Keys to a Successful

Physician Compensation Model

Dixon Davis, MBA, MHSA, CPPM

AAPC Physician Services

• The Basic Building Blocks

• Different Model Principles

• Examples of Compensation models

• Compliance and Ethics

• Administer with Success

OBJECTIVES

2

Compensation

3

• Physicians want to feel there is equity in

how they are compensated

– Compared to their internal and external

peers

– Compared to the work they provide

– For the professional training they have

received

Basics of Compensation

4

• Increasing costs, decreasing

reimbursement, and politics of healthcare

reform can make it frustrating

• It is a very personal topic

Basics of Compensation

5

• Hospital owned clinic

• Small independent practice

• Large independent multispecialty clinic

The Employer Matters

6

• Unity and comradery

• Production

• Quality

• Community service

• Feed the hospital system

• Medical Home, ACO, PHO, etc

What are the Goals of Practice?

7

• Productivity

– Paid for the work performed, discourages

non productive behavior

– Better able to control net profits

– Requires accounting management and

analysis

– Can promote competition within the group

– Can encourage overutilization

Productivity vs. Salary

8

• Salary

– Pay fixed amount

– Easy to administer

– Can promote equality and security

– Can disincentivize productivity, can create

work ethic conflicts,

– Risk of indebting business

Productivity vs. Salary

9

• Income statement

– Compensation formula is based on

assigned revenues and expenses,

organized in an income statement format

– Complex and several different iterations

– Premise is to allocate all revenue and

expenses fairly (challenge)

Income Statement Models

10

Income Statement Model

11

Dr. A Dr. B Dr. C Total

Collections 400,000.00 458,000.00 600,000.00 1,458,000.00

Refunds -2,500.00 -3,000.00 -3,500.00 -9,000.00

Shared Ancillaries 12,000.00 12,000.00 12,000.00 36,000.00

Research 5,000.00 5,500.00 200.00 10,700.00

Total Revenue 414,500.00 472,500.00 608,700.00 1,495,700.00

Direct Expenses 220,000.00 250,000.00 400,000.00 870,000.00

Staff Expenses 95,000.00 105,000.00 90,000.00 290,000.00

Variable Expenses 25,000.00 35,000.00 45,000.00 105,000.00

Fixed Expenses 30,000.00 30,000.00 30,000.00 90,000.00

Total Bonus 44,500.00 52,500.00 43,700.00 140,700.00

How will Revenue will be

allocated?

How will Revenue be tracked?

Income Statement Model

12

Dr. A Dr. B Dr. C Total

Collections 400,000.00 458,000.00 600,000.00 1,458,000.00

Refunds -2,500.00 -3,000.00 -3,500.00 -9,000.00

Shared Ancillaries 12,000.00 12,000.00 12,000.00 36,000.00

Research 5,000.00 5,500.00 200.00 10,700.00

Total Revenue 414,500.00 472,500.00 608,700.00 1,495,700.00

Direct Expenses 220,000.00 250,000.00 400,000.00 870,000.00

Staff Expenses 95,000.00 105,000.00 90,000.00 290,000.00

Variable Expenses 25,000.00 35,000.00 45,000.00 105,000.00

Fixed Expenses 30,000.00 30,000.00 30,000.00 90,000.00

Total Bonus 44,500.00 52,500.00 43,700.00 140,700.00

How will expenses be

allocated?

How will Expenses be

tracked?

Income Statement Model

13

Dr. A Dr. B Dr. C Total

Collections 400,000.00 458,000.00 600,000.00 1,458,000.00

Refunds -2,500.00 -3,000.00 -3,500.00 -9,000.00

Shared Ancillaries 12,000.00 12,000.00 12,000.00 36,000.00

Research 5,000.00 5,500.00 200.00 10,700.00

Total Revenue 414,500.00 472,500.00 608,700.00 1,495,700.00

Direct Expenses 220,000.00 250,000.00 400,000.00 870,000.00

Staff Expenses 95,000.00 105,000.00 90,000.00 290,000.00

Variable Expenses 25,000.00 35,000.00 45,000.00 105,000.00

Fixed Expenses 30,000.00 30,000.00 30,000.00 90,000.00

Total Compensation 44,500.00 52,500.00 43,700.00 140,700.00

• RVU’s

– A specified dollar amount is paid for each

calculated unit

– Simple concept but not as intuitive perhaps

as net revenue

– Independent of RCM

– Doesn’t include overhead component

RVU Model

14

• RVU (Relative Value Units)

