How are physicians compensated? There are a whole bunch of different ways in which physicians are compensated and I’ll just kind of walk through each one of them. The easiest way that a physician is compensated is just through a straight-based salary. They would receive a certain amount just like any other employee and they do the work, they get paid on a biweekly basis or whatever the employer’s payment structure is, and that’s it. There’s no bonus opportunity, no productivity incentives. It’s just a straight base. Do the work and move on. That’s the simplest way of doing things. I would say, certainly, productivity is worked into many employment contracts nowadays, especially with physicians in hospitals or health networks.
Different Compensation for Medical Providers
Those organizations generally will provide an income guarantee, meaning, the physician will see a set guaranteed minimum salary for a period, usually two years. And then after that two-year period, their compensation will be productivity-based arrangement usually based on RVUs. Straight-based salary is the first one, the second one is hourly. If the physician does shift work, so ED, hospitalist, maybe critical care, ICU. In that case, many times, it can be paid an hourly rate, and that’s very simple. You can get paid per hour the amount that you work and that’s what you take home and that’s the end of it. A little more complicated of a system would be, as I stated before, the productivity model.
There can be a hybrid where the physician will make a guaranteed minimum base. And then there’ll either be a bonus based upon their productivity or just their base compensation is tied to that as well. And there are usually two ways that those are calculated. One is net collections and the other one is RVUs. First, net collections. Net collections are used mostly by private physician-owned groups. Most physician groups do not use RVUs and almost no hospital would use net collections. If you have a net collections-based agreement and it’s a hybrid, then there would be some minimum salary amount that the physician would receive every pay period. And then they would also get a bonus based upon their net collections, meaning, how much money the practice brought in, the physician would then get a percentage of that. Other blogs of interest include:
Now there are two ways of handling that as well. One, if it’s just straight net collections, meaning they get a percentage of what’s collected. That’s usually somewhere between 30% to 40%, sometimes up to 45%. If it’s a hybrid, meaning, they have a base salary, then most employers would say, once the physician covers their base salary, let’s just say they’re making $240,000 a year. They’re getting 20,000 a month. Once they collected 20,000, anything above that they would get a percentage of, in that scenario, usually it’s somewhere between 15% to 25%. If it’s an RVU based productivity model, as I said before, this is mostly with hospitals and health networks. Once again, the physician could have a minimum based salary and then they would get bonuses based upon their RVUs. If they generate a certain amount of RVUs, usually quarterly, sometimes monthly, then they would just multiply the RVUs over that base amount times what’s called a compensation factor.
Usually, that’s somewhere between $35 to $80 depending upon specialty. The physician would then be paid out the bonus based upon their RVU production. A normal way of doing that would be, let’s just say someone is in primary care and their annual expectation is 6,000 RVUs. If it was quarterly, then that would mean they’re expected to generate 1500 RVUs a quarter, and then any RVU generated over that amount, they would be bonused by multiplying how many RVUs times the compensation factor. For primary care, I’d say probably usually somewhere between $40 to $50. That’s a hybrid model. And then some can also be compensated purely on RVUs. Meaning, they only get paid what they produce. So, they would just take their RVU production per month and then multiply what they generated times the comp factor and that’s what they would receive. And in those scenarios, there would usually be an agreed-upon draw. There’d be some amount, let’s just say they’re making 10,000 a month as a guaranteed draw, and then whatever they produced above that they would receive, and if they produced less than that, then the negative balance would be carried forward into the next month, quarter, year, whatever. So, those are the different ways physicians are compensated. They can also be compensated through bonuses.
Discretionary bonuses from the employer, signing bonuses, relocation bonuses. They can be compensated that way as well. Sometimes, there’s student loan repayment, could kind of consider that compensation as well. There’s a variety of ways of doing it. I mean, if somebody’s been doing this for 20 years, it blows my mind like how many ways to compensate physicians. There are some that are better than others, but certainly, there’s no one standard way.
