The Next Move in Physician Compensation

Here's how practices have tweaked their salary and benefits schemes in response to healthcare reform.

By Joseph Burns

For Jonathan Herlihy, compensation is one of the most difficult challenges any physician group faces today. And it's likely to become more challenging as reforms under the Affordable Care Act roll out over the next few years.

The chief operating officer of Ophthalmic Consultants of Boston (OCB), Mr. Herlihy says the 33-physician group is already feeling the effects of reform because Massachusetts has had a health-insurance mandate since 2006 and the legislature passed a law this summer limiting the rate of growth in healthcare spending. That state law requires hospitals and doctors to limit cost growth to only about 3.6% annually, Kaiser Health News reported.

Even without such cost controls, compensation planning is difficult because revenue is declining and expenses are rising, Mr. Herlihy says.

A Collision Course

“Imagine charting the two trend lines for revenue and expenses,” Mr. Herlihy says. “The line for revenue is dropping, and the line for expenses is rising. If we keep doing what we're doing, those two lines will cross. Medicare and managed-care plans are not negotiating increases in reimbursement, which means the only way to keep those lines from crossing is to increase efficiency. As doctors get paid less per patient and less per procedure, then the only way to maintain current income levels is to see more patients each day.”

Data from the Medical Group Management Association (MGMA) bears this out. The median compensation-to-collections ratio for ophthalmologists declined 2% from 2010 to 2012, according to MGMA (TABLE, page 30).

Most practices are like OCB in that they base physician compensation on productivity, says Jeffrey B. Milburn, a consultant with MGMA in Colorado Springs. “All compensation plans are designed to enhance a practice's ability to recruit and retain physicians,” Mr. Milburn explains. “But that's where the similarities end because each group has a compensation plan designed to meet its own particular needs.”

Remove such tweaks, however, and physician compensation plans typically fall into one of five categories ranging from simple salary to more complex programs based on productivity or collections minus expenses, Mr. Milburn adds.

Five Basic Plans

Physician compensation plans fall into one of five models:

► Salary. The easiest compensation method is to pay a salary, a strategy usually reserved for new physicians joining a practice. “After guaranteeing that doctor a salary for a year or two, you'll want to move him or her to a plan based on productivity,” Mr. Milburn says.

► Physicians split profits equally. “This method tends to break down over time for a variety of reasons, such as if some physicians believe they are working harder than others in the group,” Mr. Milburn says.

► Hybrid plan. Some practices use a plan in which 70% of income derives from an equal sharing of profits and 30% is based on productivity. “This plan rewards the higher producers,” Mr. Milburn says. Other groups have about 70% of income based on productivity and the balance comes from equal profit-sharing.

► Total productivity. “These plans total up the profit, which is available cash after expenses, and then pay each physician based on what he or she contributed to the total practice profit,” Mr. Milburn says. “Other groups track everyone's production and translate that into dollars but also share and allocate expenses either equally or according to a formula based on each doctor's share of expenses for equipment and staff.”

► Individual productivity and expenses allocated to each doctor. Practices that use this most complicated of formulas subtract expenses from the physician's production to determine compensation. “This formula is like having individual practices within a practice, because each doctor is paid based on has his or her own production and expenses,” Mr. Milburn says.

Calculating productivity adds yet another level of complexity because groups use collections, total patient visits, or work relative value units (RVUs). Mr. Milburn favors using work RVUs because they reflect the physician's level of work intensity.

Allocating Revenue and Costs

When adopting compensation plans, ophthalmology groups usually follow the American Academy of Ophthalmology's guidance, Mr. Herlihy says. “Typically a one-person, three-person, 10-person or 33-person office compensates its physicians by using a percentage of revenue,” he explains.

“Obviously, revenue is a key factor but you also need to consider the costs that go into running the practice,” he says. A practice should charge those costs back to each physician to foster efficiency and to bring compensation in line with reimbursements as they continue to decline.

OCB has eight offices in Massachusetts and more than 350 employees. Its physician compensation plan is based on the productivity of each ophthalmologist. “OCB has five cost-accounting categories: direct staff, utilization, other direct, percentage of revenue and per capita,” Mr. Herlihy says. “For every dollar the physician generates, the average costs are as follows: direct 17%, utilization 3%, and other direct 10%.”

