Physician Compensation

“If you don’t know where you are going, you’ll end up someplace else.”

-Yogi Berra

“. . . remember, no matter where you go, there you are.”

-Buckaroo Banzai

Not long after Dr. Sam Monroe had established himself as a valuable physician advisor, the CMO of City Hospital was elevated to a more senior position within the Akron City Health system, and Sam was encouraged to apply for the soon-to-be-vacant CMO position.

Sam was interviewed along with a few other outstanding candidates from outside the system, and after a couple of rounds of internal deliberations, the CEO decided none of the other candidates had demonstrated as much value to their respective organizations as had Sam.

When Sam received a phone call that the role was his should he choose to accept, he took the weekend to think it over and called the CEO first thing on Monday to ask when he could start. The CEO told Sam to provide him with his PA succession plan and to be ready to start in two weeks.

Shortly after beginning the new role, Sam was scheduled into a meeting with the hospital’s COO, CFO, and CEO. The only individual missing from the hospital executive team was the CNO. The topic of the meeting was “physician contracts.”

Sam had no preparation for the meeting and felt that with only a few days under his belt as CMO, there would not be a lot of expectations regarding his participation. He could not have been more wrong.

The meeting was relatively brief, with a lot of varied opinions expressed in very short order. It ended with Sam being given the responsibility not only to manage all hospital-based physicians, but to lead the negotiations for the renewal of the contracts of the hospitalist and the emergency department physicians.

He had a lot of experience as a hospitalist, as a prior medical director, and as a physician advisor, not to mention that he learned a lot about physician compensation when AMG acquired his group many years ago. However, he knew much less about the ED physicians.

The executive team gave him two mandates: lower by $2 million the expense of having these two groups under contract and engage the ED physicians on a variety of ED physician-related throughput measures to improve the overall ED metrics. Some of these included triage time, percentage of “left without being seen,” and door to discharge.

The COO was under pressure to improve overall hospital throughput, some of which was bogged down in the ED, starting with ED wait times. The CFO was under pressure to lower expenses by several million dollars and had determined with the prior CMO that the hospital-based physician contracts were “too rich.” And the CEO was under pressure from the system C-suite to be more “presidential” and run a tighter ship.

Sam had no idea that any of this had been underway when he was offered the CMO role, nor did he have any expectation that he would be called upon so quickly to manage such major issues. Nonetheless, he buckled down and got to work.

He immediately asked for copies of the hospitalist and ED physician contracts and asked to see financial reports of both programs. He scheduled meetings right away with the administrative directors of the two groups and in advance of the meetings sent each a series of questions that he wished to be addressed when they gathered.

He also made sure that he would have time on his schedule to meet with the hospitalist medical director and the CEO of the ED physician group, a physician who, like Sam many years prior, had created an independent group of physicians to provide their services to City Hospital.

Sam was taking an inventory of the current situation and would create a mental situation report to be filed away for later use. After he had his ducks in a row, he asked the CEO for permission to place “physician contracting” on the next executive team agenda so that he could provide an update of his work.

During the executive team meeting, he stunned the team by asking permission to seek a request for proposal (RFP) from other hospital-based physician organizations, particularly those that have a national footprint. He also asked that, if granted permission to conduct the RFP, the team would keep this confidential and that any meetings or face-to-face proposal reviews would take place away from the hospital.

When the executive team asked why he wanted to do this, his answer was that there was no way to accomplish the two mandates without separating from the current contracted groups. They were surprised at the speed of his findings and his resultant suggestion, and they acquiesced quickly to his request.

AMG, the employer of the hospitalists at City Hospital, provided each hospitalist with a standard physician employment agreement (PEA). Under each PEA, the physicians were now earning a base salary of $280,000 and potentially more if they exceeded the base expected “productivity.” It appeared now that at a salary of $280,000 with a productivity of 4,000 wRVUs, the physicians were being paid at a rate of $70/wRVU.

BASIC FINANCES OF PHYSICIAN COMPENSATION

When Sam’s group agreed to be acquired, the physicians were paid $62/wRVU and at 4,000 wRVUs, Sam earned about $250,000. How did the $/RVU go up so much while he was a physician advisor and away from the employed hospitalist role?

To understand the market conditions of physician employment contracting, we must dive a little deeper into some basic finances of physician compensation.

