Time to re-evaluate your physician compensation model?

If you must open that can of worms, keep these guidelines in mind.

By René Luthe, Senior Associate Editor

Henry wasn’t happy.

The top producer in his ophthalmology practice, Henry only worked four days a week, yet earned about $850,000 pre-tax annually under its current compensation formula.

He listened while his four partners worked out the terms of the practice’s new physician compensation model with the consultant. Henry, who also served as managing partner, stayed mum. For hours.

The consultant, John Pinto, recalled what happened next. Four out of five were in agreement, nodding their heads. Then Henry spoke.

“‘Fellas,” he said, “‘We’re going to have to do some more work on this formula. It’s completely unfair.’” “‘What would you suggest?’” Mr. Pinto asked. “Well, I don’t know how to adjust the math and all, but this is unacceptable. I’m taking a $10,000 pay cut under this formula.’”

The meeting, Mr. Pinto says, went on for hours more.

Feel bad for the conflict-averse, because revising physician compensation models seems destined to be a near annual event in the not-so-distant future. Notoriously declining reimbursements are putting pressure on revenues, notes Robert E. Wiggins, MD, MHA, in practice in Asheville, N.C., and the Academy’s senior secretary for Ophthalmic Practice. “The main thing I am hearing is practices are looking more carefully at expenses and expense allocation related to how much physicians are paid,” he says.

Eric D. Donnenfeld, MD, a founding partner with Ophthalmic Consultants of Long Island and Connecticut, agrees. “Declining reimbursements and increased costs of running a practice, including things like electronic medical records and compliance issues — overhead has gone up dramatically,” he says. The result? Smaller profits to go around — never a happy prospect.

Dr. Donnenfeld’s practice re-evaluates its compensation model every few years, bringing in independent consultant Bruce Maller to help design a new one. “We bounce ideas off him, we talk with him about how our compensation compares to the national average.”

Another issue that payment-model negotiators will contend with: the advent of the value-based payment. Todd Evenson, Medical Group Management Association vice president of data solutions and consulting services, says MGMA is seeing many medical groups align their compensation with reimbursement methodologies.

Perhaps the guide that follows, which discusses when and how to address this prickly subject, will save time and pain.

WHEN TO BITE THE BULLET

Get used to the idea ...

Practices that want happy associates and competitively priced services will likely re-evaluate their models more often than they’d otherwise would.

Dr. Wiggins agrees that practices will feel more pressure to re-evaluate their models in the coming years. But with such a volatile subject it’s “probably best to leave well enough alone” if the practice’s physicians feel they are fairly recompensed for their work. “If someone is unhappy with it, that means it is time to take a look at the model and see if there is something that needs to be changed, or at least tweaked,” he says.

Mr. Pinto, president of J. Pinto & Associates Inc., an ophthalmology-practice management firm based in San Diego, believes practices should probably be more proactive. Once a practice grows to three or four physicians, he recommends they formally review the compensation model annually, and vote to approve or change it. “A big mistake practices make is not reviewing the physician comp formula often enough, and assuming that whatever the practice sets up in year one is going to be suitable in subsequent years.”

But many reasons may crop up to require at least reconsideration; these sources agree certain occasions demand the model be adjusted. These occasions include:

• The addition or loss of payer contracts, particularly ones that have a different method of paying the practice

• A key provider moving toward retirement, or

• A provider taking on more responsibilities, such as becoming managing partner.

… And get help

While revamping the practice’s compensation model will mean involving the partners, one key figure who should not be involved, Mr. Pinto emphasizes, is the practice manager. “This is not an area where the administrator of the practice can weigh in, because compensation methodology is a zero-sum game,” he explains. “Anything you do to change the comp model is going to take money off one plate and put it on to another. It’s just not fair to ask your administrator to take that risk of offending a partner.”

Don’t think it’s going to be one or two senior physicians plus a consultant. Dr. Wiggins notes that transparent communication among the practice’s physicians regarding the new model’s calculation intricacies is critical to avoiding resentment. That typically means letting everybody into the pool.

