Insights on salary and incentive payments

“Ninety-nine percent of the time, compensation will be consistent with the marketplace. That’s the bottom line,” says Hobart Collins, a principal with the Medical Group Management Association in Englewood, Colorado. Although some contract terms regarding time to partnership, work schedules, or incentive structures may offer some room for negotiation in markets where certain physician specialties or services are in short supply, Hollins notes, most young physicians should expect their compensation to reflect what other physicians with comparable skills and experience will earn. For that reason, in selecting an opportunity, physicians should focus less on the compensation model and more on whether the position is a good fit.

“It would be a mistake to make a decision based solely on the compensation model. Look first for the right opportunity — clinically, professionally, and personally,” Collins says. “Physicians should remember that the groups they join all will have arrived, after years of discussion, at the compensation plan that works best for them.”

These days, physicians are not likely to see wide variations in compensation structures. The prevailing model now is a salary or net-income guarantee with a potential bonus or incentive add-on, says Mark Smith, executive vice president of the national recruitment firm Merritt Hawkins and Associates of Irving, Texas. “Compensation has never been so simple, and the vast majority of physicians starting out will be compensated with a salary plus a bonus or incentive of some type,” Smith says. “So the issue for comparison purposes becomes: What is that incentive or bonus, and when and how does it kick in?”

Jennifer Shu, M.D., a New Hampshire pediatrician, discovered early on that the way an incentive plan is structured is more important than the fact that it’s available. When she accepted her first job out of residency in San Diego, she was offered the opportunity to earn up to an additional $10,000 a year provided her billings exceeded a certain amount at year-end. The problem was that the higher earnings were unrealistic.

“The bar was set so high, it wasn’t humanly possible to [earn] the incentive payment,” Dr. Shu, a former board member of the American Medical Association’s Young Physician Section, recalls. “Until you get into the practice setting and figure out how many patients you can see and still provide good care, it’s hard to know whether the incentive plan is realistic.” Now in her eighth year of practice, Dr. Shu urges physicians who are offered incentive plans to request details about how the plan works in practice — not theory — and whether young physicians have actually received incentive payments.

Collins explains that the bonus or incentive in any event is likely to be “of modest potential” for the first and second years of practice, as most groups hope to merely “break even” on the newly hired physician in the first year.

Despite the move toward less complexity in compensation models, some young physicians may find themselves with a steep learning curve when they’re changing jobs or trying to weigh one opportunity against another. Anthony Barile, M.D., an infectious disease specialist in Melbourne, Florida, experienced an eye-opening adjustment when three years ago he moved from his first position with the U.S. Navy to a 100-physician multispecialty practice. “Basically, I went from a position where I was paid according to my rank to one with a very complicated compensation formula,” says Dr. Barile.

Now working under a productivity-based compensation structure (see description below), Dr. Barile is paid 50 percent of his own collections, with the remaining 50 percent earmarked for overhead expenses. He also receives a quarterly bonus based on revenues from the group’s ancillary services, such as laboratory, radiology, and cardiac catheterization services, in a complicated formula that provides a higher percentage of those revenues to partners than to nonpartners. Admitting that it’s taken him nearly three years to make sense of the compensation plan that dictates his earnings, Dr. Barile recommends that physicians ask for a detailed illustration of how the plan works in practice.

Even if there’s little room for negotiating a compensation model or amount, it’s important, nonetheless, to gain a basic understanding of the different prevailing models. Physicians should understand not only how these models are structured, but also how the compensation plan may affect practice dynamics, group-member relations, and long-term earning prospects. Following are common compensation models physicians are most likely to encounter during their job search and each model’s possible pros and cons.

Straight salary/minimum-income guarantee or salary plus bonus/incentive. Most often seen in large HMOs, academic settings, and large corporate- or physician-owned practices, these closely related models are perhaps the most straightforward, because the income level is set and physicians know how much they’ll earn. When a bonus or incentive is added in, physicians should inquire about how, when, and under what conditions the sum is paid. The minimum-income guarantee, with or without bonus, is the most prevalent model today for new physicians starting out.

Pros and cons: These salary models are essentially worry-free for young physicians, so they offer a sense of security. But without the bonus component, which is usually based on the group’s total earnings, they offer little long-term financial incentive if there is no “ownership track,” and may ultimately either discourage entrepreneurship or support minimum-effort work standards.

Equality/equal shares. This model, considered the easiest from an administrative standpoint, is based purely on economics: after expenses, the remaining revenues are allocated equally among the group’s physicians.

Pros and cons: On the plus side, this structure discourages over-utilization and doesn’t require complex mathematical formulas. The possible downsides are that the model presumes all physicians are equally skilled, equally productive, and most importantly perhaps, equally motivated to work in the group’s best financial interest. That means “high producers” have little long-term incentive and low producers may be allowed to ride on the financial coattails of the more productive physicians. Nonetheless, many single-specialty groups adopt this model on the premise that all services, even those for which reimbursements are lower, are valuable and necessary to a group seeking to operate a full-service practice.

Production- or productivity-based compensation. This model, with its myriad variations, can be fairly complicated. Essentially, physicians are paid a percentage of either billings or collections, or they are paid based on the resource-based relative value scale (RBRVS) units assigned to procedures or patient-visit types. The overhead costs of the practice — both fixed and variable — are allocated among the physicians.

Pros and cons: The possible advantage of this model is that it both encourages and rewards extra effort by individual physicians. In that also lies the potential downside: it can create a competitive intragroup environment that some physicians might not find appealing or that can deter citizenship. The productivity model and relative overhead allocation can also be difficult to manage administratively and politically. “Physicians need to understand their personal objectives. If they’re interested in a very collegial environment, they might not want to be in a group where each physician is paid on his or her own production, because that will be pretty competitive,” says Cornett.

Physicians should also determine whether their earnings in a productivity-based scheme will be based on their billings or on collections. If earnings are collections based, it behooves the physician to determine what percentage of billings the group typically collects, as well as how quickly — or slowly — reimbursement is received.

Patient mix also comes in to the picture in productivity-based compensation, so it’s advisable to inquire about relative percentages of commercially insured, Medicare/Medicaid insured, and uninsured patients seen in the practice, as well as how new patients are assigned. For example, a physician whose patient base consisted primarily of Medicare or Medicaid patients would earn less than a counterpart whose patient base was primarily commercially insured, as Medicare/Medicaid reimbursement tends to be the lower of the two.

Excerpt from Physician Compensation Models: The Basics, the Pros, and the Cons, New England Medical Journal, October 18, 2011

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