When Sam was in private practice, his group managed all of the billings and all of the overhead of running the practice. When he visited a patient in the hospital and performed a follow-up visit, he billed for the service and his office submitted the claim. Once the money was collected and expenses paid, he took home what was left.

For such a visit, Medicare might pay $93.80, but Blue Cross might pay 125% of Medicare at $117.25. If Sam generated two-thirds of his payments from Medicare and one-third from Blue Cross, he might generate a blended payment of roughly $100.60 for his follow-up hospital visits, assuming all of the claims were paid at 100%. Sam was entitled to “keep” the entire payment, as he managed his practice expense and the malpractice expense of his professional service.

When the practice was acquired, however, Sam’s group achieved only about 85% in collections for all of the billings. Part of the reason it is not 100% (and it hardly ever is), is that patients who are responsible for a co-pay or who are self-pay do not always pay their billed share, not to mention denials from insurance carriers. So, the practice received a blended net collection of about $85 for each of this type of hospital follow-up visit.

Under an RVU system, let’s say a follow-up hospital visit (coded as CPT 99222) is converted into 2.68 RVUs (1 RVU for practice expense, 0.38 RVU for malpractice, and 1.3 for the work RVU) and the conversion factor is $35. Because the employed physician is no longer responsible for the practice expense or malpractice expense, even if the hospital received 100% of a typical Medicare payment, Sam is not entitled to the gross $93.80 (2.68 × $35) from Medicare, as the hospital has to manage all of the physician’s expenses of practice.

Again, if the current hospitalists were being compensated at $70/ wRVU, it would also seem at first glance that the hospital is still keeping $23.80 on each of these visits ($93.80 – $70).

When Sam collected his 85% in private practice, he had to pay for all of the overhead of the practice expenses which, at the time of the practice sale, was about 50%. As such, he only took home $42.50 for “work” of his hospital visit ($100 blended rate × 85% collection × 50% overhead).

At first glance, once more, it appears that the hospital offers a better structure for compensating employed physicians. But that is not quite the case.

When the hospital employs a physician to provide the same follow-up visit or service to the patient, the hospital also has overhead expenses, often referred to as corporate expense, overhead expense, overhead allocation, corporate allocation, or shared allocation.

In our example, let’s also say that the hospital’s collection for a single professional service (hospital follow-up visit) of a Medicare patient is almost always going to be 100% ($93.80 = 2.68 RVU × $35 CF) but the overhead expense might be close to 75%, so the net patient revenue would be $65.55 ($93.80 × .75).

So, the hospital is not generating a positive margin when paying the hospitalists; in fact, they are actually losing $4.34 ($70 – $65.66) on Medicare patients! And, if the overall hospital collections for physician services across all payers are no better than the private practice at 85%, the net patient revenue for all billings (using the same hypothetical blended rate as above) would amount to $63.75 (100 × .85 × .75), which is even worse!

Now that he was the CMO, Sam could see the system finances, specifically the payer mix, blended rates, collections, and expenses, from the “other side” and realized that the hospital was actually subsidizing the physician compensation since the hospital was creating a negative margin.

Why must an employer subsidize so much of the physician income? It harkens back to “usual and customary.” Years ago, when physicians determined their fees and CMS tried to create formulas (RBRVs) to account for the fees it would pay, and then created yet more formulas to limit overall expenditures (SGR, RVUs,) in the face of growing services, higher utilization, more beneficiaries, longer life span, etc., physicians continued to work hard to maintain their base incomes. It was those incomes that set the market standard for salaried compensation, which goes to basic economic principles of supply and demand.

The City Hospital system was strategically positioning itself in its market and needed employed hospitalists to achieve its goals of efficient hospital operations and to manage competition for care and services. There was a demand for physicians and the supply dictated the price.

If ACH were to employ the hospitalist group, it would have to pay handsomely. When Sam’s partners did the math and determined that they probably could not work much harder and that they did not see any opportunities for ancillary services, capital partners, physician enablement companies, the hospital and the health system appeared to be the only logical partner to maintain their incomes.

So, when AMG offered to acquire the practice, despite any feelings of paranoia or concern by the physicians, the “splitting of the money” naturally drove the group to sell to AMG and move to the new contracted employment.

