Why small practices should consider Performance Based Physician Compensation Model

Physician Compensation Model

Over the years, private practices, especially those with 7 or less providers, have struggled with which compensation model to use when contracting new Physicians and Physician Extenders. The very popular model of Straight Salary, which has commonly been used since the 1990’s, is proving not to be the best model for either the practice or the provider. Straight Salary models, and those that include aacross-the-board bonus, became popular due to the minimal contractual requirements but were found to have some pitfalls as well. Some of these pitfalls are just meeting the minimal requirements set forth in the contract, and a lack of participation in practice and community initiatives. These contracts lack any kind of growth in revenue incentives for the physician and therefore the practice sees no real growth in revenue year to year.

The more popular way to overcome the pitfalls of Straight Salary Compensation is to use a Performance Based Compensation Model using Relative Value Units (RVUs) to design the compensation.

First, what is RVU? RVUs are a reflection of the relative time, skill, training, and intensity required of a physician to provide a given service.

CMS breaks down RVUs into three categories in an effort to cover all aspects of the cost of providing care. The three components are:

  1. Work RVU’s (wRVU), covering the physicians actual time and work;
  2. Practice Expense RVUs (PE RVU), covering the overhead expenses in the office; and
  3. Professional Liability Insurance RVUs (PLI RVU), cover not only insurance but also educational expenses to maintain their professional license.

These three categories make up the Total RVUs.

In the annual Fee for Service Schedule, CMS assigns a corresponding figure for each of the 3 categories, gives the current years conversion factor (the dollar amount for a unit of RVU,) and determines the Geographic Practice Cost Index (to account for cost of living in different areas). The formula looks like this:

Total RVUs = (wRVU x wGPCI) + (PE RVU x PE GPCI) + (PLI RVU x PLI GPCI) x Conversion Factor

Practices can decide which of the three categories to include in compensation. It is understood that the wRVU depends 100% on the physician’s effort and value. Compensation based on wRVU not only ensures that the provider is meeting their contractual obligations, but they are also incentivized to diagnose their patients to the highest specificity and code their visits correctly. A substantial portion of PE RVU would always go to the practice to cover those overhead expenses. These would include staffing, supplies, and the cost of maintaining the tangible and intangible properties. The practice should cover 100% of PLI RVU to take care of the cost of insurance and education expenses.

Very often when a practice looks at the Performance Based vs the Straight Salary method, they find they are overpaying some of the physician and underpaying others for the work they are doing.

Practices can look at the pros and cons of Straight Salary (which provides security and predictability of cash flow to physicians) and Performance Based Salary (which relates to value brought to the practice and to the patient). For example, practice can measure the wRVU over the last 12 months and use that to calculate the money fixed salary component and offer PLI RVUs on top of it and other incentives for over-achievement.

Basing a salary on RVUs, work only or work and professional liability insurance, ensure that physicians are being paid for the work they are doing while also being compensated for licensure and liability insurance. And of course, the practice is keeping a portion of the reimbursement to cover their cost as well with the PE RVU. Straight salary compensation neither encourages patient care at the highest quality nor gives the physician any real control over their own income. However, when using the RVU-based Performance Compensation model, the practice is putting the physician personally responsible for their quality of work and their income, ultimately saving time and money for private practices. The Performance Based Physician Compensation model is becoming the popular model in private practices.

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