized they are rewarding the wrong behavior. "We didn't spread the hours far enough," said Tim Nelson, assistant vice president for operations. "Most will work 28 hours and decide to live without the additional $6,000 they would receive for working 32 hours." Today, the practice is developing a new system that will base physician salaries in part on meeting target RVUs.

One caveat: If your group is considering productivity incentives, keep a close eye on the Stark II regulations. The proposed guidelines ban physicians from referring government-paid patients to ancillary services and other "designated health services" in which they have a financial interest. They also regulate how profits from those services may be distributed.

(For more information, see "How the new Stark II regulations will affect doctor pay" at www.acponline.org/journals/news/mar98/starkii.htm.)

Other incentives

Even as practices move to productivity-based systems, some are discovering that paying for effort may not be enough. The Hitchcock Clinic's southern New Hampshire region, which has about 250 primary care and specialty physicians, adopted a system in 1997 that pays 30% of its compensation pool based on RVU targets. (The other 70% comes from a base salary.) When fee-for-service revenue rose after the plan was implemented, nearly half of the group's physicians saw their pay increase. The group's financial picture did not improve, however, because the cost of caring for managed care patients continued to grow.

Moreover, a pure "eat-what-you-kill" arrangement can backfire. The consultant Ms. McGraw recalled one 45-physician practice in which a doctor, determined to make as much money as possible, overbooked his schedule and forced the office to stay open as late as 9 p.m. some evenings. That required other employees—including security—to work longer hours, raising overhead costs for everyone. "It's a good example of what happens when you send the wrong message," Ms. McGraw said.

Because of that type of experience, some practices are moving toward incentives that focus on quality of care, cost controls and administrative duties. The Carle Clinic, a 300-physician multispecialty group in Champaign, Ill., currently dedicates 25% of its salary pool to an equal split among physicians who have been employed at least five years. As part of a new compensation system under development, however, the group plans to base that percentage instead on quality measures like patient satisfaction and physician access. "We assume a service mentality will grow market share," said Robert C. Parker Jr., FACP, the group's chief executive officer.

Subsidizing primary care physicians

Some multispeciality groups, where specialists earn more than generalists, are wondering whether they should tilt the compensation system toward primary care physicians. Increasingly, groups are willing to pay a premium to primary care physicians because they generate referrals.

According to Matthew Ward, vice president of Med Cap Resources, a consulting firm in Richmond, Va., few practices made "above-market" offers to primary care physicians 10 years ago, and then only if they were trying to place somebody in an unfavorable geographic location. Today, however, it's a different story. "Primary care has become a much more valuable commodity to the extent that people actually care to give these physicians subsidies," he explained.

For practices that pay physicians a straight salary, it is fairly easy to divide up income and give primary care physicians more than they would earn on their own. If a practice operates under a productivity model, the most obvious way to subsidize generalist pay is to literally take money away from specialists and give it to generalists.

At the Horizon Physician Network in Columbus, Ga., for example, physicians keep 80% of their net income and put the rest in a pool that is divided equally. As a result, primary care physicians, who earn less, typically get more from the pool than they put in. The rules require physicians to put at least $15,000 into the pool but no more than $75,000. But as a result, physicians doing poorly may actually have to contribute more than 20% of their income, while physicians who are doing well may contribute a lower percentage of their pay.

"Primary care physicians will say they think they deserve a larger distribution pool," said Ed Sanders, chief financial officer of the multispecialty group. "Specialists say, 'No, we think this division is quite enough.' Then primary care physicians might come back and say that we should remove the $75,000 cap. It's a political thing as much as an economic thing."

Another way to subsidize lower earners is by discounting overhead. Typically, primary care physicians spend 45% to 60% of their revenue on overhead. Instead of allocating overhead proportionally, some multispecialty practices reduce overhead for primary care physicians to 30% of revenues.

Capitation

Capitated revenue makes splitting physician pay even more complicated. Often, multispecialty groups use an actuarial formula to split capitated payments by specialty. If, for example, a practice receives $20 per member per month, $12 might go to primary care, $2 to orthopedics, $1 to cardiology, 50 cents to dermatology and so on. Practices then typically multiply that amount by the number of patients in the physician's panel to come up with monthly compensation.

But paying specialists raises some difficult issues. Splitting the $2 or $1 per patient equally among all physicians in a certain specialty doesn't seem fair because some specialists see more patients than others. As a result, some practices split capitated fees according to the number of referrals each physician sees.

Another alternative is to convert capitated fees for specialists to fee-for-service payments based on RVUs, but the risk is that the group could actually end up spending more on specialty care than it received from the capitated contract. Mr. Ward suggested a system that both rewards for referrals and compensates for the number of RVUs in order to account for work performed.

Gary Matthews, principal with The Health Care Advisory Group in Atlanta, suggested that groups include variables such as patient satisfaction when dividing up capitation. Just what weight each would get—equal split, referrals, production, patient satisfaction—must be negotiated, depending on the needs of the group.

When handling both fee-for-service and capitated patients, however, groups risk creating a complicated two-tier compensation system. Deborah L. Walker, principal of Boehm/Walker Associates in Surfside, Calif., worries that such a system can cause physicians to "look at a patient and wonder whether they are fee for service or capitated," she said. To avoid such a situation, Ms. Walker recommended that groups set up a base salary plus incentive system that works with revenue from both payment streams.

No matter what system you choose, be prepared for some grousing. Though formulas abound, few please everyone.

"There are three compensation models," said George W. Shannon, ACP-ASIM Member, internist and family practitioner with the Horizon Physician Network. "Last year's, which everybody hated. This year's, which nobody likes. And next year's, which is the perfect answer."

Bryan Walpert is a freelance writer in Denver.

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