Individual Incentive Pool
Physician compensation models that are pure percentage of collections. We’ll kind of work through how that works and then how the physician is compensated in those types of models. I guess as an initial matter, if a physician works for a hospital or healthcare network, it’s very rare that they would be compensated just based on net collections, that doesn’t happen. Most of those organizations, if they’re going to use a productivity model, it’s going to be via RVU based compensation. The kind of organizations that use net collections the most are smaller physician own practices, and it’s also specialty dependent as well. I find dermatology, anesthesiology use net collections the most in their compensation.
It’s probably rare for peds or primary care to use pure net collections based. There are two types of ways of doing the net collection model: One, you can have a hybrid of where you would get a base salary guarantee, and then you would also have percentage of net collections threshold. ‘What are net collections’ is probably a great thing to touch on first. Any kind of services that the physician does and is billed for and then the practice receives, are net collections. The main difference between RVUs and net collections is, under RVUs, it doesn’t matter what the organization collects. Sometimes there are insurance companies who will then write down what is actually paid out, there’s bad debt, meaning, the physician will provide a service, but then a patient for whatever reason doesn’t end up paying.
Or like I said before, the insurance company doesn’t pay, there are write-downs. Maybe for whatever reason, charity care-specific situations to practice will discount a bill. And any of those scenarios, those things are passed through to the physician. A physician could do a service, but if the company is not paid, the physician will not reap the reward of those collections. Now in an RVU based compensation model, it doesn’t matter about collections. It’s simply what does the physician do, what are the encounters that they did, and then what are RVUs generated. That one thing to consider is how efficient is the billing for the practice that you’re joining. If they are bad at collecting, it’s going to affect you as well.
You need to make certain that they’re using a positive and efficient biller. Many uses outside third-party billing companies and others have it in-house. It just kind of depends. What are the two types? One, as I said before, you could have a base number, and this is a common way of doing it. You have a base compensation number for the year, and then this scenario, it’s usually done monthly. The employer will say, once you’ve collected enough to cover your salary, you then get a percentage of the net collections above that monthly. Let’s say someone makes 20,000 a month. Once they collect 20,000, then anything above that, they’ll get a percentage of, normally, somewhere between 30% to 40% is kind of an industry standard.
It’s most likely not going to be more than that. I don’t recall ever seeing a net collections-based agreement over 45. In that scenario, you do have a base, so there’s a minimum amount. However, if you’re ultra-productive, then you’ll also kind of reap the reward of that from the collections you get. A monthly way of doing that is the most common. They could also do it quarterly. It would be rare for a place to do that on an annual basis. The physician generally wouldn’t accept that because they would have kind of a smaller amount throughout the year than they’d get, or at least theoretically, they would get a big check at the end of the year. Most people would prefer getting it spread out over the year than one big lump at the end of the fiscal year or calendar year, depending upon how the employer does it. Are net collections-based agreements fair? Certainly, they’re fair, it just depends upon what’s the actual number and then what are the different thresholds as far as what you get. If it’s an absolute pure net collections model, which is the kind of the second way of doing it, you simply get paid everything that you collect and then multiply by that percentage. The problems with that are usually just at the beginning. Like an average accounts receivable cycle from when a physician has an encounter to when the practice gets paid, is usually anywhere between like 30 to 90 days.
So, in that model, a physician comes into the practice, they’re working, they’re doing a bunch of counters procedures, whatever, but the practice isn’t getting paid for 60 days beyond that. Well, the physician is not going to make any money in month one or two or even three. I mean, it will obviously increase over time. Many times, in that scenario, if that’s absolutely the model that the employer insists upon, then we’ll have base draw work in the first couple of months. And then that will be kind of either forgiven or taken away over time from what the physician produces so they don’t make zero or a very small amount of money in the first couple months of the employment arrangement.
