Physician Compensation: New Complexities and Trends

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Jen JohnsonTodd SorensenThe current trend toward hospital–physician integration has renewed the focus of leaders on both sides on developing fair, sustainable physician-compensation plans. On March 21, 2011, in Chicago, Illinois, at the Congress on Healthcare Leadership of the American College of Healthcare Executives (ACHE), three speakers, Timothy J. Cotter, Ralph DeJong and Thomas Nantais, presented “Best Practices for Physician-compensation Governance and Strategy.” They addressed emerging trends in physician compensation (as well as best practices gleaned from prior experience in structuring these arrangements).

Timothy J. Cotter, managing director of Sullivan, Cotter and Associates, Inc (Chicago), began the presentation by noting that approximately 40% of primary-care physicians and 25% of specialists in the United States are currently hospital employed, and the means by which these employed physicians are compensated are evolving as a result of health-care reform.

What’s more, he says, it is increasingly vital that these arrangements be appropriate, as they are subject to more federal oversight than ever before. “There are very hefty penalties against health systems for physician-compensation noncompliance,” he notes. “Health-care organizations want to make sure they have a strong, defensible position regarding physician compensation.”

Lessons of the 1990s

Increased oversight is not the only reason that health-care organizations are approaching compensation negotiations with a heightened sense of caution. Many are still reeling from similar circumstances in the 1990s, when a rush to employ physician groups resulted in deals that left hospitals feeling shortchanged.

Todd Sorensen, AVA, partner, VMG Health (Dallas, Texas), says, “Hospitals, we hope, learned something from the first time around; the effort, this time, is toward having some kind of activity-based production measure. It takes reimbursement off the table—if physicians are busy, whether they are working on Medicare, Medicaid, or commercial-insurance patients, they get paid the same.”

Jen Johnson, CFA, managing director, VMG Health, also notes that in the 1990s, these arrangements often included intangible value paid for practices, “and physicians were then getting raises,” she says. “They weren’t producing, and the hospitals got aggravated and divested.” Sorenson adds, “The first time, physicians got five-year (or even longer) no-cut contracts, and this time around, generally speaking, they might get a couple of years, after which there can be termination, without cause, by either party.”

ACHE copresenter Ralph DeJong, partner, McDermott Will & Emery (Chicago, Illinois) observes that a growing trend in recent compensation arrangements is hospital-board oversight. This, too, Sorensen traces back to the 1990s. “Hospital boards, back then, saw big red numbers, when it came to physician employment,” he notes. “As a result, dropping those physicians was an easy way to dump the deficits that were created by that business plan.” Johnson refers to this round of integration agreements as part two. “This time, everyone is considering new compensation structures to demonstrate learning the lesson,” she says.

Fair Market Value

As a result, Cotter notes, while the advent of health-care reform will provide some financial incentives related to quality and efficiency, physician compensation, at least for the short term, will primarily be about productivity. “As we go forward, much as we want to talk about efficiency and value, we’ll be paid on a volume basis, and we should be preparing for that future now,” he says.

Johnson concurs. She notes that a growing trend in compensation arrangements for physicians is “productivity based—for instance, a low base salary with a dollar-per-RVU payment. Three years ago, we rarely saw that,” she says. Sorensen adds that large groups, especially multispecialty practices, are increasingly seeking blended dollar-per-RVU arrangements. He says, “It allows groups to split up the dollars as they have historically, or as it has worked best for them in the past.”

Cotter notes that 60% of health-care organizations are now conducting external reviews of fair market value, and his DeJong says that this proportion should be even higher. “Fair market value is important because the risks are so high—from the tax law, Stark law, and antikickback perspectives,” he says. “All of these laws, at their cores, deal with what independent data say physicians