Practice Tips: The 3 Ps of physician compensation

Performance, productivity, and profitability are the 3 components of getting paid. These elements all affect one another, so balancing them is key.


How physicians are paid matters. The goals of physician compensation are performance, productivity, and profitability. None of these 3 reigns supreme; they all affect each other. Profitability is affected by performance and production, and performance is affected by production as well as other factors. In this context, performance is a function of productivity, quality, and practice revenues and expenses.

Traditionally, physicians have been paid a salary with production incentives. This is still the most common methodology, but the trend is moving more toward production and performance incentives. However, defining production can be tricky. Is it total charges? Is it revenue? Is it revenue minus expenses? Is it Relative Value Units (RVUs)? If RVUs, then is it total RVUs or just work RVUs? Does it include other factors such as quality, patient satisfaction, call, and leadership roles, and if so how do you quantify those attributes? Providing “value” is the end goal: to the patient, the payer, the government, and the practice, hospital, or entity that is paying.

Let's be clear on one thing: There is and never will be a single perfect and easy formula that will work for everyone. The industry as a whole is shifting to rewarding outcomes, and reimbursement plans are moving in that same direction through shared savings programs, value-based reimbursement, quality reporting, and EHR incentives that include patient surveys.

Studies have shown that a performance-based, or “value-based,” compensation plan can motivate physicians to provide high-quality care as efficiently as possible, which is in keeping with the industry trends. To pay physicians based on performance, it is necessary to measure performance. One common way is to use RVUs, which serve as a good proxy to measure relative resources (production, income, and expenses).

Using work RVUs along with other measures is even better. For example, practices can design a compensation system that accounts for specialty, patient satisfaction, successful participation in incentive programs such as the Physician Quality Reporting System (PQRS) and Meaningful Use, and other activities that add “value” to the patients and to the practice. This requires some analysis of ratios by physician and, in a multispecialty group, by specialty, including revenue, expense, and work RVUs. A spreadsheet can provide modeling about how changes in the formula will affect each physician.

After the new system is implemented, it is important to evaluate and test it to make sure the new plan is not being “gamed.” For example, physicians might cherry-pick certain payers, procedures, or types of patients (established vs. new, acute vs. chronic) to improve their own compensation. That is why it is important for the stakeholders to participate in the design, so that there is general agreement about the goals of the plan as well as the fairness.

For more information on how to develop compensation plans that will help productivity, performance, and profitability, download MGMA's new free resource on value-based compensation. It can be accessed under “Practice Solutions for Physicians. “ For a more in-depth “how to” on using data and spreadsheets to measure performance and inform the development of a new compensation system, view a recorded webinar. More information about compensation plans is also online here and here.