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 are paid in similar circumstances.” Johnson agrees. “A solid valuation firm will conduct multiple approaches—more than one market survey, historical compensation, and so on,” she says. “We’re seeing more and more people just pointing to median compensation per RVU, and if you apply that to high volume, you could be overpaying.” Sorensen adds a special consideration for radiology groups. He says, “When you’re looking at historical compensation, it’s important that the radiologists understand what they make on the professional component and what their return on investment is on the technical component. Even some sophisticated, large groups haven’t considered this—they’ve only thought about what it takes to keep recruiting physicians and keep them in the group. They ought to make a return on the technical component—and for a lot of radiology groups that are selling or considering selling their technical component, they should realize that what they make on it is sizable.” The Next Frontiers As medicine moves from the fee-for-service model toward the pay-for-quality approach reinforced by health-care reform, compensation arrangements should be designed to bridge the gap. Johnson asks, “How do you pay for quality? The OIG and CMS have put out guidelines that make it work. You have to understand historical performance, as well as the national standard and top-decile performance. Every pay-for-performance agreement we’ve seen gives maximum compensation for attaining the top decile.” She adds, “If you’re going to pay for it, you should be sure it’s based on credible medical evidence.” Sorensen observes that if accountable-care organizations (ACOs) are to become more prevalent, they will bring with them a new set of challenges in determining physician compensation. “There’s nothing that says hospitals have to be the owners of ACOs, but the most prevalent thought is that they are the natural leaders or directors,” he says. “How do they divide up all those payments in a fair way?” Johnson notes that gain-sharing arrangements are traditionally structured so that savings are divided evenly, but this model might be difficult to apply to ACOs. “I think there will be more people looking at quality programs to get to the same place,” she says. “ACOs aren’t looking as good on paper as people thought they would.” Cotter concludes that physicians and hospitals alike need to be vigilant in structuring compensation arrangements to ensure that the deals can withstand the changes to come. “We need to be careful going forward,” he says. “Finances are different than they were in the early 1990s. We need to make deals that are sustainable.” Cat Vasko is editor of and associate editor of Radiology Business Journal.