The physician's costs associated with seeing patients are 30% before accounting for group practice overhead (20% of revenue) and per capita (6%). “That results in a total overhead of 56%,” Mr. Herlihy says. “The remaining 44% covers the physician's compensation, benefits, funding for retirement, and meeting expenses.”

OCB is a subspecialist group practice that includes cornea, glaucoma, oculoplastics and retina specialists. It uses a cost-based system because each subspecialty has a different patient mix and different costs, he adds. “Each doctor has a certain level of overhead based for direct staff, rent, equipment use, and other factors,” Mr. Herlihy says. “If a doctor has a total overhead rate of 60%, as much as 35% of that 60% are direct expenses. The remaining 25% is the percentage of revenue and per-capita costs that are shared equally with each partner.”

The physicians at Retina Associates of Cleveland participate in a plan based on a blend of profit sharing and a percentage of productivity. Left to right, front: Scott D. Pendergast, MD, Llewelyn J. Rao, MD, Hernando Zegarra, MD, and David G. Miller, MD; back: Z. Nicholas Zakov, MD, FACS, Joseph M. Coney, MD, Jerome P. Schartman, MD, Lawrence J. Singerman, MD, FACS, FICS, and Michael A. Novak, MD.

Dr. Wiggins notes that Asheville Eye Associates uses several physician compensation plans.

Different Staff and Equipment Needs

Yet, some specialists also take on general ophthalmology in the practice, Mr. Herlihy explains. “A majority of the anterior segment physicians also are cornea or glaucoma subspecialists; and the oculoplastics and retina physicians are specialists who have different patient and insurer mixes, which translates into different reimbursement structures,” he says. In addition, the physicians have different staffing and equipment needs. “For these reasons, we found a cost-based system was more equitable for a multispecialty ophthalmic group practice,” he says.

The compensation plan that Retina Associates of Cleveland uses is somewhat similar to that of OCB: A blend of profit sharing and a percentage of productivity. “We take part of the revenue pie and divide it equally and take the remainder and give it to them based on their productivity,” practice administrator Warren Laurita says. The group has nine ophthalmologists, seven of whom are partners.

“Here's how it works. We take 40% of income and divide that on a per capita basis based on the number of partners,” Mr. Laurita explains.

“The other 60% of income would be used to pay for the partners' productivity. Using the total number left after subtracting the 40% is the denominator and the individual productivity number is the numerator. That gives us a percentage for each partner.”

The two ophthalmologists who joined Retina Associates most recently are on a partnership track. Until they become partners, they get a guaranteed salary for the first two years and then a salary plus a bonus based on productivity minus expenses for practice overhead.

“After a few years, the new associates will be eligible to become partners,” Mr. Laurita explains. “At that time, they would buy a share of the practice's hard assets which will depend on the value of the corporate assets and liabilities as shown on the balance sheet.”

One Group, Three Plans

Asheville Eye Associates in Asheville, N.C., has several compensation plans, and each one is based on productivity, managing partner Robert Wiggins, MD, MHA, says. One is for three partners who are retina specialists, one is for seven other partners who are general ophthalmologists, and other plans are for three associate ophthalmologists and four optometrists.

“The non-retinal ophthalmologists' compensation is primarily based on individual productivity, meaning the dollars generated minus practice expenses,” Dr. Wiggins says. The retina specialists have a compensation formula different from all the other doctors in the practice. That has remained unchanged since the retina practice merged with Asheville Eye Associates.

Source: Medical Group Management Association Physician Compensation and Production Survey: 2012 Report Based on 2011 Data. Available at www.mgma.com.

Of the retina specialists, Dr. Wiggins says, “they split their profits evenly so that individual compensation is related to group productivity.” This arrangement has its pros and cons. One potential tradeoff, for example, is a decreased incentive for individual productivity.

“For the optometrists, we pay strictly on productivity, meaning they get a percentage of revenue for the professional fees and optical fees they collect,” he adds.

While the compensation plans are slightly different for each of the three groups, Mr. Herlihy, Mr. Laurita and Dr. Wiggins agreed that it's important for groups to evaluate payment formulas at least once every several years.

Such re-evaluation is likely to be important in the coming years when all practices experience what OCB is already finding: Increasing expenses, declining revenue and increased pressure to cut costs still further. OM

Joseph Burns (www.josephburns.net) is a writer and editor in Falmouth, Mass., who specializes in writing about healthcare.