Have you ever wondered how physicians are paid? Physician compensation (e.g. what doctors are paid) varies from setting to setting. Physicians employed by hospitals are often paid differently than those in private practice or those in academic medical centers. Doctor pay has evolved over the last two-plus decades and can be significantly different depending upon on the doctor’s employment situation. Not only has compensation changed but it has done so under, or due to, constant and fluctuating pressure brought on by the dynamism of the healthcare landscape (e.g. managed care, the Affordable Care Act, etc.). The information posted below is overly simplistic to paint a general picture regarding physician compensation.
Private medical practices (e.g. your doctor’s office) are businesses. As with most privately held businesses, the owners of the business (physicians) are paid after all of the other bills have been paid. So doctors, nurse practitioners, and physician assistants will see patients, document their charts, then bill insurance companies (or patients) for their services. Revenue flows into the business for delivery of the product – healthcare. For example, as indicated in Figure 1, Practice X has revenues of $250,000 (Dr. X has seen enough patients to generate $250,000 in revenue). The cost to run the business (salaries, rent, leases, supplies, etc.) is $100,000. This leaves a profit in the practice of $150,000. This money can then be paid out to the owner of the practice, the shareholder. (If there is more than one shareholder, they would parse the profit based on ownership share, number of owners, etc.)
What Figure 1 indicates is that Practice X is running a 40% overhead (40 cents of each dollar earned is spent on operating expenses) delivering 60% back to the shareholder(s). So, as with any business, operating cost management is essential to ensuring greater profitability. Generally speaking, though, reimbursement models (how revenues are generated) are changing. Therefore, it’s in Practice X’s best interest to get as many patients into the practice on a daily basis as possible to ensure revenue and cover fixed costs. In other words, if the practice does not see many patients a day, revenues will suffer.
In many instances, private practices have physician-owners who also employ physicians. The employed physician’s salary becomes an expense to the practice and the employed doctor receives a fixed salary and maybe a bonus. The remainder of their revenue generated passes through to the shareholders as profit and extra compensation. As Figure 2 displays, Dr X has hired another doctor. The new doctor increases revenue (based on his productivity) from $250,000 to $350,000. Expenses have only increased by $75,000 (including the new doctor’s salary). As evidenced in Figure 2, Dr. X receives his $150,000 compensation but then has an additional $25,000 available for distribution.
Many physicians, tired of running their businesses (practices), have become employed by hospitals. In fact, based on 2016 data, the American Medical Association (AMA) suggested that only 47.1% of doctors remain in private practice. This is the lowest number in private practice that the AMA has recorded (Policy Research Perspectives: Updated Data on Physician Practice Arrangements. American Medical Association. 2017).
Why? Many doctors grew disenchanted by burdensome regulations and the management of what are usually multi-million-dollar businesses. As a result, they became employees of hospitals to ensure a steady paycheck and mitigate the risk of business such as paying employees, shopping for malpractice insurance, negotiating with insurance companies, and managing office lease arrangements.
In the 1990s, when hospitals began a phase of gobbling up private practices, many hospitals did so believing that managed care would be easier to handle with a large network of physicians. In many of these employment contracts, doctors were guaranteed salaries. So, unlike our model above, the doctor’s salary was not predicated on his productivity and/or expense management.
Figure 3 delineates a fictitious doctor’s shift from private practice into an employment arrangement with a hospital.
First, the caveat to these math examples is that they are, by design, overly simplistic (but directionally accurate). They are “built” to use bite-sized graphics to convey basic mathematical calculations. Actual compensation plan design is complicated with many moving parts and “fair market value” constraints.
Preamble aside, let’s unpack Figure 3. Dr. X, as noted in the Private Practice column above, had gross revenues of $150,000 so he paid himself a salary of $150,000. Dr. X has grown disenchanted with day-to-day management of his medical practice. He simply wants to practice medicine. Fast forward to when Dr. X becomes employed by Hospital Y.
Hospital Y guarantees that Dr. X will make $300,000 per year. However, as indicated under the “Employment” column, note that Dr. X generated no more revenue than during his private practice days and his expenses were static. Removing his guaranteed compensation leaves the system $150,000 in the red for Dr. X (otherwise known as “subsidizing” the physician).
As the red ink flowed, and the threat of managed care domination waned, many hospitals divested underperforming medical clinics.
In the 2000s, the acquisition game started again. Medicare cut payments to many specialists on in-office procedures (such as imaging) creating narrowing margins for medical practices. For those practices greatly impacted (with high Medicare populations – like cardiology), and that may have been poorly managed (e.g. inflated expenses), the loss of revenue shrinking the delta of profitability drove many providers to the relative protection of the health systems.
