There is no such thing as the “perfect” compensation model. The model that will work for you depends on your organization’s status, the company’s objectives, your plan for achieving those objectives, the culture of the community you are serving, and much more. This is also why the model is not a “set it and forget it” business element. It is an evolving component of your business, changing as the needs of your community, business, and the healthcare industry changes. To determine which model is best for you, consider those elements in the context of each of the following compensation models.
Straight Salary
This was the most popular model used in the ‘90s, during a boom in the healthcare industry, when physicians were being hired left and right. Unfortunately, many professionals in the industry see this model as a huge mistake. Why? Under this model, also known as the “salary plus incentive (or bonus)” or the “minimum income guarantee,” the productivity rates of many physicians severely declined. Along with the reduced productivity of their staff, hospitals, and other healthcare institutions repeatedly experienced financial losses. These events combined ultimately lead some institutions to their downfall. However, the Straight Salary model is experiencing a comeback.
This is most often used in large healthcare maintenance organizations (HMOs, large practices owned by either corporations or physicians, and academic institutions). The income level is set in stone, so if ever there are bonuses paid to the physician, the following questions should be asked:
-How will the payment be disbursed?
-When will the payment be disbursed?
-Under what conditions would I qualify for this incentive?
Consider the following advantages and disadvantages to determine whether this model would be right for you.
Pros
-Very few contractual requirements
Cons
-Physicians may not be motivated to exceed expectations
-Patient scheduling may have to be handled in a centralized manner
-Hospital staff may not be interested in engaging in organization initiatives
Revenue Minus Expenses
This is one of the least sustainable compensation models. Under this model, physicians are likely to defer concerns about rising expenses, suboptimal payer mixes, and other facets of management that could potentially affect both costs and revenue.
Under this model, the physician earns their allocated revenue generated from the practices minus the allocated expenses. So, they are primarily concerned with wRVUs (work relative value units), which is the amount the physician is paid for their work. The value of the wRVU is based on:
-The work effort exhibited by the physician
-The expenses incurred due to the services given
-Expenses related to professional liability insurance
Unfortunately, many healthcare professionals have complained about physician micromanagement under this model since it places excessive emphasis on generating revenue. The Revenue Minus Expenses model is also not ideal as it is not conducive to an evolving practice. Neither can it accommodate non-profit ideals (i.e., patients should get care whether they can afford it or not). Consider the benefits and drawbacks of this model to determine whether it’s right for your practice.
Pros
-Physicians may exhibit excellent work ethics and standards to generate more revenue
Cons
-Physicians are unlikely to be motivated to participate in organizational initiatives that do not generate revenue
-There may be penalties for suboptimal payer mixes or low profit margins
-Requires greater effort in tracking and allocating expenses
Straight Productivity Model
As long as the practice maintains a reasonable rate per wRVU, this model can also be favorable to an organization’s financial bottom-line. Under the Straight Productivity Model, the physician is paid either based on the RBRVS (resource-based relative value scale) units, a percentage of the billings and/or collections (RBRVS are assigned individually to procedures or types of patients visits). Fixed and variable overhead costs of the practice are then allocated to the physicians.
It shares many similarities with the Revenue Minus Expenses Model, one of which is that it discourages physicians’ involvement in non-revenue generating activities. This can be harmful to the practice as it creates a physician-focused, rather than a service-focused, institution. The result can be a very individualistic, separatist institution. Take a look at the pros and cons below to determine whether it’s the right choice for your organization.
Pros
-May result in increased productivity among physicians
Cons
-The individualism and separatism may be difficult for some physicians to cope with
-Physicians may lose the incentive to participate in non-revenue generating initiatives
-Physicians may be unable to either control expenses or improve operations
Base Salary Plus Incentives
This is one of the most popular options for compensation models. The Base Salary Plus Incentive model is relatively flexible, behaving like a Straight Salary model. It can go two ways: If the physicians are satisfied with their base compensation, they may not have the motivation to pursue bonuses and will perform at minimum expectations (or slightly above). On the other hand, under the right conditions, physicians may be easily motivated to surpass thresholds.
These “right conditions” may be influenced by an absence of disincentives for falling below threshold wRVU expectations (their base compensation will not be reduced if they fall below the threshold). This can result in either the physician being complacent with base pay or motivated to surpass the threshold slightly. When productivity incentives are combined with non-productivity incentives, and expectations are realistic, physicians are highly likely to be motivated to surpass thresholds.
Here are a few factors to keep in mind if you’ve decided to implement the Base Salary Plus Incentives model.
Pros
-Physicians will display increased productivity rates
-Incentives can be tailored to either individuals or groups
Cons
-Requires the right balance between many different factors including base salary, non-productivity, and productivity incentives. This results in added risk
-Salaries must be continually adjusted to match physician productivity levels
If your institution is struggling to identify the perfect compensation model for your physicians, you need the help of a comprehensive medical practice management consultant. Great Lakes Advisory experts can help you to choose the perfect model to ensure your practice thrives and that your physicians remain motivated and satisfied. There are many ever-changing details to consider when deciding on a compensation model, so let an expert help you work through these details. Contact our consultants today for strategic planning in numerous aspects of your medical practice.