An estimated 45% of physicians nationally are employed by hospitals and health systems. Their compensation arrangements vary widely and take into account regional and local adjustments, different payment methodologies, productivity factors, value factors, benefits and other components, such as quality, financial, efficiency and other factors. Compensation and benefits for physicians should be designed to be sustainable long-term, should provide for fair and reasonable compensation for physicians, and should align physician incentives with the mission and values of the employing hospital or health system. Additionally, a compensation system should reward exceptional clinical performance, promote a commitment to continually improve clinical performance, align physician compensation and incentives with the strategic direction of the health system, promote patient safety, provide financial stability, and maintain accountability for care.

Objectives of a physician compensation policy

A compensation policy should be designed to provide fair and reasonable compensation to employed physicians. It should provide for market-driven, competitive compensation that will facilitate the health system’s ability to recruit, retain and motivate physicians. The policy should align physician compensation with the system’s mission, business strategy, and corporate culture and should afford a safeguard against adverse contracting risk with payers. It should support an integrated hospital-physician culture and foster a relationship that promotes collaboration, recognizing the value of an inter-dependent relationship among healthcare professionals and providers. If the purpose of designing or redesigning a physician compensation policy is to provide a cost-savings measure for the health system, without a focus on providing competitive, fair, and reasonable compensation for physicians, then the compensation design will likely not be acceptable to physicians, will not improve the health system’s competitive position, and will not facilitate improvements in quality or efficiency in providing care.

Some physician compensation policies are designed using rigid structures. In those models, compensation is structured to fit within specific parameters without allowing flexibility, without building in the ability to reward exceptional physician performance and hard work, and without the ability to meet market demands. In those situations, physicians frequently become frustrated and seek employment elsewhere, especially following receipt of unsatisfactory annual evaluations and incentive payments. A compensation policy should allow flexibility in order to accommodate local market conditions, as well as changes in reimbursement. It should contemplate compensation as an evolutionary process that might unfold over time to take into account market changes, competition, regulatory pressures, changes in reimbursement methodologies, exceptional performance, and new forces that drive compensation decisions. Because the policy will establish the basic foundation for physician compensation decisions, it should be thorough and should address all pertinent issues relating to compensation.

Steps in developing a compensation policy

Independent physician compensation consultant. The first step in designing a compensation policy is selecting an independent compensation consulting firm with special expertise in physician compensation to assist the health system in designing the physician compensation policy or model. Utilizing an independent consulting firm provides a number advantages. It brings expertise to the process from an independent source that has knowledge and experience about different types of compensation models and arrangements. Second, an independent firm can assist in generating a level of trust with the physicians, particularly with regard to an understanding that the objective is to establish a compensation system that is fair and reasonable, and not merely a create cost-cutting measures. Third, from a legal compliance perspective, a report from an independent compensation consultant can particularly useful in justifying compensation methodologies. An experienced physician compensation consulting firm can also serve as a resource for providing non-legalistic, practical business solutions and direction when dealing with difficult compensation arrangements and specific physician situations. A health system should not underestimate the importance of selecting a compensation consulting firm that will be a good fit in terms of knowledge, experience, responsiveness, high level attention, adequate staffing, and anticipated compatibility with management, physicians, legal counsel, and others who may be involved in the process.

Physician Interviews. After selecting an independent compensation consultant, but before designing a compensation policy, the health system should conduct private interviews of a representative sampling of employed physicians. The physicians should include primary care physicians, physicians from medical and surgical specialties, and hospitalists. Additionally, the physicians should include newly recruited physicians, established physicians, employed physicians who hold medical staff leadership positions, possibly physicians who are outspoken critics of hospital operations, and physicians who can provide insightful information about relationships with executive management, nursing personnel, and competitive facilities. The principal reasons for this effort are to let physicians know that they will have input into the compensation design process and to assure them that designing a compensation system is not merely a cost-cutting measure. Additionally, the interview process will likely reveal significant favorable and unfavorable matters weighing on the minds of physicians with respect to employment, compensation, health system operations, and relationships within the health system. Through the interview process, the interviewers should acquire helpful information about physician attitudes, opinions, and mindsets. To maximize the benefits obtained from the interview process, the interviewers should be carefully selected, and the interview questions should be carefully planned. In order to obtain frank comments from physicians, hospital executives and the hospital’s legal counsel should not conduct the interviews.

The information obtained during the private interviews should be compiled and discussed among hospital management officials and the independent consultants in an effort to gain an understanding of the perspectives of physicians, including their concerns, complaints, criticisms, commendations, and accolades.

Legal considerations. Notably, any compensation policy should assure compliance with legal and regulatory requirements, in particular, the federal physician self-referral statute, known as the Stark law (42 USC §1395nn), and the federal anti-kickback statute (42 USC §1320a-7b(b)), and applicable state laws relating to solicitation or referral of patients. Both federal laws include statutory exceptions. The Stark law includes regulatory exceptions, and the federal anti-kickback statute has regulatory safe harbors. The complex statutory and regulatory schemes can make complying with these laws difficult, but compliance is essential because the potential sanctions and penalties for non-compliance are severe.

