Reed Tinsley, CPA

RVU physician compensation model

I'm often asked about compensation modeling, especially during these times when there are continued pressures on physician practice net income. Many practices, especially those owned by hospitals, are moving to some sort of a RVU-based compensation model. If you are looking at this type of model, here is what I see as the most common one out there:

Base salary consistent with expected MGMA production

RVU target consistent with expected MGMA production and salary (based on physician work RVUs)

5-10% risk corridor either way

Physician gets a bonus of x% of base where X is the amount that total RVUs exceed RVU target, except that no bonus is payable if total RVUs are within risk corridor

Base salary is increased or decreased in following year by Y% where Y is the amount by which physician's annual total RVU's exceeded or failed to meet the target, outside of the risk corridor

Following year's RVU target is = to current year's total (actual)

Brief summary of MGMA's 2011 physician compensation survey

In a statement released by the Medical Group Management Association, primary care and specialty-care physicians saw varied movement in compensation levels from 2009 to 2010, according to the MGMA's new Physician Compensation and Production Survey: 2011 Report Based on 2010 Data (www.mgma.com for more information).

Total median compensation increased for doctors in:Internal medicine ­– from $197,080, to $205,379 (a 4.21 percent increase); Cardiology – from $481,878 to $500,993 (a 3.97 percent increase); and Emergency medicine – from $262,475 to $277,297 (a 5.65 percent increase).

Compensation remained flat or declined for physicians in:Urology – from $390,678 to $372,455 (-4.6 percent); Ophthalmology – from $338,208 to $330,784 (-2.20 percent); Radiology – from $478,824 to $471,253 (-1.58 percent); and OB/GYN – from $282,645 to $281,190 (-.51 percent).

Regional compensation differencesRegional data included in this year's report show differences in compensation based on location. In the Southern region of the United States, primary care and specialty-care physicians reported the highest earnings at $216,170 and $404,000, respectively. Physicians in the Eastern regions reported the lowest median compensation, $194,409 and $305,575.

Determining appropriate overhead allocations

Question. We have an OB/Gyn group. The founding partner wishes to no longer be on call nor handle OB. In computing her share of the practice expenses, she will be charged a percentage of fixed overhead and a different percentage of variable overhead. There is a disagreement between the partners' CPAs as to what constitutes fixed overhead, especially as it relates to salaries. Do you have any information on this matter?

Answer. What constitutes “fixed” versus “variable” overhead in a compensation plan is
negotiated by the physicians who are party to the plan, within parameters that are more or less well accepted. Fixed expenses include:

Depreciation and equipment repair and maintenance charges

Interest expense or similar charges, like leasing

Legal accounting, retirement plan administration

Occupancy costs: rent, utilities, insurance, maintenance, cleaning

Salaries area different story - some practices rarely considered solely fixed overhead, although in surgical practices in particular they may be partially fixed and partially variable. For example, one common approach is to treat 50% of salaries as fixed and 50% as variable. Another approach is to identify positions and allocate them to fixed or variable. The office manager or practice administrator would typically be part of fixed overhead, while nursing or reception staff could be fixed or variable.

Admonition: When a physician cuts back on hours, if other physicians do not pick up those
hours, there may be less patient volume and therefore a need to cut back on staff salaries.

Reviewing/Affirming Your Group’s Compensation Philosophy

Before considering any specific pay formula or plan, the initial stage of analysis for an organization should be a review of its compensation philosophy, and today many groups are undertaking a careful analysis of what they feel the goals and objectives of their compensation formula should be. Goals for consideration might include such diverse issues as: 

• Aligning compensation with work effort
• Promoting a group culture
• Providing health care services to underinsured or uninsured
• Ensuring cost effective quality care
• Ensuring a methodology that will attract and retain quality physicians
• Improving service to referring physicians
• Permitting balanced lifestyle for those physicians who desire better balance
• Valuing business leadership and physician administrative services
• Promoting teaching, education and research

When considering design principles for the income distribution methodology,, groups are wise to seek formulas that are well defined and understood, and which leave little that is subject to interpretation and the resulting potential for mistrust. Further, the methodology should employ measures that are simple, within the physician’s control, and which present a clear relationship to the desired behavior or goal. These characteristics are desirable to both the physician and compensation professional. However, in today’s reimbursement environment - that is neither rational nor simple itself, it is unlikely that a formula can perfectly meet all of those characteristics as well as satisfy the wants and needs of the physicians.

New MGMA physician compensation survey highlights released

The Medical Group Management Association ("MGMA") recently released the result highlights of the largest physician compensation survey in the United States. The survey is based on 2010 data from 60,000 providers in more than 150 specialties; the publically reported figures focus on 15 specialties.

According to the selected specialties data, orthopedic surgeons were the highest earners, with a median salary of $514,659. Invasive cardiology ($500,993) and diagnostic radiology ($471,253) were also among the highest paid specialties.

Primary-care physicians earned least based on the data. Family practice (without obstetrics), pediatric/adolescent medicine, and internal medicine recorded median salaries ranging from $189,402 to $205,379.

Emergency medicine physicians experienced the highest level of salary increase (5.65%). Neurologists (5.02%) and internists (4.21%) rounded out the top three salary gainers. On the other end of the spectrum, the largest median salary decrease was seen by urologists (-4.66%). In comparison, the 2010 rate of inflation, as indicated by the Consumer Price Index, was 1.5%.

Regional data revealed that primary care physicians and specialists earned least in the Eastern region and most in the Southern region.

