Compensation Plans are Stronger When Healthy Practice Formulas Are Exercised

By Deborah, H. Wells, CPA, MBA

Many of today’s physician practices are undertaking an ambitious task of reevaluating their compensation formulas. Most formulas for compensating physicians were developed before the managed care era. In the course of about 15 short years, the business environment for physician practices has changed dramatically:

• Shrinking reimbursements and new rules by both the government and carriers have resulted in a smaller revenue pie for many practices.

• Mergers and acquisitions have left many practice groups with the challenge of coordinating the compensation formulas of two or more practice groups.

• In the managed care environment, the varying levels of contributions made to a practice by physicians, both production and non-production oriented, may have greater ramifications to the bottom line than they previously did.

Certainly the easiest path to follow is to not make any changes. However, we are beginning to see frustration by some physicians in group practices that are not addressing these issues openly. All compensation formulas should be reviewed, and possibly revamped, to meet today’s needs of providing incentives for the behavior that will not only reward individual efforts but also support the strategic objectives of the practice.
All physicians of the practice should have the opportunity to give their opinions of the adequacy of the existing compensation system. The discussion itself, even if no changes are made, can be healthy for the group.
Physician compensation formulas fall on a continuum between two common models:
• Equal compensation for all senior associates.

• Compensation based entirely on production, e.g., number of patients seen, number of procedures or relative value units performed, income generated or income collected.

There are potential drawbacks for both of these models. We find that a mixed model does the best job of linking incentives with strategic objectives of the practice.
One impediment to developing a compensation formula may be the group’s information system. Many physician practice groups have information technology systems that do not have the necessary detail to handle sophisticated models. However, fairly simple changes to existing systems as well as supplementing with off-the-shelf software may assist with the process. Another impediment may be tackling the project totally internally. The independence of thought of internal staff or physicians involved in this process may be questioned by some physicians.
Here are a few key concepts that physician practice groups should think about when reevaluating their compensation formulas:

• Some measure of work units should still be the major factor in compensation. Work units could represent up to 60-80 percent of the compensation model.

• Make sure that you select only two, or at most three, other factors, so the model is not too complicated to understand and apply.

• You may want to include a small percentage of equal compensation to encourage team efforts.

• Only address more sophisticated issues such as utilizing relative value units if your information systems can produce reliable data efficiently. However, begin the process of tracking the necessary information now.

• Accept that some subjective factors will need to be included but make sure that you have a system or procedure in place to review the subjective factors.

These subjective factors could include the following:

• Patient satisfaction.

• Development of new referrals or referral sources.

• Administrative duties at the practice or hospitals.

• Development of new strategic revenues.

• Participation in addressing compliance issues.

• Opening a new satellite office.

The process of revising a compensation system should have physician involvement from the very beginning as well as an independent party who will begin the process by developing an understanding of the culture of the group as well as its strategic objectives.
It is important to remember that no compensation model is perfect and that all will, to some degree, reflect the subjective views of the partners. But the compensation formula is one of the most powerful tools that a physician practice has for focusing the efforts of your physicians. The effort expended now to make changes may be very worthwhile to the future success of the practice.

Deborah Wells, CPA, MBA, is a Shareholder and Director of the Medical Services Group of Alpern Rosenthal, one of the largest certified public accounting and business advisory firms in the country. She can be reached at 412.281.1018 or at dwells@alpern.com.

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