Medical groups and entities integrating with physicians are struggling with the challenges of implementing a physician compensation plan that promotes critical group success factors while operating in an environment of constantly changing reimbursement methodologies.  We have seen organizations move from productivity-based models to salary models to capitation pools and back again.  All of these organizations are realizing that future physician compensation plans must incorporate something besides a complex set of incentives for various desired behaviors.  Most are realizing that physicians can game any plan within a short period of time once it is understood by the physicians.  Any compensation plan that tries to reward all the critical success factors, quickly becomes too complex.  Most of the time, the incentives for desired behaviors are not adequately compensated to induce any significant behavior change.

Having consulted with numerous groups and facilitated seminars on physician compensation plans, I have identified three components which, when implemented, can provide any organization with a compensation plan that will meet the challenges of today’s changing market and changing reimbursement methodologies.  Every successful plan needs to have accountability, empowerment and market components.  This concept promotes a salary/bonus model that incorporates incentives for practice patterns that promote group success.  This concept requires strong physician leadership.  However, my experience shows that any successful compensation plan in this ever-changing environment requires strong physician leadership. 

ACCOUNTABILITY

Base compensation (salary portion) must promote overall accountability to the group. Three benchmarks  which should help establish base compensation for any group include  (1) hours worked in direct patient care,  (2) relative value units produced or production defined by the group (i.e. gross charges, number of visits/surgeries/consults etc.) and  (3) actual cash collected for services rendered.

These three benchmarks should be weighted depending on the group’s perception of each component’s value in establishing accountability in base compensation for the group.  This base compensation should make up between 50% to 80% of an individual physician’s total compensation.  The base should never exceed 80% to allow for adequate reimbursement for other components of physician compensation.  This base compensation is founded on the premise that a group or organization has to have highly productive physician members to be successful and yet each group can measure that accountability in different ways. 

The rates for the base compensation are set at levels to approximate 70% of targeted physician compensation. Internal benchmarks like prior year’s compensation are good measures to start with.  This concept allows cash flow planning on behalf of the practice as well as the individual physician since the base compensation is usually paid out ratably on a monthly basis.  Whether the practice’s payor mix is highly capitated or discounted fee for service, accountability for productivity is in place and can be adjusted according to payor mix and the practice’s perception of how to measure accountability. 

EMPOWERMENT  

This is where the rubber hits the road with any successful market leader.  Physician groups are notoriously slow decision makers due to the need to build consensus with all or a majority of the physicians in the practice before they can move forward on an issue.  Even today most compensation models still promote this concept as productivity based models result in establishing each physician or specialty as its own profit center.  This does very little to promote the overall success of the medical practice itself.

Successful groups must empower their leaders and the best way to do that is with the ability to monitor and set compensation.  Yes, I know this is a far stretch from where most groups are today, but it is not as significant as actually selling control of the practice that occurs daily.  Whether the compensation model is for an acquired group or a free standing group, I still believe the same principle applies for success.  Physician leaders have to be identified and empowered in the group.  In this model, the incentive bonus pool for physician compensation is completely discretionary.  The key reason for this is to empower the physician leaders.  This alone will move the practice towards proactive management and governance.  Since this incentive pool should be at least 20% of total compensation, it will allow the physician leaders to promote and adequately reward the team players.

This discretionary model of incentive bonuses also allows the practice to monitor and reward more areas of behavior without trying to place an insignificant amount of incentive on each one.  It also requires the individual physicians to concentrate on the overall group success rather than two or three areas of behavior in an attempt to game the plan. 

Ideas for critical success factors can be:

Peer coding analysis

Peer patient satisfaction results

Peer costing analysis

Individual goal setting

Group contribution (meetings, committees, etc.)

Administrative duties

Attitude

Patient management

Peer ancillary utilization

Whatever factors the group chooses, they should be closely tied to the capabilities of the management information system.  The compensation committee should be comprised of at least 50% physician members with equal voting rights.  This committee does not have to constitute every specialty in the group.  The whole purpose is to empower the real physician leaders.  The peer data has to be provided to the physicians on a regular basis.  Since this can be a tough concept to get all physicians to accept, consider first and/or second year safeguards where under-performing physicians are guaranteed at least 90% of prior year income if productivity is also comparable. 

Medical practices, whether free standing or integrated, must develop a common vision and start to focus on their control of medical management.  This requires strong physician leadership and a commitment of financial and human resources.  Empowerment of these leaders with a discretionary incentive bonus plan will make a difference. 

MARKET

Overall physician compensation should approximate market value. This concept is particularly important for organizations that have acquired physician practices that regularly refer to their facilities. The concept of implementing a market-based compensation plan requires the utilization of external benchmarks.  These benchmarks are becoming more sophisticated and relevant to compensation planning.  Some of the more common benchmarks used today are:

§         Physician  Compensation and Production Survey, Medical Group Management Association

§         Group Practice Compensation Trends and Productivity Correlation Survey and Group Practice Survey of Key Medical Management Information, The American Medical Group Association

§         Physician Marketplace Statistics and Socioeconomic Characteristics of Medical Practice, American Medical Association

§         Statistical Report, Society of Medical-Dental Consultants

§         Individual Specialty Associations

In the future, I look for these benchmarks to become very sophisticated and available on-line over the Internet.  The value of this concept is to provide an external objective benchmark for the practice to consider when establishing an individual’s overall compensation.  It is impossible to please everyone and the group or organization cannot afford to compromise the success of everyone for the demands of an individual physician.  External benchmarking allows the leadership to assess its establishment of overall compensation.  In cases where overall compensation is being questioned by a physician, external benchmarking helps add credibility to the compensation plan.  It reduces the risk that a practice will lose key physicians to the market if compensation is maintained at a fair market rate.  It is usually better to use at least two external benchmarks to be sure a reasonable target is established.  I also feel that internal past performance should weigh significantly in establishing these targets and the external benchmarks should serve more in a check-and-balance role.

Compensation plans must consider the market value of a physician’s contribution; the better compensation plans will incorporate this concept. 

SUMMARY

By implementing accountability, empowerment and market components into physician  compensation plans, you can assist physician organizations in meeting the challenges of today’s health care market.  The salary/bonus model described above, which employs these components, is applicable to all groups, organizations and their respective markets.  It is flexible enough to allow change every year without starting over on the “formula.”  It empowers the leadership to identify and reward new behaviors without the need to single out one or two behaviors for incentives.  This limits the ability of physicians to game the plan.  Credibility is established with external market benchmarks.  The compensation plan considers the overall performance of the physician.  This method is generally perceived as fair with a high degree of security for the physician and promotes group success. Not every group will have the leadership or trust level to implement a compensation model like this.  It requires subjective decision making and physician performance evaluations.  There is no such thing as a “perfect” compensation plan.  I do believe that a compensation plan, that incorporates these three components, is a jump-start towards the overall goals of basic fairness and promotion of overall group success.  The day of the lone ranger should be over with!