How to Design a Physician Compensation Plan

How to Design a Physician Compensation Plan

What is a doctor’s value?

Medical practices of all types have wrestled with that question for years. And the answers are only becoming more complicated as the Affordable Care Act continues to drive the American health care system toward a values-based care delivery model.

Without a fair and measurable system for physician compensation, medical practices cannot attract and retain top doctors, which can lead to a downturn in both new and repeat patients for medical businesses.

In other words, you need a well-designed plan for compensating physicians, regardless of whether you run a major health care system or a small community practice. All medical organizations are in the same battle for physician talent, and they all need effective strategies for attracting and retaining that talent.

Here are some things to remember.

Data driven

No matter how you set up your physician compensation plan, it must be based on tangible, objective and easily accessible data. Whether you base your compensation packages on collections and relative value units, or tie them back in some way to organizational goals, you must define what success means in your practice. This should always be the starting point when building a compensation plan.

RVUs vs. collections

Most health care facilities tie their physician compensation to one of two financial indicators – collections or relative value units, or RVUs. Collections is directly tied to the cash flow of the practice, so it makes balancing the budget easier. But because it is tied to cash flow, collections-based compensation is also highly dependent on a practice’s revenue cycle. If you pay a doctor based on collections, you could be waiting a month or more to recoup that payment in the form of new revenue. 

RVUs is the method by which many larger facilities compensate, and increasingly, smaller practices are moving to this model as well. RVUs are the percentage measurements by which the government gauges value delivered to a patient, and subsequently, by which it calculates Medicare and Medicaid reimbursement.

Designing the plan

There are three types of RVUs: Practice expense, malpractice insurance and physician work. The category used to calculate physician payment is, perhaps obviously, physician work. All modern electronic health records systems have a component that tracks work RVUs for physicians. Most medical practices calculate base salary at an amount of compensation per work RVU. For instance, a doctor might negotiate a salary of 4,000 RVUs earned at $50 per unit, for a base salary of $200,000, and the doctor’s salary can never be less than that. 

Any RVUs earned above the base salary are paid out as an incentive, at the same $50 per RVU rate as the base salary.

THE PRINCIPAL ADVANTAGE OF THE RVU METHOD IS THE DIRECT LINKAGE TO THE PHYSICIAN COMPENSATION.

The principal advantage of the RVU method is the direct linkage to the physician compensation. They should understand and feel how the compensation is consistent with their efforts. While the organization requires enough cash (capital and debt) to provide cash requirements, simplicity and directness go a long way in developing a successful compensation plan.

In addition, ten (10) percent of the compensation plan should tie to the organization’s goals and accountable care organization (ACO) incentives.

This “village” bonus should provide glue between the physicians.

The bottom line is, all physician performance and compensation in the future will be measured by — and tied to — value delivered to the patient. And that means good business and good medicine will go hand-in-hand like never before. The era of the ACO is upon us, and all compensation for health care providers is, and will be, tied to results – patient experience, effectiveness of care and minimizing patient readmissions. 

Moving forward, the value of a physician, and a health care system as a whole, will be based not purely on reputation but on hard data and demonstrating through metrics that you’re providing exceptional value to patients.

It’s a new health care world, and this will affect how doctors are evaluated and compensated and how new doctors are recruited. It will take work to thrive in the new environment, but the aim is to build stronger medical practices with better-equipped doctors who keep patients healthier and out of the hospital.