Now hospitals that employed doctors deployed different pay packages for the doctors. In lieu of a big guarantee (of the ‘90s), health systems began to reward physicians for the work performed. While not perfect, the work relative value unit (wRVU) compensation models provided a means of objectively rewarding providers for “working.” That simply translated into more work (e.g. seeing more patients), more pay; less work, less pay. This offered hospitals some downside protection for reduced physician productivity. (Concomitant with the wRVU productivity model are inherent down-sides.)
As an aside, wRVUs are a construct of the government. Figure 4 shows actual wRVUs for certain office procedures.
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In Figure 4, if this doctor gets paid $20 per wRVU, you can see the impact of 100 office visits for patients with differing levels of severity. (e.g. a 99211 requires less “work” than a 99215.)
Many newly crafted compensation plans, whether stepped/tiered threshold models or pure dollar/wRVU payments, were deployed.
Physician compensation plans began paying, either in whole or part, based on the doctor’s productivity to offer doctors financial upside should they hit productivity goals. It should be noted that these models generally do not account for revenues collected per wRVU, but rather purely the production side. For instance, in Figure 5, if we pay Dr. X $25/wRVU and we only collect $20/wRVU, we are decidedly underwater from the get-go exclusive of our cost structure within the health system. It is incumbent on the system to tactically manage its revenue cycle system to ensure maximum collections of money due the system.
In Figure 6, Dr. X is generating $750,000. The cost to run his practice is $250,000. Dr. X is guaranteed a small base ($75,000) and is paid $25/wRVU. Generating 10,000 wRVUs, Dr. X has added another $250,000 to his compensation for total physician compensation of $325,000. Reducing the gross revenue by the provider compensation leaves a profit of $175,000 (most systems “subsidize” employed providers).
Many of these models, in some form or another, exist today, holdovers that are fairly easy to understand/implement. Some private practices have even deployed these models in an attempt to motivate providers and enable them to choose their workload while clearly understanding how that might impact them.
Presently many health systems and hospitals are contemplating changing their compensation structures. By doing so, they would disrupt current paradigms regarding physician pay by embedding components that address certain Medicare rules and regulations associated with new reimbursement (revenue) models.
As “pay for value” evolves, compensation models must change to consider the value of care delivery. This creates a fine balance of quality care delivery with the understanding that patient volume loads (and compensating for the same) may not soon recede. As these compensation plans evolve, systems must make sure that their plans pass fair market value (FMV) review to ensure that the system is not overpaying the provider, which may draw the ire of the federal government.
I stipulate that this is not cut-and-dried. Figure 7 is a hypothetical example delineating the modus of compensation plan design, in broad strokes. Of course, systems will continue to reward for the number of patients seen but also place a measurable value on quality and efficiency driving the compensation to realize the value care models. That is, physicians will receive a component piece of their compensation based on care delivery, as evidenced in Figure 7.
Using our Dr. X example, Hospital Y is deep into quality measures and has determined that its efforts require physician input into quality improvement. In Figure 7, Dr. X retains his nominal base pay and his wRVU production compensation that he had established in Figure 5. Additionally, the system crafted an “efficiency goal” defined as aiding in the reduction of 5% of controllable costs, which would add $25,000 to Dr. X’s compensation if he meets all of the requirements. The system also created a “quality” component of four disease states (ostensibly all valued at $10,000 each) for another $40,000 in potential compensation. These pieces must be measurable and “valued” and cannot be subjective in nature.
Combining Dr. X’s incentives, we see that he generated $315,000 in incentives to tie in to his base of $75,000. Presuming that his gross revenue (the system is collecting $75/wRVU) is $750,000, removing expenses and MD compensation, the system realizes a $110,000 profit on Dr. X. (Again, as noted in the “2000s” example shown in Figure 5, most systems lose money on their physician practices/clinics.) The key, too, is ensuring that the “at risk” money (e.g. incentives) are priced at FMV rates and are robust enough to positively impact the physician’s behavior (e.g. production, an eye toward quality and efficiency, etc.)
All of this said, doctor pay is driven, in large part, by production. But that may shift as care value is measured, monitored, and reported, and revenue is more closely aligned with quality of care. The crux of evolving compensation models revolves around the idea that compensation and quality will be woven into a tight tapestry where, at some point, there may exist a shift of a greater level of compensation from production to quality.
As with most things in healthcare, there is no one right answer to compensation. Even with provider compensation, some things are local.
This article originally appeared on Forbes.com.