In accordance with the Stark law and the federal anti-kickback statute, generally compensation must be determined based on services personally performed by a physician, and not the physician’s ability to generate other business, such as laboratory, radiology, or inpatient admissions. Additionally, crediting the services to the physician must not otherwise be prohibited by applicable law, must not result in an increase in compensation to the physician that exceeds fair market value, and must not take into account the volume or value of referrals made by the physician or other business generated by the physician. However, compensation may vary by physician specialty, productivity, performance, functions, and responsibilities.

The total compensation payable or provided to a physician, including all cash and noncash compensation in any form, must be consistent with fair market value for the nature, scope, and extent of services to be provided, and must be reasonable in amount. The terms of the arrangement must be commercially reasonable. Under the Stark regulations (42 CFR §411.351), “fair market value” means the value in arms-length transactions, consistent with the general market value, and “general market value” means the compensation that would be included in a service agreement as the result of bona fide bargaining between well-informed parties to the agreement who are not otherwise in a position to generate business for the other party at the time of the service agreement. The Stark regulations further provide that usually, the fair market price is the compensation that has been included in bona fide service agreements with comparable terms at the time of the agreement, where the compensation has not been determined in any manner that takes into account the volume or value of anticipated or actual referrals.

The compensation payable to a physician should not exceed the amount that would ordinarily be paid for like services by like enterprises (whether taxable or tax-exempt) under like circumstances. This concept is known as “commercial reasonableness.” A compensation arrangement will be considered to be “commercially reasonable” if it would make commercial sense if entered into by a reasonable entity of similar type and size and a reasonable physician of similar scope and specialty, even if there were no potential referrals. Some independent compensation consultants will advise on commercial reasonableness.

Additionally, the policy should take into account tax considerations. Among other tax regulatory considerations, the health system should incorporate into the policy processes to assure that the total compensation payable to each physician is reasonable for the physician’s specialty and area of practice. For a tax-exempt health system, the policy should incorporate IRS regulations that support and provide for a rebuttable presumption that each physician’s compensation is reasonable, including approval of each physician’s compensation arrangement in advance by the health system’s governing board (composed of individuals who do not have a conflict of interest concerning the employment arrangement), the use and review of, and reliance on data and information regarding comparable compensation, and timely documentation by the governing body of the basis for its conclusions concurrently with making compensation determinations.

Components of compensation

Compensation for physicians typically consists of several components, including base salary, bonus, incentives, benefits, and other components. The compensation policy should provide for an optimal and appropriate balance with respect to each of the components. Typically, those components might include:

• Base salary. This component provides basic financial stability and security for the employed physician. Hospitals will often determine the base salary using a percentage of the physician’s salary during the prior year or an average of the physician’s salary during the prior two years. Some may determine the base salary using a estimate of the current year’s compensation. In determining base compensation, health systems often utilize specialty-specific, national market data and published physician compensation and productivity survey data. The survey data is benchmark data, typically referenced in terms of percentiles. Compensation is often based on physician compensation surveys and benchmark data that correspond to the physician’s responsibilities, such as clinical, administrative, or other specified responsibilities. In those situations, compensation is often set between the median and the 75^th percentile. Some health systems may utilized blended survey benchmarks from a combination of nationally recognized physician compensation surveys. Among the nationally recognized physician compensation surveys are those annually published by:
  • American Group Managers Association
  • ECG Management Consultants
  • Gallagher Integrated Healthcare Strategies
  • Jackson & Coker
  • Medical Group Managers Association
  • Merritt Hawkins
  • Pinnacle Healthcare Consulting
  • Sullivan Cotter
  • Sutter Pacific
  • The Medicus Firm

• Production-incentive compensation based on a productivity metric. Use of wRVUs is, perhaps, the most commonly used method for determining a compensation incentive. Again, market data taken from physician compensation surveys or blended survey benchmarks from a combination of nationally recognized physician compensation surveys is frequently used with a median percentile as a benchmark to establish a “conversion factor” applicable to each physician specialty. In today’s market, physician compensation is often based on “wRVUs,” which are the work relative value units as defined in the most recent National Physician Fee Schedule Relative Value File published by the Centers for Medicare & Medicaid Services in the Federal Register applicable to the calendar year in which the services were personally performed by the physician. It is a standardized way to determine and assign productivity credit for work performed by a physician. A physician is given credit for wRVU production for charges entered into the electronic medical record or electronic health record system by a specified closing date. Generally, a physician’s compensation will be based on CPT codes that are associated with an assigned wRVU. The conversion factor is then applied to a “production threshold” for the physician, calculated by dividing the physician’s base salary by the conversion factor. For example, if the physician’s base salary is $250,000 and the 50^th percentile conversion factor for the physician’s specialty is $50 per wRVU, then the physician’s production threshold is 5,000 wRVU.

