Today, I’m going to talk about how a physician income guarantee works. There are different ways that this can work. And we’ll kind of walk through the different models. First, if you just have a straight base salary, there’s no productivity attached to it, there are no volume expectations, you could consider that an income guarantee. Most people would just consider that a base salary, but theoretically, you consider that an income guarantee, meaning, no matter what happens, you’re going to get this amount of money, completely independent of volume, productivity, encounters, net collections, RVUs generated. This is what you’re going to make. In most situations that involve a base salary with no productivity incentives, there will be some expectation from the employer.
Certainly, if a physician who comes into practice is unproductive, doesn’t see as many patients as they should, like the expectation is, at some point, the employer is either going to tell the physician they need to increase the productivity. In some contracts, there’s a language that the employer can unilaterally reduce the base salary based upon productivity, or if it’s not going well, the employer could always just terminate the agreement without cause and let the physician go for being unproductive. In a normal kind of what is an income guarantee, it would normally be thought of with a hospital. So, if a physician is employed by a hospital, there will normally be a period, usually, one or two years, where no matter what happens, they are guaranteed this amount of money. And then after that period, and let’s just say it’s two years, then their compensation will shift to productivity model.
If it’s a hospital, then it would normally be RVU based. Let’s just say someone is a hospitalist and they’re coming into work. They may just be given a flat base and say, you must work this many shifts a year. And then after that, it might be a productivity model. Now, using a hospitalist is probably a bad idea since it’s pretty volume-dependent and the hospitalists can only do so much. Let’s use a different example because that was a terrible one on my part. Let’s just say they’re in primary care. They are employed by the hospital, they set up a clinic in the area, it takes usually 12 to 18 months for a practice to reach maturity. And so, they say, no matter what happens, you’re going to get $200,000 in year one or two.
And then after that income guarantee period is over, we’re going to compensate you due to how productive you are. So, they will track your RVUs for the first year or two. Most places would do it. They would say, alright, you generated this many RVUs in year two, which then equals this amount of money, so then we’re going to give you a base of this in year three. And then, if you generated a certain amount of RVUs over that amount, then you’ll get compensated either monthly, quarterly, or annually. Most places would do it quarterly. I mean, it is frustrating for a physician to work all year and must wait the entire year to get any kind of productivity bonus. I would suggest making certain it’s smaller than a year, but quarterly is kind of a normal amount. Other blogs of interest include:
Is there any negotiation in an income guarantee? Well, certainly you can negotiate the amount of the income guarantee, but if you’re in a health network or a hospital, you’re not going to be able to change the model with how they compensate all their physicians. You should be aware of how it’s calculated, different places do it very differently. You should talk to someone who can walk you through, alright, here’s how this is going to work after the income guarantee ends.
And then this is what you should expect, during the kind of moving forward after that. If you have a job that you come into and its immediately productivity-based, that’s a big red flag for several reasons. Well, one, let’s just say, if it’s RVU based, it’s a little fairer because in work RVUs, you’re paid for what you do, not what’s collected. If you’re in a pure net collections-based agreement, it usually takes 60 to 90 days for a normal accounts receivable cycle. You could be working for 30 days and not see a dime. And then it slowly trickles in and builds up over the course of the year to 18 months, as I said.
In that situation, you need to be very careful. Normally, we would work in short-term income guarantee in that situation, so that they would at least get a certain amount, and then it would likely be forgiven over time as the collections come in. Hopefully, that was helpful and just a basic of what is an income guarantee.
How do RVUs Work?
When a physician is either switching a job or many times when someone is coming out of training, they may be offered an employment agreement that contains RVUs. An obvious question to most people who aren’t used to being compensated in that way is: what is an RVU, and then how do I get paid for it? I’m going to break this down in the simplest way possible and make it easily digestible for people who are maybe looking at a job where they may be paid based on RVUs. Just as kind of like an initial matter, most of the time, if you’re going to enter a job, there’ll be a guarantee period prior to a productivity-based agreement kicking in.
For instance, let’s say, a gastroenterologist is employed at the hospital. They’ll usually have an income guarantee for the first year or two. Basically, a base salary that is not tied to productivity in any way. Then maybe after year two and then entering year three, it’ll transition into productivity model. In most cases, at least as far as being employed at the hospital, it would be RVU based. Let’s kind of talk about what is an RVU and then how do you get paid for it? An RVU stands for relative value unit and the CMS, Center for Medicare, and Medicaid services kind of came up with the system. I believe it was in the early 90s when essentially every CPT code is given a value or a number based upon how long it takes, how acute it was, how much time and skill is involved in it.
All of the specialties with all the encounters and CPT codes have an RVU number attached to them. There are three types of RVUs. You have the work RVU for the physician, you have the practice expense RVUs, and then the malpractice RVUs. The only RVUs that matter to the physician is the work RVUs. That just considers what the physician does. One of the benefits of RVUs versus net collections, which is another common way of being compensated for production, is that RVUs kind of take out any type of collections problems. Even though a physician may do a service, provide a service to a patient, if they’re being compensated via net collections, if the money isn’t received by the practice or the hospital or whoever the employer is, the physician won’t see it.
Let’s say write-offs, reductions by insurance companies just straight defaults by the patient in paying, all of those will go towards the physician doing the work, but not getting paid for it. RVU kind of takes that away. It’s only based upon what the physician does. In this case, as I was saying before, each encounter is given a number and then that number is then multiplied by what we’d call a conversion factor. Then that’s how much the physician will get paid. Let’s just do primary care for instance. Let’s say the median RVUs generated in a year for primary care is roughly between 5,000 to 6,000. If they were being compensated annually based on RVUs, you’d take 6,000 RVUs and you multiply those times the conversion factor, and then that’s what they would make for the year.
Obviously, there are multiple ways of paying them. No one’s going to wait till the end of the year. Generally, they would have a draw. So, there’d be a number that they’d agree to where the physician would be paid that amount. Then either monthly or quarterly, there’d be reconciliation. Then if there’s a leftover amount, meaning they’ve generated more RVUs than they were actually paid via the draw, then they would receive that as a bonus at the end of the month or the quarter or whatever the reconciliation period is. There is no negotiation as far as what an encounter is worth, as far as RVUs go. That is set by CMS and that’s what it is. There can be a negotiation in the conversion factor that changes based upon specialty. One specialty maybe has a conversion factor of 35, which is kind of like the average, whereas maybe, like a neurosurgeon might be 75 or $80. It just depends.
If you’re with a health network or a hospital, they usually have their own kind of internal benchmarks as far as what each specialty will receive for their compensation factor. Maybe if you were with a small physician-owned group that was using RVUs, you’d have some more leverage in negotiating what your compensation factor would be. How to kind of use this information practically, I would just search right out on the internet for kind of what an annual RVU amount would be in your specialty. Then also, look for the compensation factor as well. Another way of compensating physicians is they’ll have tiers. For instance, if their expectation is 5,000 RVUs in a year, then maybe between 5,000 and 6,000, they’ll be paid this comp factor 6 to 7, it would raise up to maybe $5 more and then 7 to 8, another $5.
That’s not uncommon either. Anyway, that is what an RVU is for a physician. Once again, you only care about the work RVU. There are multiple ways of compensating from it, but hopefully, that’s kind of like a bare-bones analysis to at least give you knowledge about it.
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