Income Structure is Key to Physician Recruiting

Not so long ago, determining how much to pay physicians required some educated guesswork.

Because doctors were mostly independent, private practitioners who paid themselves, there was a limited amount of data available on physician compensation. As physicians increasingly became employees, hospitals, medical groups, and other organizations developed greater interest in knowing what to pay them. A growing number of professional associations, benefits consulting firms, and physician recruiting companies now track physician compensation trends. It is now possible to get a fairly clear handle on what physicians are making nationally.

However, how much physicians should be paid is no longer the only salient question when it comes to creating physician compensation packages. How physician compensation should be structured is an equally important issue. When it comes to physician recruiting financial packages, one size does not necessarily fit all. Certain types of income structures may be more strategically advantageous than others, depending on the nature and objectives of the organization doing the recruiting.

For example, some healthcare facilities may choose to offer physicians a straight salary. In this option, the physician is listed as a W-2 employee on a hospital's payroll and benefits are included. The straight salary formula is not widely used in today's market, but it can make strategic sense in academic settings or in searches where relatively low income-producing physicians are being sought (pediatric sub-specialists and psychiatrists often fall into this category).

These and other types of doctors, though needed in a community, may not collect enough revenue to cover their respective overhead, benefits, and salary. A competitive salary offers candidates in these specialties the security of a fixed bottom line and can be considered a loss leader by the hospital to secure needed services and to support service lines that produce positive revenue. In the last year, 14% of Merritt Hawkins & Associates' recruiting assignments featured straight salaries.

More typical is the salary with production bonus model (in the last year, 65% of Merritt Hawkins' search assignments featured this model). This financial structure offers physician candidates both a clearly delineated income base and a mechanism for earning additional income predicated on their personal production. There are four primary ways that production can be arranged depending on the type of physician behaviors hospitals and medical groups wish to reward.

Some compensation models are based on gross billings generated in the practice. The intent of the gross billings formula is to alleviate candidate concerns over whether or not the hospital has a robust collection rate for the candidate's medical specialty. However, the hospital should monitor what candidates have established as their billable rate per CPT code with local payers, to ensure charge amounts do not exceed the probable reimbursement amount.

A second way to structure production bonuses is through net collections. In the net collections formula, income is based on all collections associated with the physician's provider number, and is relatively easy to track. There are two general ways in which physicians receive remuneration through net collections: a 100% of collections, minus overhead model, and a collections threshold model.

With 100% of collections (sometimes referred to as "eat what you treat"), physicians keep whatever they collect after their salary and overhead are paid for. Production is generally defined as collections for the professional component, but technical fees and revenue generated by non-physician providers can be used in the formula if the physician has these in the office and the associated expenses are factored in as overhead. In the collections threshold formula, a threshold is set high enough to cover the candidates' salary, benefits, and expenses. The candidate then receives a percentage of collections exceeding the threshold amount (usually 50%).

Production can also be based on practice volume measures, such as Relative Value Units, generated by physicians or on patient encounters. Finally, there is a growing movement to reward physicians not only on volume measures but on qualitative measures, such as outcomes data and patient satisfaction scores. These factors may be combined with volume measures to create a hybrid volume/outcomes based incentive model.

Though many hospitals are moving toward employing physicians, there are still circumstances in which hospitals may wish to recruit doctors into traditional, solo private practice settings. The solo practice model can be particularly appealing to established physicians with a strong entrepreneurial bent who value practice autonomy.

Compensation in this setting usually is structured in the form of an income guarantee provided by the hospital to the physician. The income guarantee acts as a subsidy for the first 12 to 24 months a physician is in practice, ensuring the doctor of a base of monthly earnings. The subsidy must be repaid to the hospital, but outstanding amounts the physician may owe on the subsidy can be "forgiven" provided the physician remains in the community for a stipulated period of time. In the last year, 16% of Merritt Hawkins & Associates' search assignments featured income guarantees.

Knowledge of these and other physician incentive structures will become increasingly important as physician practice models continue to evolve and as healthcare reform ushers in new physician payment systems.