• Quality incentive compensation. This component of compensation is typically developed to measure and reward performance for quality outcomes, efficiencies in providing care, financial performance, and patient experience. Quality metrics should be based on factors that will improve quality, efficiency, patient experience, and performance.

• Administrative compensation. Physicians may be paid for providing needed administrative services, such as services as a medical director or services provided in a medical staff leadership position. In many cases, administrative compensation is based on an hourly rate that is capped in terms of total amount payable during a specified period, and the administrative compensation hourly rate is typically lower than the rate for professional services The specific administrative responsibilities should be specified in writing as part of the physician’s employment agreement or in a related medical director or professional services agreement. Additionally, the physician should document the time spent on administrative duties, and the time should not overlap with professional services (no double-dipping).

• Supervision of practitioners. A physician may be compensated for the time, work and risk associated with supervising non-physician practitioners, such as PAs, nurse practitioners, CRNAs, nursing personnel, medical administrative personnel, and others. Local law may limit the number of individuals who may be supervised by a physician. Some hospitals provide a fixed annual supervision fee for this component of compensation.

• Emergency call or trauma call coverage pay. This component of compensation may vary by hospital, and some hospitals limit compensation for this component to physicians in specific surgical specialties who provide surgical call coverage or trauma call. Call pay may be determined in different ways, but is often based on hourly or daily rates.

• Standard benefits. Another component of compensation involves benefits, which include noncash compensation, including participation in benefit plans, availability of medical, dental, life insurance, and disability benefits, paid time off, professional liability insurance, taxable and nontaxable fringe benefits, including expense allowance or reimbursement for continuing medical education and related travel expenses, professional dues, license fees, and subscriptions.

• Other. Other components of compensation may include (a) a relocation allowance or reimbursement for moving expenses for physicians who are relocating from a residency or fellowship program or a different geographic area, (b) in certain instances, an income guarantee, or (c) other compensation. Such components of compensation that are not based on personally-performed services should be carefully evaluated under the Stark law, the federal anti-kickback statute and related state law.

In addition to the factors set forth above, other considerations in designing a compensation policy may take address the following:

• Physician classification. Some health systems categorize physicians into new physicians (physicians recruited from residency and fellowship programs and other physicians already engaged in practice who become newly employed) and established physicians (those engaged in practice for several years).

• Specialty. Many health systems group physicians based on their specialty, such as primary care, medical specialties, surgical specialties, and hospitalists. Although compensation should be administered consistency, health systems often take into account differences in specialties, performance, functions, responsibilities, and business need.

• Full-time vs. part-time. In most cases, a physician is considered to be employed full-time if the physician works a minimum specified number of hours per week, including a minimum number of patient contact hours. Health systems usually specify the number of clinic work days that a physician is expected to maintain, not including call coverage. In some cases, a health system may establish different expectations for physicians in some specialties with respect to the number of hours actually spent in clinical and non-clinical activity. If a physician works less than full-time, the physician’s base salary, production-incentive compensation, and production threshold may be prorated or in some instances, the physician may be paid a fixed salary.

• Audits. The policy should provide for regular, periodic coding and compliance audits to assure compliance by the physician and the health system.

• Time records. If a component of compensation includes compensation for administrative services, such as compensation for serving as a medical director, the physician should provide time sheets, memoranda, or other documentation describing the work performed and the time spent providing services. A health system will also require time records for Medicare/Medicaid cost reporting purposes.

• Maximum compensation. The policy should establish the method of determining base compensation. If base compensation exceeds the 75% percentile of the survey or blended survey benchmarks used for determining compensation, then the health system should document the reasons for providing compensation that exceeds the 75% percentile. If compensation exceeds the 90% percentile, extraordinary performance should be documented and demonstrated.

• Compensation committee. The health system should designate a compensation oversight committee to oversee, administer, and interpret the compensation policy.

• Reconciliation and recoupment. The policy should include provisions for reconciliations and recoupment in the event overpayments are made to the physician or to take into account audit adjustments. Also, if the health system determines that a refund is due and owing to a payer as a result of a physician’s inaccurate or improper coding or billing, the policy should provide for recoupment from the physician within certain parameters.

• Evaluation. Each employed physician’s performance should be evaluated and documented annually, and compensation should be re-evaluated at least biennually to assure that compensation falls within a range of fair market value, taking into account productivity, quality, and other performance factors.

The policy should provide that each employed physician must enter into and sign a written employment agreement, even though the Stark law and the anti-kickback statute do not mandate a written agreement for bona fide employment.

Concluding remarks

The process for designing and developing a physician compensation policy can be time-consuming and detailed. A health system should carefully proceed to assure not only that the objectives described above are achieved and accomplished, but also that that the health system and its executive management maintain credibility with physicians as a new or adjusted compensation system is implemented.