It normally takes around 12 to 18 months for practice to reach maturity. Once again, it’s kind of specialty-dependent, but in that case, your net collections will continue to increase over time throughout the first year and into year two as well. If you’re joining a practice and you’re replacing someone, you’re going to have a head start. But if you’re joining a new practice or maybe like a new branch of practice, it’s not going to happen instantly, it’s going to take time to build up. So, those are the different collection percentage models for a physician.
RVU Group Plan Compensation
How does a base salary plus productivity model works in a contract? It can work in several different ways. We’ll kind of go through that. In a physician contract, if someone is just coming out of training or is switching jobs, it’s very likely that there will be income guarantee period. It doesn’t make a lot of sense for a physician to join a practice or a hospital, and then just go straight production from the very beginning. Now, it could be specialty dependent. Maybe if you’re doing some staffing or shift work with an ED or hospitalists, that may make sense.
However, if you are kind of building a practice, if you’re in primary care, cardiology, or any of outpatient-based clinic practices, it takes time to build up a patient base. 12 to 18 months is a normal amount of time for practice to reach maturity. If you come in, there likely will just be an income base guarantee and then maybe some stretch goal production models where, if you hit certain thresholds, you’ll get bonus. But in that case, after the income guarantee period, after the first year or two, it can then switch. And today I’ll just talk specifically about how a base salary plus productivity model would work. It’s basically a hybrid compensation model. I’ll take two scenarios and kind of walk through them briefly.
Let’s just say, a physician has a guaranteed base, plus RVU based productivity bonuses involved. And let’s talk about how that would work. Let’s say you made; I’m just going to use an example. Let’s say you made 240,000 in year one and then 240,000 in year two is the income guarantee. And then after that, your compensation then shifts to productivity model. What an employer could do is instead of just paying you 240, they could cut your base guarantee in half. So, you’d be making 120 and then once you hit certain productivity thresholds, they would do calculation and you would get the surplus of that. Let’s take RVUs as an example. Let’s say you’re in primary care and the annual RVU goal is 6,000. Most places would do maybe a quarterly reconciliation, it’s 1,500 RVUs that you’re expected to generate.
You have the 120 annual base, right? And just divide that by 12. And so, you have 10,000 a month and then after the quarter, they’ve paid you 30,000. In addition, at the end of that, they would say, alright, did you generate 1500 RVUs? Then anything above that, you would then get multiplication where they’ll take the surplus RVUs times compensation factor, and then you would get that as a bonus at the end of the quarter. Now, in that scenario, that’s not a way that most places would do it, because most physicians are not going to be okay with getting a small base each month and then a big windfall at the end.
In addition to that, if you were getting half base, you certainly wouldn’t be expected to have a normal median RVU productivity to get any additional comp, it would be lowered. Another way to do kind of a base plus productivity would be through net collections. The scenario would be the same the physician would have a base salary, and then they would have net collection threshold. One way of doing it would be, let’s just say the physician is getting paid 20,000 a month. The employer would say, okay, once you cover your base salary, once you would get 20,000 in collections in that month, anything above that amount, you would get a percentage of usually somewhere between 30% to 40%, and then they would get that at the end of the month.
Usually within 15 to 30 days of the end of the month. That would be a normal way of doing it as well. Honestly, from contract to contract, the way that a physician is compensated probably varies the most from any other term. There are so many ways of doing compensation. Is there one that’s better than others? No, I don’t think so. I mean, it’s just kind of depends upon specialty, depends upon how efficient the billing practices of the business that you work for are, depends upon the volume, depends upon how established the practice is. All those variables go into, I guess they combine to determine what type of compensation model would be best for you.
Until we can kind of take a total look at all of it, there’s no way of knowing what’s the best in your situation. Then also there are employers who just say, this is the model we’re using. And you must deal with that as well. In that case, if you know what the model is, and that they’re not going to change the model, the one variable that they can change is the numbers used. The RVU threshold, the net collection percentage, what the base straw is, those are all the things that can change that can determine whether it’s a great opportunity for a physician or not. That’s a brief example of a base compensation plus productivity model for a physician.
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