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Physician Compensation Models

​​Physicians starting in practice need to gain a basic understanding of the different prevailing models of physician compensation. It is important to understand not only how these models are structured, but also how the compensation plan may affect practice dynamics, group-member relations, and long-term earnings prospects.  

Following are common compensation models physicians are most likely to encounter during their job search and each model’s possible pros and cons. ​

​Payment Model ​Pros ​Cons
Straight salary/minimum-income guarantee or salary plus bonus/incentive. Most often seen in large HMOs, academic settings, and large corporate- or physician-owned practices, these closely related models are perhaps the most straightforward because the income level is set and physicians know how much they’ll earn. When a bonus or incentive is added in, physicians should inquire about how, when, and under what conditions the sum is paid. The minimum-income guarantee, with or without bonus, is the most prevalent model today for new physicians starting out. ​These salary models are essentially worry-free for young physicians, so they offer a sense of security. ​Without the bonus component, which is usually based on the group’s total earnings, there is little long-term financial incentive if there is no “ownership track,” and may ultimately either discourage entrepreneurship or support minimum-effort work standards. 
Equality/equal shares. This model, considered the easiest from an administrative standpoint, is based purely on economics. After expenses, the remaining revenues are allocated equally among the group’s physicians. ​On the plus side, this structure discourages over-utilization and doesn’t require complex mathematical formulas. The possible downsides are that the model presumes all physicians are equally skilled, equally productive, and most importantly perhaps, equally motivated to work in the group’s best financial interest. That means “high producers” have little long-term incentive and "low producers" may be allowed to ride on the financial coattails of the more productive physicians. Nonetheless, many single-specialty groups adopt this model on the premise that all services, even those for which payments are lower, are valuable and necessary to a group seeking to operate a full-service practice. 
Production- or productivity-based compensation. This model, with its myriad variations, can be fairly complicated. Essentially, physicians are paid a percentage of either billings or collections, or they are paid based on the resource-based relative value scale (RBRVS) units assigned to procedures or patient-visit types. The overhead costs of the practice — both fixed and variable — are allocated among the physicians. ​The possible advantage of this model is that it both encourages and rewards extra effort by individual physicians. ​This model can create a competitive intragroup environment that some physicians might not find appealing. The productivity model and relative overhead allocation can also be difficult to manage administratively and politically. Physicians should also determine whether their earnings in a productivity-based scheme will be based on their billings or on collections. If earnings are collections based, it behooves the physician to determine what percentage of billings the group typically collects, as well as how quickly — or slowly — payment is received. Patient mix also comes into the picture in productivity-based compensation, so it’s advisable to inquire about relative percentages of commercially insured, Medicaid insured, and uninsured patients seen in the practice, as well as how new patients are assigned.  ​
Capitation or productivity plus capitation. The concept of capitation — prepaid health care premiums allocated to contracted provider groups for all coverage or specialty-services coverage of a defined enrollee population — became prevalent in the late 1980s and early 1990s. Capitation is still present in certain HMO-intensive markets, such as California, Minnesota, and the Northeast. Translated into a compensation model, capitation involves distribution of health plan payments among physicians in a nearly equal manner or based on some type of formula. ​Capitation rewards groups, and in turn those groups’ individual physicians, who deliver cost-efficient, effective care. ​Capitation-based income is dependent on marketplace factors and a group’s negotiating prowess, which means that overall income levels may wax or wane from one year to the next. In addition, because global capitation contracts may entail providing all services to a group of patients, a high percentage of catastrophic diagnoses may negatively affect the group’s bottom line, and therefore individual physicians’ income levels. 

Questions to Ask and Issues to Consider When Evaluating Compensation Plans 

How does the compensation plan work, initially and at different points in time? 
It is perfectly reasonable for a physician to ask how much he or she will be paid in the first year and in subsequent years. For example, if the first one or two years’ salaries are fixed, and compensation then moves to a productivity basis, ask for details on how the transition is handled and how other physicians have fared in years two or three.  

How are overhead expenses allocated? 
In most cases, newly hired physicians will receive a “grace period” in the first year from financial responsibility for overhead. But those expenses, which could equal up to half of a group’s revenues, may be a significant consideration when the physician becomes a partner or shareholder.  

What is the income-distribution methodology for partners or shareholders? 
Even if the position will be straight salary initially, physicians should inquire about how income is distributed among the group’s partners, and which factors, if any, affect the proportional distribution among individual physicians. 

What is the buy-in and how does it work? 
Since many practice positions involve either net-income guarantees or salaries in the early years, entrepreneurial physicians who desire an ownership position should request the details if they’re considering more than one position. A five-year partnership track may be far less appealing than a two-year track, for example, and the longer route to partnership may mean less long-term earning potential. 

Regardless of the compensation model in place at the hiring practice or entity, young physicians should calculate their living expenses and monthly personal budgets based on the compensation amount that is guaranteed. It’s not advisable to count on a year-end bonus, even if it looks likely, because unforeseen factors could affect whether the bonus actually materializes.