Surprisingly (at least to him), Sam’s initial review of the current hospitalist finances showed that the system did not collect enough money from those 4,000 wRVUs to cover the $280,000 base salary. Years ago, Sam was uninterested in these equations, but he was also unable to learn more facts when negotiating his practice buyout and new employment contracts. Now that he was the CMO, he could see the system finances, specifically the payer mix, blended rates, and collections from the “other side,” and he found that the hospital had only been able to collect about $60/wRVU, also known as net patient revenue per wRVU.

The administrative expenses of a hospital were sizably larger than those of a practice, especially when the hospitals were part of a larger system. Remember, too, that as employees, physicians enjoyed benefits such as health insurance, 401k plans, paid time off, and CME stipends that are structured quite differently in a small office and must be accounted for by the employer.

With all of those benefits (which can amount to about 25% of someone’s income), on average, the hospital was subsidizing (or “supporting”) the physician salary by about $110,000, which was well below what other systems were known to be spending.

Today, the average subsidy per physician/FTE is anywhere from $200,000 to $280,000 and varies by geography, employer model, system structure, and site of care (ambulatory vs. inpatient). Be mindful of the size of this number in your organization.

In the early 2000s, as more physicians became employed under contract, market forces dictated rising physician compensation as a result of supply and demand. While those salaries have largely been flat of late, there was certainly a new normal by the time Sam became CMO. Employers were increasingly relying on practice benchmarks across a region to determine comparable salaries across similar settings.

At the time of the contract renewal under Sam’s authority as CMO, hospitalists were being paid about $280,000, and at 4,000 wRVU, the rate was “backed into” and thus amounted to $70/wRVU. Which came first, the salary or the rate, has long been forgotten. So, even with the new understanding of the finances, Sam was left with the market conditions that would dictate the “going rate.”

What was not clear to Sam was whether or not the hospital could cut the rate and achieve any type of savings as mandated without the physicians choosing to not renew and walk out the door. Hence, Sam decided to source other hospitalist groups in case this happened.

LESSONS LEARNED

• The more the money was split up and diverging in different directions, the larger systems grew in order to keep the whole pie to themselves.

• This pie growth also added increasing amount of administrative work and expense, so it kept fostering more integration of models.

• Employed physicians are seen as a direct cost to a system. Any revenue that is generated by physician work is captured in facility fees, ancillary services, etc. Just as practices sought to enhance ancillary services to generate revenue, large systems use physician labor to do the same thing.

• Physicians generate large amounts of dollars through cognitive and procedural services, and also spin off the “technical/facility” dollars to the system. Most systems, therefore, account for employed physicians as “the cost of doing business.”

• Hospitalists are unique in that they have only one source of revenue and that is professional revenue for the care of patients. The work is cognitive and requires documentation. The compensation for hospitalists is more simplified.

• Other medical specialists, such as cardiologists, have additional sources of professional revenue such as when the work is procedural (documentation required, too) or interpretative (e.g., electrocardiogram, echocardiogram, catheter film, nuclear imaging). Those services have CPT codes and corresponding wRVUs (also subjected to payer mix, collection, overhead, etc.) but the net patient revenue applies just as well.

• For surgeons/surgical specialists, their professional revenue for surgery and follow-up care may fall under global payment models (lump sum prepayments) and which may create subtle complexities for determining net patient revenue, but the general principle still applies.

• The point is for the CMO to know how physicians manage billing and collections in private practice compared to how the model is converted and how it works under employment.

QUESTIONS TO ASK

• As one follows the flow of money, do you perceive employed physicians as a cost to the system? Is it because professional services alone do not cover the salary? Should physicians be able to “cover” their salary? Is this a hospital/health system issue or a systemic issue regarding reimbursement?

• Are health systems to be considered the newest version of a capital partner for physicians? Or a holding company of sorts? The company (i.e., hospital/health system) holds access to capital and dispenses dollars to the physicians based on their work.

• How do CFOs account for the upstream or downstream revenue to the hospital, group, or health system provided by employing physicians? How do they value physicians? Or are employed physicians simply seen as the cost of doing business?

Excerpted from The Chief Medical Officer’s Financial Primer: The Vital Handbook for Physician Executives by Lee Scheinbart, MD, CPE, FAAPL.