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Small-group strategies for revamping physician pay

Basing pay on collections, not charges, and dividing expenses fairly can help avoid infighting

From the December 1999 ACP-ASIM Observer, copyright 1999 by the American College of Physicians-American Society of Internal Medicine.

By Phyllis Maguire

SAN DIEGO—While creating a new compensation plan can produce hard feelings in small-practice settings, avoiding common pitfalls can minimize conflicts.

At the annual meeting of the Medical Group Management Association (MGMA) in October, Bruce A. Johnson, JD, principal of MGMA Health Care Consulting Group, told an audience of physicians and practice administrators that smaller practices have more at stake when adopting a compensation plan than larger groups do. That, he said, is because the entire group suffers if one disgruntled physician leaves.

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Mr. Johnson offered these tips to help practices smooth over the trouble spots when designing compensation plans:

Don't crunch numbers until you agree what to measure. Everyone should agree on a particular compensation model—what incentives to use on top of a base salary, for instance—before looking at how physician pay will be affected. "Once you start looking at numbers, all objectivity goes out the window," Mr. Johnson said. "Don't let doctors see any of the numbers until they buy into a plan's method and philosophy."

Use "real numbers" when determining revenues. Compensation plans should measure physician production according to "real numbers," such as actual cash collections instead of charges. If you do use gross charges, those charges should be multiplied by the group or specialty collection rate.

Don't make exceptions. Compensation plans need to be consistently applied. If all the physicians in the group are encouraged to take local CME classes, for example, the practice should not pay for one physician's weeklong CME junket in Hawaii.

Divide expenses carefully. Under most "eat-what-you-kill" models, practices subtract physicians' expenses from their revenues. While such plans are easy to administer, they can lead to infighting. As Mr. Johnson said, "All you hear from physicians is, 'I'm in the office only one day a week, so why should I pay more than one-seventh of the rent?' "

He recommended that groups use three different categories to assess physician expenses: direct physician-specific expenses, such as base salary and car leases; fixed expenses, such as rent and depreciation, to be shared equally; and variable expenses like staff salaries, based on the physician's productivity. (This last category is where a physician who works just one day a week could get some relief: Part-time physicians shouldn't have to pay as much in administrative expenses as their full-time colleagues.)

One benefit of pooling some expenses is that it helps physicians move from an individualistic approach, where they are each separate profit and cost centers, to a more cohesive group mentality.

Reward productivity fairly. On the other hand, practices that take a total team approach to compensation—subtracting all expenses, including physicians' base salaries, from total revenues and divvying up what remains as equal bonuses—often have problems rewarding productivity. Such models cannot fairly pay physicians who produce significantly more or less than their colleagues, and they don't encourage physicians to curb direct individual expenses.

Groups compensate for variations in productivity by adjusting base salary and bonus amounts, but Mr. Johnson suggested going one step further: Link physicians' productivity to the amount of overhead expenses they are charged. Physicians who earn in the 75th percentile of national benchmarks for revenues in their specialty, for example, could be charged the 25th percentile of overhead expenses.

(Physician productivity benchmarks can be found in the MGMA's "Physician Compensation and Production Survey," while cost benchmarks are listed in its "Cost Survey." Each publication sells for $200 to MGMA members, $300 for non-members. Call 877-275-4662 to order.)

Keep it simple. Most compensation plans add bonus incentives to base salary. Quality incentives are now popular, such as rewarding physicians for complying with medical record completion guidelines or for accumulating CME credits.

While larger practices can work with up to five different incentives, small practices should stick to only two or three. That is because small groups have less time and money to track the effects of incentive programs. And fewer incentives help focus a group's efforts on major changes it wants to make while ensuring that physicians will find the plan easy to understand.

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