Compensation planning suggestions for hospitals who employ physicians

Assure that the reasons for the compensation arrangement are appropriate (such as benefiting the community) and not suspect. Be particularly careful with incentive compensation as poorly crafted incentives can incentivize employees in ways that are detrimental to the charity and the public interest.

Assure that compensation does not exceed reasonable compensation (such as by reference to compensation surveys or other data).

It's useful to have contemporaneous support to justify compensation (reasonableness, mission, reviews and approvals, and arm’s length negotiations).

Compensation should be determined by independent persons.

It's useful to have independent board designated committee review and approve executive compensation and other arrangements that might be suspect (such as incentive compensation plans and recruitment incentives).

Desirability of complying with intermediate sanctions presumption of reasonableness at least where compensation is paid to disqualified persons.

Remember importance of adopting and following a conflicts of interest policy (prevents conflicts and assures proper review/handling of conflicts).

Non-cash compensation, particularly personal use of charity assets, is more suspect. Extra scrutiny is critical in such valuations.

Caps useful with contingent compensation. In some situations, caps are not practicable (e.g., some percentage of gross revenue plans). A provision such as the following might be considered:

Employee acknowledges that employer is a nonprofit corporation that is described in Section 501 (c)(3) of the Internal Revenue Code and as such is prohibited from paying total compensation (including benefits) to any person in excess of that considered reasonable under Section 162 of the Code or that is of a type that my not be paid by such an organization. While the parties believe that the compensation and benefits provided pursuant to this Agreement are well within the range of reasonable and are otherwise allowed to be paid by an organization described in Section 501(c)(3) of the Code, employee agree that in no event will employer be required to pay employee total compensation in excess of that considered reasonable under Section 162 of the Code or compensation of a type that may not be paid by an organization described in Section 50l(c)(3) of the Code.

Consider an audit program or other safeguards against illegal or improper compensation.

Critical that all compensation be reported properly (employee/independent contractors, Forms W-2 1099, Form 990).

Remember The Smell Test: Think about how it will look on the front page of the paper, because it may appear on the front page of the paper.

Example language for base salary plus incentive compensation based on single, stated threshold amount

This language may be used when, in addition to a base salary, a physician employee will receive incentive compensation in excess of an incentive threshold, which is a single, stated amount. As an incentive bonus, the physician may earn a given percentage of net collections from the physician’s personally performed services in excess of the threshold amount. In setting the threshold amount, the employer should consider the amount necessary to cover the direct and indirect costs associated with the physician’s practice. 

Example language: 

1.      Base salary. Employer shall pay to Physician a base salary equal to _________ dollars per year, or pro rata portion thereof plus: 

2.       Incentive compensation. As a bonus, Physician shall receive an amount equal to ____________ percent (___%) of the physician ‘s net professional fee collections in excess of the Incentive Threshold The Incentive Threshold shall be an amount equal to ________________ dollars. 

3.       Cap. In no event shall the total compensation payable to Physician, including base salary and lncentive Compensation, be greater than  S                  per year.

Incentive compensation based on Relative Value Unit generation by physicians

Physician employers may want to use Relative Value Unites (RVU) to measure productivity and incentivize employed physicians. Relative value scales are used by Medicare to determine the fee for a particular medical procedure by factoring together certain components of work, expense and risk. The employment agreement should include an exhibit with the RVU values for the anticipated CPT codes utilized in the physician’s practice. The example below may be used when a physician is to receive both a base salary based upon a standard amount for each RVU generated, plus incentive compensation based on a bonus rate for any RVUs generated over a stated, threshold amount. 

Here is sample language: 

1.         Base Salary. Employer shall pay Physician a base salary equal to $_____ (the “Normal Compensation Rate“) times the number of professional RVUs generated by Physician; plus. 

2.       Incentive Compensation. Physician shall be entitled to receive incentive compensation equal to $________________ (the “Bonus Rate’) times the number of professional RVUs generated by Physician in excess of the R VU Incentive Threshold 

3.       Definition: RVUs shall mean the Relative Value Units factors utilized by Medicare associated with professional medical services personally provided by Physician as defined in accordance with the Physician ‘s Current Procedural Terminology Codes using solely the “Work RVU” factors published by the Health Care Financing Administration. 

4.       The RVU Incentive Threshold amount shall be $______

 5.       Cap. In no event shall the total compensation payable to Physician, including base salary and Incentive Compensation, be greater than $_______ per year (this provision is mainly used by hospitals who employ physicians)

 

Compensation concepts

Your group's compensation formula may be its most jealously guarded sacred cow. Whether sensible or not, it continues in place as long as members don't object. And your members will likely not object as long as the pot of available income keeps growing. Despite the possible upheaval, it's time to reconsider partner pay. These five basic principles form the foundation of any income division format you design:

• Group members must trust the income division process and the people implementing it
• The formula must be reasonably simple and clearly understood
• The formula must provide some equity, although each member may not necessarily be treated equally
• Include proper incentive to work for the growth of the group, and promote practice goals
• The members must offer fair evaluations of each other and the practice's needs

Compensation concepts

Your group's compensation formula may be its most jealously guarded sacred cow. Whether sensible or not, it continues in place as long as members don't object. And your members will likely not object as long as the pot of available income keeps growing. Despite the possible upheaval, it's time to reconsider partner pay. These five basic principles form the foundation of any income division format you design:

• Group members must trust the income division process and the people implementing it
• The formula must be reasonably simple and clearly understood
• The formula must provide some equity, although each member may not necessarily be treated equally
• Include proper incentive to work for the growth of the group, and promote practice goals
• The members must offer fair evaluations of each other and the practice's needs