“It’s going to take a subset of practice members and outside advisers to get it right and to do it in a way that is the least politically contentious,” Mr. Pinto says. The subset typically includes the highest producer in the practice, the lowest producer in the practice, the practice’s accountant and a consultant. “It’s then a matter of that task force studying, reviewing, making the recommendation to the board, and then the board votes it up or down.”

GETTING IT RIGHT

First, look and listen

The current predominating model entails a minority of the profits split pro rata to ownership — “Say 20% to 30% of the profits split according to how much of the practice a partner owns” — with the balance of the available profits split up pro rata to individual net collections, Mr. Pinto says.

“I think we are seeing more and more practices shift to that kind of model with a minority of profits split equally and a majority split based on individual production,” Mr. Pinto says. “This approach scales very well to a lot of practice situations. In the last 20 years, I’ve seen a drift to more and more practices taking that kind of approach.”

But compensation models are not a one-size-fits-all matter. MGMA’s Mr. Evenson recommends practices consider their mission as they begin the re-evaluation process. “It’s important to look at and collaborate with the individuals within that organization to assess the service they want to provide within the community,” Mr. Evenson says. For instance, is the mission to deliver the highest quality care at any cost, or to see the largest audience and the most patients within that region?

“Physicians as well as administration must define what the practice’s mutual goals look like. After that, the practice will need an environment in which the compensation plans that persist have a certain level of production,” Mr. Evenson says. “Practices have fixed as well as variable costs. In an environment so heavily influenced by FFS payments, organizations will need to understand the production that is required to sustain and thrive.”

Sharing rewards — and costs

In hammering out a new compensation model, each practice must find its place on the “capitalist-socialist” continuum, but models seldom are purely one or the other. Balancing the demands of more time-consuming, less profitable services at the practice with the need to reward and incentivize high-producing providers is essential to both the success of the practice and physician morale.

“We still believe very strongly in a capitalistic approach to our practice, where we want our associates to feel that their hard work is rewarded with increased revenue,” Dr. Donnenfeld says.

Toward that end, to help compensate for the declining reimbursements and increased cost of overhead that shrink the compensation pie, Dr. Donnenfeld’s practice encourages its physicians to participate in “patient shared-billing opportunities” — services such as LASIK, femtosecond cataract surgery with astigmatism management and multifocal or toric IOLs that third-party payers do not cover, but which are beneficial to patients’ sight. “Our criteria is that the doctors believe in the technology and they believe the technology is offering patients an improvement to their lifestyle, and is truly an improvement over conventional surgery,” Dr. Donnenfeld explains.

Not that a “pro-capitalist approach” precludes a percentage of profits being evenly divided among associates. Dr. Donnenfeld says his practice also believes the higher-earning doctors must be supportive of their lower-earning but hard-working colleagues. “Working together is important and so we share a portion of our reimbursement,” he explains. Thus while more productive doctors receive a higher reimbursement, every doctor benefits when one does well.

“The reason for that is we want our patients to have the best care possible. We want to make certain they have access to the best specialists in our practice, so it makes sense for patients to be referred to our specialists for different subspecialties in ophthalmology like retina, cornea, glaucoma, oculoplastics and refractive,” Dr. Donnenfeld explains.

Similarly, some costs are shared. Certain services have a high overhead or lower reimbursement, or both. “You’ve got to know that if you are in the market for a neuro-ophthalmologist, everybody is going to have to share the burden,” Mr. Mays says. “Or if you want your optometrist to spend two days a week doing low-vision patients.” That, however, should be factored in as part of the practice model.

Dr. Donnenfeld agrees. “High-wage earners need to be supportive of the lower-wage earners who may see more patients and are the driving force behind ensuring the practice continues to flourish.” What physicians must keep in mind during these negotiations, Dr. Donnenfeld emphasizes, is that taking quality care of patients is what drives patients to your practice — and everyone benefits.

After all your careful thought, the conferences with consultants and input from associates, you are not going to satisfy everyone — look at Henry. “We rarely end up making everyone equally happy,” Mr. Pinto says. “We strive for making everyone equally unhappy.” OM