RVU = wRVU + pRVU + mRVU

• wRVU = work value of RVU

– Same value across geography and

specialty

– Intent is to represent amount of work done

wRVU vs RVU

15

wRVU's $/wRVU Compensation

Physician A 5500 $51.00 $280,500.00

Physician B 4500 $51.00 $229,500.00

Physician C 5000 $51.00 $255,000.00

Physician D 4800 $51.00 $244,800.00

Total 19800 $1,009,800.00

Basic wRVU Model

16

• Assume $51 value per wRVU

Individual

$/wRVU Shared

$/wRVU

wRVU's Compensation

Physician A 5500 258,500.00 19,800.00 278,300.00

Physician B 4500 211,500.00 19,800.00 231,300.00

Physician C 5000 235,000.00 19,800.00 254,800.00

Physician D 4800 225,600.00 19,800.00 245,400.00

Total 19800 930,600.00 79,200.00 1,009,800.00

wRVU Split Model

17

• Mix of productivity and shared revenue

• 47 for Individual and $4 shared evenly

• % of Net Revenue

– Compensation is based on a specified

percentage of net revenue. (can also be

Net Professional Revenue

– Easily understood

– Dependency on good RCM

– Doesn’t include overhead component

% of Revenue Model

18

% Net Revenue Example

19

• Cash Based

• Paid at 51% of Net Revenue

Dr. Sample Jan Feb Mar 1st Qtr

Net Revenue / Collections 40,800.00 36,000.00 38,500.00 115,300.00

% of Net Revenue 51.00% 51.00% 51.00%

TOTAL Compensation

Earned 20,808.00 18,360.00 19,635.00 58,803.00

Salary Draw 15,000.00 15,000.00 15,000.00 45,000.00

Bonus to pay 13,803.00

• The accounting method can affect a

revenue based compensation model

– Cash Based: Recognizes revenue when

cash is collected and recognizes expenses

when cash is paid

– Accrual Based: Recognizes revenue when it

is earned and expenses when they are

incurred

Cash vs. Accrual

20

% Net Revenue Example

21

• Accrual based accounting example

• Based on Net Professional Revenue

Jan Feb Mar 1st Qtr

Gross Revenue 40,800.00 36,000.00 38,500.00 115,300.00

Less: Ancillary Revenue 6,035.07 3,346.04 - 9,381.11

Total Professional Revenue 34,764.93 32,653.96 38,500.00 105,918.89

Contractual & Bad Debt % 29% 29% 29%

Contractual & Bad Debt

Deductions 10,081.83 9,469.65 11,165.00 30,716.48

Professional Net Revenue 24,683.10 23,184.31 27,335.00 75,202.41

TOTAL Compensation 12,588.38 11,824.00 13,940.85 38,353.23

Base Salary 10,000.00 10,000.00 10,000.00 30,000.00

Bonus to pay 8,353.23

• After revenue covers initial costs, greater

% of revenue can go toward profit

Profits Increase with Revenue

22

Revenue = 100,000 Fixed Expense = 30,000 Variable = 40,000

Profit = 30,000

Revenue = 120,000 Fixed Expense = 30,000 Variable = 50,000

Profit = 40,000

Revenue: + $20,000 Variable Expense + $10,000

• Conversion rate starts out smaller and then increases as revenue

increases. More closely reflects real business

Tiered % Net Revenue Models

23

Net Revenue 299,700.00 333,000.00 370,000.00 447,700.00 550,000.00

From To Rate

- 250,000 48.0% 120,000.00 120,000.00 120,000.00 120,000.00 120,000.00

250001 350,000 54.0% 26,837.00 44,819.00 53,999.00 53,999.00 53,999.00

350001 450,000 56.0% 0.00 0.00 11,199.00 54,711.00 55,999.00

450001 - 58.0% 0.00 0.00 0.00 0.00 57,999.00

Formula Result 146,837.00 164,819.00 185,198.00 228,710.00 287,997.00

Overall Rate 48.99% 49.50% 50.05% 51.09% 52.36%

• Conversion rate starts out smaller and then increases as revenue

increases. More closely reflects real business

Tiered % Net Revenue Models

24

Net Revenue 299,700.00 333,000.00 370,000.00 447,700.00 550,000.00

From To Rate

- 250,000 48.0% 120,000.00 120,000.00 120,000.00 120,000.00 120,000.00

250001 350,000 54.0% 26,837.00 44,819.00 53,999.00 53,999.00 53,999.00

350001 450,000 56.0% 0.00 0.00 11,199.00 54,711.00 55,999.00

450001 - 58.0% 0.00 0.00 0.00 0.00 57,999.00

Formula Result 146,837.00 164,819.00 185,198.00 228,710.00 287,997.00

Overall Rate 48.99% 49.50% 50.05% 51.09% 52.36%

Overall Rate potentially important for FMV

• Professional component of revenue

– Needed if productivity payment is to be

based on just the professional component

– Provider not paid for revenue from technical

component

• wRVU values

Professional and Work Values

25

• Value of wRVU’s

Professional Value Component

26

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NIC

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51797 Total Intraabdominal pressure test 0.8 37.70% 62.30%

