Published 10/1/2013
Thomas F. Murray Jr, MD

Physician Compensation in Private Practice

Current models must adapt to changing norms

Physician compensation models typically vary by practice type. The classic private practice model of three to seven physicians has traditionally used models that treat each provider’s clinical revenue as his or her own and divide expenses according to a method that accounts for fixed and variable overhead. This is the so-called “eat what you kill” approach.

At perhaps the opposite end of the spectrum, large group private practices, multispecialty practices, and hospital practices have traditionally featured a base pay plan with incentives for productivity. More recently, additional measures such as quality, cost effectiveness, risk-sharing, and other behavioral variables have been incorporated into these payment plans.

But practice arrangements are changing and becoming more complex. As private practices have consolidated into larger groups and added ancillary revenue, compensation models have to be adjusted to keep pace. Most physicians agree that a reasonable compensation model should be fair, easy-to-understand, and result in payments for the work performed. These values need to be balanced with issues of ancillary ownership, variable staffing and support needs for different providers, and an individual provider’s insurance mix.

Allocating clinical revenues
Clinical revenue—the income from a provider’s surgical and office work—is most commonly credited separately to each orthopaedic surgeon in a group. That total, less expenses, is typically the simplest method of income division and generally works well in smaller groups.

However, as the size of the group increases, a ledger system can be very difficult to manage and differences of opinion on expense accounting can become challenging. In addition, providers with less robust payer mixes who provide very important support to a larger group practice may be unfairly compensated relative to their worth. Such concerns have led to the development of other methods of revenue division.

Allocating ancillary revenues
Most orthopaedic surgeons are aware that ancillary revenue division is closely regulated by Stark II guidelines and cannot be based on utilization or referrals. With a nod to the value of practice ownership, many groups simply divide ancillary revenue evenly or perhaps along lines of vested interest. However, systems that simply split all ancillary revenue evenly run the risk of rewarding less productive members of a group the same as the most productive in a way that can be divisive.

As clinical revenue continues to decline for a given quantity of work and clinical expenses continue to rise, the method for division of ancillary revenue becomes more important to a viable private practice.

Measuring work
The Medicare Relative Value Unit (RVU) system provides a convenient way of measuring provider effort and work via the work RVU (wRVU). Many practices routinely track this variable as a measure of physician workload. In hospital and academic practices, the wRVU is used as a measure of work in calculating physician compensation or bonus pay.

Such a system leaves overhead and profitability, as well as payer mix, as the short-term concerns of administration or management and allows providers to focus day-to-day on caring for their patients. These types of pay systems seem to contribute to the attractiveness of hospital employment or similar arrangements for many new physicians.

Healthcare reform experts have also repeatedly suggested the inclusion of quality incentives in payment schemes. Creating appropriate incentives and weaving them into the myriad complicated pay systems within private practice may prove to be a real challenge. However, because improved quality care and its rewards are more likely the result of a team or practice-wide effort, it may be that such incentives can be simply added to an already well-structured compensation program.

What’s next?
As medicine and the delivery of health care continue to change and evolve, compensation plans for private practices will likely need to evolve as well if these groups are to successfully recruit and retain new orthopaedic surgeons or other physicians, either as employees or partners. Groups would do well to consider the principles of simplicity, fairness, and appropriate pay for work performed when developing compensation systems.

Models used by hospitals and academic institutions, based in part on wRVUs, may enable larger private practices to divide clinical and ancillary revenue in a way that rewards work and allows those in the earlier or latter stages of their career, or with different goals (ie, work/family balance) to work at a more appropriate pace. Such plans can be payer blind on a patient-to-patient basis and enable dwindling clinical revenues to be supplemented with ancillary income in a way that creates appropriate incentives for physicians.

These types of compensation plans, in a group setting, may promote teamwork because they result in improved rates of pay for all as the group succeeds. As seacoast physicians are fond of quoting, “a rising tide lifts all boats.”

Thomas F. Murray Jr, MD, is a member of the AAOS Practice Management Committee. He is in private practice at OA Center for Orthopaedics in Portland, Maine, and can be reached at tmurray@orthoassociates.com