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A Dream Deferral

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About three years ago, Jim Woodward wanted a beer. So did Tom Oliver, MD. The need to blow off steam was understandable for the two men. Woodward, then the president and chief executive officer of Winchester (VA) Medical Center, and Oliver, the hospital’s medical staff president and a practicing urologist, were discussing possible solutions to one of the more intractable issues surrounding large standalone community hospitals today: doctors demanding payment for covering call. So it happened that on the back of a napkin, a great idea was born.

“The problem we faced is the same many other hospitals face: maintaining an ER call roster in the face of changing economics and the changing social mores of physicians,” Oliver says.

Because Winchester is a regional referral center, its physicians, while taking call, were being inundated with a large volume of patients—including many uninsured—with whom they had no association, meaning their time and fees were going uncompensated, says Woodward, now CEO of Meriter Health Services in Madison, WI. Due to the problem, Winchester had lost its entire staff of psychiatrists and ophthalmologists. Meanwhile, an OB/GYN had written a letter threatening to stop taking call unless paid. Other specialties were grumbling as well. “These things are not rare,” Oliver says. “Putting out fires is what we were doing.”

So the doctors were not happy. And as many CEOs can attest, if the doctors aren’t happy, nobody’s happy.

Common problem

Paying for call, as some hospitals have discovered, can be extremely expensive and can spiral out of control quickly. Dan Mulholland, a senior partner with the Pittsburgh law firm of Horty Springer & Mattern, is an expert on call compensation. Typically in such situations, he says, one physician group approaches the hospital and demands payment for call and threatens to stop taking call if the hospital refuses.

“If the hospital rolls over and pays what’s demanded, other doctors start to line up,” says Mulholland. Once such a precedent is in place, he adds, it is almost impossible to rein in.

But with little apparent alternative, Woodward and Oliver had begun seriously looking at the possibility of paying a cash per diem to call physicians. The economics weren’t pretty at an estimated annual price tag of $3 million, but call had to be covered and physicians were tired of covering call for free. The hospital had a problem paying for call, however, because it was a net loser on the bottom line. Over that beer, Oliver and Woodward started wondering if they could structure a deferred compensation plan that would not only pay physicians for call, but allow the hospital to have some leverage of its own for the future.

A novel solution

The two sketched out a possible plan, then started discussions with the medical staff and consulted with Mulholland on a variety of possible solutions. “We all agreed something needed to be done,” says Woodward. “This was a plan developed between administration and the physicians jointly, and that was part of the beauty of it.”

The basic sketch called for payments to be set up in a savings plan that offered an investment vehicle for participants so that the money would grow over time. “You get money assigned to you, but you don’t get it until you’ve completed x-number of years of call,” says Oliver. For example, he says, if the hospital “gives you $100 for taking call last night, they just lost $100 with nothing to show for it.” That money, fully taxable, nets physicians much less than the $100 in real terms. It’s then spent and forgotten about.

The key win for the hospital and physician is that under a deferred compensation plan, the benefits are not taxed for many years, allowing the money in it to grow. Most important for Woodward and his fiduciary concerns was that certain incentives could be added to the program that keep the physicians coming back for more call, so to speak.

Building the plan

Under a deferred compensation model, says Mulholland, “eventually the cash gets paid out, but it’s more like a physician alignment strategy rather than just figuring out a way to cover call.”

Why? Because deferred compensation plans, per IRS rules, must have a significant risk of forfeiture. That opened the door for the hospital to structure certain regulations into the program, such as a vesting period of between five and 10 years, better compensation should the hospital hit certain financial targets, and penalties if the enrolled physicians set up competing entities, such as surgery centers.

With Mulholland’s help, Oliver and Woodward worked up the basics of the program, which was built as a 457(f) supplemental retirement plan under IRS terminology. Then they presented it to the physicians and asked them to divide the pie among themselves based on the varying workloads for call. “That prevents one group from saying ‘We want all the marbles because we’re us,’” Mulholland says. “We wanted them to be reasonable with one another in deciding how it’s going to be distributed.”

Winchester physicians decided to create four tiers of payment rates for call coverage based on the likely workload of the different physicians. For instance, “the orthopedic surgeon on call will be up all night, so he’s on the top tier,” says Oliver. In the next group would be the cardiologists, and so on. The hospital can structure any number of additional criteria into the plan, such as requiring physicians to keep seeing Medicare and Medicaid patients.

Paying for it

Woodward, who’s since moved on to an academic medical center where the call needs are largely covered by residents and fellows, hopes Winchester’s program will one day become self-sufficient, rather than drawing the deferred compensation pool from the bottom line, and provide a model for other hospitals struggling with the same issues.

To help toward the goal of self-sufficiency, Winchester bought life insurance for the physicians with the hospital as a partial beneficiary, with other beneficiaries named by the physician. “The idea is that some years down the road, as physicians who were more senior pass away, the proceeds would go to the hospital and the physicians’ beneficiaries,” Woodward says.

Three years into the program, Woodward recalls that upon introduction, the plan immediately solved the hospital’s call problems, possibly permanently. “Overnight, the teeth gnashing and concern on the part of the medical staff disappeared,” he says. “It was probably the most shocking thing I’ve ever experienced in my career in terms of a solution that was so creative and was received so positively.”

Some physicians, many of whom plan to use the money for college savings for their children, are recouping about $70,000 a year in current dollars, he adds, joking that the plan has worked so well, it “made me think about quitting and going back to medical school.”

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at pbetbeze@healthleadersmedia.com.