51797TC TC Intraabdominal pressure test 0 0.00% 100.00%

5179726 26 Intraabdominal pressure test 0.8 100.00% 0.00%

51798 Total Us urine capacity measure 0 0.00% 100.00%

51800 Total Revision of bladder/urethra 18.89 100.00% 0.00%

51820 Total Revision of urinary tract 19.59 100.00% 0.00%

99203 Total Office/outpatient visit new 1.42 100.00% 0.00%

99204 Total Office/outpatient visit new 2.43 100.00% 0.00%

99212 Total Office/outpatient visit est 0.48 100.00% 0.00%

99213 Total Office/outpatient visit est 0.97 100.00% 0.00%

99214 Total Office/outpatient visit est 1.5 100.00% 0.00%

• Percentage of professional value

Professional Value Component

27

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51797 Total Intraabdominal pressure test 0.8 37.70% 62.30%

51797TC TC Intraabdominal pressure test 0 0.00% 100.00%

5179726 26 Intraabdominal pressure test 0.8 100.00% 0.00%

51798 Total Us urine capacity measure 0 0.00% 100.00%

51800 Total Revision of bladder/urethra 18.89 100.00% 0.00%

51820 Total Revision of urinary tract 19.59 100.00% 0.00%

99203 Total Office/outpatient visit new 1.42 100.00% 0.00%

99204 Total Office/outpatient visit new 2.43 100.00% 0.00%

99212 Total Office/outpatient visit est 0.48 100.00% 0.00%

99213 Total Office/outpatient visit est 0.97 100.00% 0.00%

99214 Total Office/outpatient visit est 1.5 100.00% 0.00%

• Look at historical productivity,

compensation, and business income levels.

– Target the new model based on historical

figures as behaviors will likely continue

– Target the new model at 90% of previous

years numbers and then pay out any excess.

• Benchmark against national survey stats

Identifying Conversion Rates

28

• Where to start?

– Patient satisfaction scores

– Quality measures associated with the new

ACO rule.

– Quality standards associated with

meaningful use

– Internal audit scores (i.e. accuracy,

timeliness, data points)

Quality Metrics

29

• Combination of wRVU Productivity and Quality

• $47 for Production and $4 for Quality

Quality Model

30

Indiv $/wRVU

Quality Comp

wRVU's % Quality Comp

Physician A 5500 258,500.00 0.18 14,256.00 272,756.18

Physician B 4500 211,500.00 0.32 25,344.00 236,844.32

Physician C 5000 235,000.00 0.24 19,008.00 254,008.24

Physician D 4800 225,600.00 0.26 20,592.00 246,192.26

Total 19800 930,600.00 1.00 79,200.00 1,009,801.00

• Use wRVU’s to create percentage of work

done and share revenue by percentage

• Pay base salary (draw) and then bonus of

extra money based on productivity

• Compensation allowances based on

amount of call coverage

• wRVU allocation for admin time

More Options

31

Bonus on % of wRVU

32

wRVU's % wRVU's Bonus

Available Bonus

Disbursement

Physician A 5500 27.78% $18,758.33

Physician B 4500 22.73% $15,347.73

Physician C 5000 25.25% $17,053.03

Physician D 4800 24.24% $16,370.91

Total 19800 $67,530.00 $67,530.00

• Equal Salary paid to each physician

• Bonus shared by partners based on production

• Time value units

– A specified dollar amount is paid for each

time value unit

– Fair for total time spent

– Independent from RCM or work units (good

for admin/clinic mix)

Time Value Units

33

• Medical Directorships

• Additional call pay

• Moonlighting

• Ownership (imaging equipment, surgery

centers, DME, etc)

Other Compensation Ideas

34

• Physicians understand how they are

getting paid and are not confused by

formulas

• Easier to administer – less time to

calculate and fewer opportunities for

errors

• Less risk of compliance issues as long as

basic premise is legal.

Benefits of Simplicity

35

• Fair Market Value

– Usually done by comparison to surveys

• Compliant coding and billing

– Medical coding/billing drives the financial engine of reimbursement and most productivity models

– Non compliance can result in big fines, loss of Medicare

• Stark and Anti-Kickback

– There are some compensation models that are illegal and result in hefty financial penalties and jail time.

Compliance and Ethics

36

• Practice is performing below national mean

• Providers are paid salaries

• Owners are concerned about business profits

• Group is very interested in quality

• Options?

• Considerations….

What do you think?

37

• Practice owned by physicians

• All providers are owners

• Culture is eat what you kill.

• Options?

• Considerations……

What do you think?

38

• Focus on compensating each physician for

everything they are involved with

• Dispersing revenue for ancillary or facility revenue

• Any compensation that could be related to a

referral of services

• Productivity models with Utilization rates higher

than national median rates

• Competition levels that harm culture or patient

experience

Red Flags to Be Aware Of

39

• Tie to strategies and goals of practice

• Maintain perceived equity

• Keep as simple as possible

• Run several models to verify the goals of

the model are accomplished and

sustainable

• Keep consistent whenever possible

• Maintain compliance and stay out of jail

Administer with Success

40

Thank you for attending!

CEU Code: