How Does a Physician Income Guarantee Work? | Physician Employment

Today, I will talk about how a physician income guarantee works. There are different ways that this can work. And we’ll kind of walk through the other models. First, suppose you have a straight base salary. In that case, there’s no productivity attached to it, and there are no volume expectations. You could consider an income guarantee. Most people would think that a base salary. Still, theoretically, you consider that an income guarantee, meaning, no matter what happens. You will get this amount of money, utterly independent of volume, productivity, encounters, net-collections, and 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.

Practice Compensation

Indeed, if a physician who comes into practice is unproductive, and doesn’t see as many patients as they should, what is the expectation? The employer will tell the physician they need to increase 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 terminate the agreement without-cause and let the physician go for being unproductive. In a usual kind of what is income guarantee, it would generally be thought of with a hospital. 

If a Physician is Employed by a Hospital

So, suppose a hospital employs a physician. In that case, there will be a period, usually one or two years, where they are guaranteed this amount of money no matter what happens. And then, after that period, and let’s say it’s two years, their compensation will shift to the productivity model. If it’s a hospital, then it would generally be RVU based. Let’s 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. 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 Say a Physician is a Primary Care

Let’s say they’re in primary care. The hospital employs them. They set up a clinic in the area, and it usually takes 12 to 18 months for a practice to reach maturity. And so, they say, no matter what happens, you will get $200,000 in year one or two. And then, after that income guarantee period is over, we’ll compensate you for 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 equals this amount of money, so 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, you’ll get compensated either monthly, quarterly, or annually. Most places would do it quarterly. It is frustrating for a physician to work all year and wait the entire year to get any productivity bonus. I would suggest making sure it’s smaller than a year, but quarterly is an average amount. 

Is there any Negotiation in an Income Guarantee?

Is there any negotiation in an income guarantee? Well, certainly you can negotiate the amount of the income guarantee. Still, if you’re in a health network or a hospital, you cannot change the model with how they compensate all their physicians. You should be aware of how it’s calculated. Different places do it differently. It would help if you talked to someone who could walk you through it. Alright, here’s how this will work after the income guarantee ends. And then this is what you should expect, moving forward after that. 

A Red Flag

Suppose you have a job that you come into which is immediately productivity-based. In that case, that’s a big red flag for several reasons. Let’s 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 regular accounts receivable cycle. You could be working for 30 days and not see a dime. And then it slowly trickles in and builds up for the year to 18 months, as I said. 

In that situation, you need to be very careful. Usually, we would work on a short-term income guarantee in that situation so that they would at least get a certain amount. 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.

Other Blogs of Interest

• How to Negotiate a Physician Contract | Contract Negotiation Tips for Medical Doctors
• What is a Non-Compete for a Physician? | Physicians Non-Compete
• What Should be in a Telehealth Contract?

What is a Base Physician Compensation Model Plus Productivity?

How does a base salary plus productivity model work in a contract? It can work in several different ways. We’ll go through that. In a physician contract, if someone is just coming out of training or is switching jobs, there will likely be an income guarantee period. It doesn’t make much sense for physicians to join a practice or a hospital. Then go straight production from the beginning. Now, it could be specialty-dependent. Maybe that may make sense if you’re doing staffing or shift work with an ED or hospitalist.

Productivity Based Model

However, if you are building a practice in primary care, cardiology, or any outpatient-based clinic practice. It takes time to build up a patient base. 12 to 18 months is an average time for practice to reach maturity. If you come in, there likely will be an income base guarantee. And maybe some stretch goal production models where you’ll get a bonus if you hit certain thresholds. But in that case, after the income guarantee period, after the first year or two, it can then switch. And today I’ll 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.

Physicians Base Salary Plus RVUs

Let’s say, physicians have a guaranteed base, plus RVU-based productivity bonuses involved. And let’s talk about how that would work. Let’s say you made 240,000 in year one. And then 240,000 in year two is the income guarantee. And after that, your compensation then shifts to the productivity model. An employer could, instead of just paying you 240, they could cut your base guarantee in half. So, you’d be making 120. Then once you hit certain productivity thresholds, they would calculate, and you would get the surplus. 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? Divide that by 12. And so, you have 10,000 a month, and 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 get multiplication where they’ll take the surplus RVUs times compensation factor. You would get that as a bonus at the end of the quarter. In that scenario, that’s not how most places would do it. Because most physicians won’t be okay with getting a small base each month and a big windfall at the end. 

Physician Compensation Models

Additionally, if you were getting half base, you wouldn’t be expected to have a normal median RVU productivity to get additional comp. They would lower it. Another way to do a base plus productivity would be through net-collections. The scenario would be the same: physicians would have a base salary. And then they would have a net collection threshold. One way would be that the physician is getting paid 20,000 a month. The employer would say, okay, once you cover your base salary, once you’d get 20,000 in collections 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. From contract to contract, the way physicians earn probably varies the most from any other term.

Is One Better Than the Others?

There are so many ways of doing compensation. Is there one that’s better than the others? No, I don’t think so. It depends on the specialty and how efficient the billing practices of your business are. The volume and how established the practice is. All those variables, I guess, combine to determine what type of compensation model would be best for you.

Until we can take a total look at it, there’s no way of knowing what’s the best in your situation. Then also, some employers say, this is the compensation model we’re using. And it would help if you dealt with that as well. In that case, say you know what the compensation 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, and the base straw. These are all things that can change and determine whether it’s a great opportunity for physicians. That’s a brief example of a base compensation plus productivity model for physicians.

Physician Compensation with a Percentage of Collections

Physician compensation models that are pure percentage of collections. We’ll work through how that works and how physicians get compensated in those models, as an initial matter. Physicians who work for a hospital or healthcare network would rarely be paid just based on net-collections. That doesn’t happen. Most of those organizations, if they’re going to use a productivity compensation model, it’s going to be via RVU-based compensation. The organizations that use net-collections the most are smaller physician-own practices, and it’s also specialty-dependent. I find dermatology and anesthesiology use net-collections the most in their compensation.

Individual Incentive Pool Models

It’s probably rare for peds or primary care to use pure net-collections. There are two ways of doing the net collection compensation model. One, you can have a hybrid where you would get a base salary guarantee. And then, you would also have a percentage of a net-collections threshold. 

What are net-collections is probably a great thing to touch on first. Any services physicians do and are billed for, and then the practice receives are net-collections. The main difference between RVUs and net-collections is that under RVUs, it doesn’t matter what the organization collects. Sometimes there are insurance companies who will then write down what’s actually paid out. There’s bad debt. Meaning the physicians will provide a service. But then a patient, for whatever reason, doesn’t end up paying. Or, as I said before, the insurance company doesn’t pay. 

There are write-downs. Maybe charity care-specific situations to practice will discount a bill for whatever reason. And in any of those scenarios, those things are passed through to physicians. A physician could do a service. But if the company doesn’t get payment, the physician won’t reap the reward of those collections. Now in an RVU-based compensation model, it doesn’t matter about collections. It’s simply what the physicians do, their encounters, and then what RVUs generated. That one thing to consider is how efficient the billing for the practice you’re joining is. If they are bad at collecting, it will also affect you.

Two Types of Billing 

You need to ensure they’re using a positive and efficient biller. Many use outside third-party billing companies, and others have it in-house. It just depends. What are the two types? As mentioned, you could have a base number, which is a common way of doing it. You have a base compensation number for the year. This scenario occurs 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, anything above that, they’ll get a percentage of between 30% to 40%, which is 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 have a base, so there’s a minimum amount. However, if you’re ultra-productive high performance, you’ll also reap the reward 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 annually. Physicians generally wouldn’t accept that because they would have 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. Rather than one big lump at the end of the fiscal year or calendar year. Depending on how the employer does it.

Is the Net-Collections Model Fair?

Are net collections-based agreements fair? Indeed, they’re fair. It depends on the actual number and the different thresholds as far as what you get. If it’s an absolute pure net-collections model, which is the second way, you get paid for everything you collect. And then multiply by that percentage. The problems with that are usually just at the beginning. An average accounts receivable cycle from when a physician has an encounter to when the practice gets paid is usually anywhere between 30 to 90 days.

So, in that model, physicians come into the practice, they’re working, they’re doing a bunch of counter procedures. But the practice isn’t getting paid for 60 days beyond that. The physicians will not make any money in months one, two, or even three. I mean, it will increase over time. In that scenario, say 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 either forgiven or taken away over time from what the physician produces. So they don’t make zero or little money in the first couple of months of the employment arrangement.

It usually takes around 12 to 18 months for practice to reach maturity. Once again, it’s specialty-dependent. But in that case, your net-collections will continue to increase over time throughout the first year and into year two. If you join a practice and replace someone, you will have a head start. However, it will not happen instantly if you’re joining a new practice or maybe like a new branch of practice. It’s going to take time to build up. So, those are the different collection percentage models for a physician.

What is the Most Common Physician Compensation Model?

What are the most common types of physician compensation models? Spoiler alert! There is no common model. From contract to contract, the way people get compensated varies the most. It’s the most variable part of any physician contract across contracts. I review hundreds of physician contracts a year. It just blows my mind how many ways different organizations compensate physicians. But there are probably three main types, and I’ll go through those right now. 

Straight-Based Compensation 

The easiest and simplest way of paying a physician is just a straight-based salary. There is no productivity attached to it, no volume expectations. You do the work; you get paid a base salary, and that’s it. For people just coming out of training. It’s not uncommon for them to receive a guaranteed base without productivity for the first year or two. And there are many jobs where they pay the base, and that’s it. 

Productivity Compensation Models

However, there are also different ways to compensate physicians that introduce some productivity. I’d say the first one is RVUs. When someone enters an organization, whether they’ve been out for a long time or just coming out of training. If you’re joining an organization. This goes mostly for hospitals and big healthcare networks. It’s rare to have a physician-owned practice use RVUs. So they’ll have an income guarantee, usually for a year or two. And then their compensation will switch completely to RVU production. How much they make each year depends on how many RVUs they generate. 

I will not get into what an RVU is or how they calculate it. I do have a couple of videos. If you’re interested, you can look at it. I go through what an RVU is and how a physician gets compensated for it. 

But on the basic level, they multiply the number of RVUs you generate times the compensation factor. Like a monetary amount that varies by specialty. Usually, it’s somewhere between 40 to $80. And then they multiply that times your RVUs, and that’s how much you make for the year. Now, there must be some details that go into that. Usually, there’ll be a base draw. So the physician will continue to get a regular monthly salary, but then it’s reconciled quarterly.

Example Scenario

For instance, let’s say they’re taking home 20,000 a month. At the end of the quarter, they’ve been given 60,000 from the employer. And then they’ll look back on how many RVUs they generated times the compensation factor if there is a surplus. It means they generated more RVUs than they made and are usually given a bonus. Most employers in that scenario will not give a full percentage with a base draw. Let’s say in the previous year, someone just via RVUs generated like $240,000, right? So, it’s 20,000 a month. The employer will not give them a base of 20,000 a month because there will be variables involved. If someone takes a two-week vacation but keeps getting paid 20,000 per month. 

There will be a deficit they will either have to pay back or carry forward. Most employers will give maybe around 80% of what they made in the previous year as their base draw. And then that way, there aren’t a lot of negative balances to carry forward. Most physicians do not like that at all. One way to do it is just after the Physician income guarantees straight RVU compensation. Others will do a hybrid of a guaranteed base in addition to RVUs. They’ll give monthly, quarterly, and yearly targets for RVUs. Once the physician hits that amount, they can receive a production bonus. 

As I said, it would be just the RVUs generated above several times the compensation factor. Hospitals and healthcare organizations primarily use them. 

How Net Collections-Based Model Works

I would say that a different compensation model is net collections-based, primarily from physician-owned groups from smaller practices. How it works is, that they’d calculate the amount collected by the practice that directly results from the physician’s services. And then the physician would get a certain percentage of that.

Usually, the percentage would be between 30% to 40%, somewhere in there. Now, you think that’s completely unfair if you’re a physician. I only get 30% to 40%. Still, when you consider overhead staffing, supplies, payroll taxes, and all that stuff. It does work out mathematically to be equitable for both parties. You are not going to get net collections-based compensation. It is like 50% or anything. It’s just not going to happen. Net collections-based compensation models are like RVU-based models, and there’ll usually be monthly reconciliation. And if you were to generate a hundred thousand dollars monthly, then they would just do the calculation.

If you’re on 40%, you will get $40,000, usually paid within 15 to 30 days of the end of the month. And that’s what you make. Some more variables go into it, which is tricky if you go into a job. It’s just pure collections from the very beginning. You aren’t making a lot in the first couple of months. Because the average accounts receivable cycle can be anywhere from 30 to 90 days. It’s from when you do a service to when you get paid through the insurance companies. You could work for the first month or two and make a tiny amount of money. And then it grows over time. Usually, in those scenarios, we try to bake in a draw. So that the physician isn’t just making a tiny amount in the first few months. 

Summary

My opinion on what’s fair and what’s not? It just depends upon the job and the specialty of the physician. All the different compensation models are fair if the compensation is proper. I think on a kind of motivational level. It makes sense to incorporate some production into the contract. Someone who only has a base salary and has no bonus or upside in producing more or working more. It’s just human nature though, that they’re just. I don’t know if being ‘stagnant’ is the right word. 

But people are motivated by money. That’s just a reality. And if an employer can incorporate some way of compensating an ultra-productive physician, there’s no downside to that. It’s probably a matter of whether the employer’s creative. But, I mean, there are a million ways of doing compensation. So those are the three most common models: straight-based salary, RVU-based production, and net-collections. And then there are so many permutations that would be a hybrid of all three of those.

Negotiating a Physician Signing Bonus | Negotiate Salary and Bonuses

I’m going to talk about negotiating a signing bonus for a physician. In signing a bonus, there are some things to keep in mind and some industry averages as a signing bonus. First, when a physician is either coming out of training or switching jobs, it’s industry-standard for a signing bonus associated with the new employment contract. It’s also dependent upon whether the physician agrees with a hospital or healthcare network. Or if they’re joining a physician-owned practice.

Let’s take each one of those in order. First, let’s say you’re a resident or fellow coming out of training, and you’re going to join a small physician-owned practice. That is probably the level you’ll get the smallest signing bonus. Normally, in that scenario, I would say somewhere between 10,000 to 30,000 is standard. It is also specialty-dependent. The more specialized a physician is, the more leverage they have in negotiating. And therefore, they can get a higher physician signing bonus. Suppose you are a physician from training or joining a hospital or healthcare network. I find the signing bonus for them is usually a little bit higher than if you join a physician-owned practice. 

So, what do you do to negotiate? Well, I would ask the people you’ve trained with, what are some other bonuses you’re receiving? Because those people in your specialty will have up-to-date information on the offer in general. However, I do find it is very geographic-specific. Suppose you are moving to a location that is hard to staff too. Maybe not desirable at the general level like other locations. In that case, you’ll have the opportunity to get a higher signing bonus. 

Smart Way of Negotiating 

Let’s say the employer says, hey, we’re going to give you a $10,000 signing bonus, but you want more. Let’s say you want 20. Well, you don’t ask for 20. In any negotiation, you don’t throw up the number you want. You go higher than that. So, if they’re offering 10 and you would like 20, the smartest thing to do is ask for 30 and then hope they’ll meet in the middle.

Another thing that needs consideration is relocation assistance. Some places will, well, most places will give a signing bonus and relocation assistance. Let’s say you get a $10,000 signing bonus. Then you’d also get 10,000 relocation assistance, which would aid in moving expenses. 

Sometimes, they’ll allow the physician to use that for travel to the city, to look for a place to live. So, airfare, hotel, whatever, and others will also allow it if it’s a short move and you’re not going to use all 10,000. Then you could also use the rest of that money towards a security deposit or a mortgage in some situations. 

It depends upon the employer and how they handle things. Physician-owned practices are much more flexible in using that amount for whatever you want. Big healthcare organizations usually have policies on what you can and can’t use, which is not flexible. It’s, this is what you can use it for. And that’s it. 

Student Loan Assistance

Also, the last part could be some student loan assistance beyond the signing bonus and relocation assistance. You seldom see student loan assistance from private physician-owned practices. It just doesn’t happen. If you’re going to get student loan assistance, it’s almost always going to be through a hospital or healthcare network. Those can be substantial 50,000 up to 150,000.

And how they’ll handle that is at the end of the year, they will usually pay. Well, that’s not true. Either monthly, quarterly, or yearly, pay a lump sum directly to whoever the loan provider is for the physician. Then it pays off over time. Those are best because, generally, there’s no repayment obligation. After all, it gets paid after the physician has worked a period. There is no repayment. Now, suppose you are getting a signing bonus and relocation assistance. In that case, there almost always will be a repayment obligation. Suppose the physician leaves before generally the initial term of the agreement. So, if you had a, let’s say, three-year contract. The employer would say that you will owe us back a certain amount if you leave before the end of three years.

It could be forgiven monthly, once again, quarterly, or yearly. Let’s say it forgives monthly. 1/36 of the amount forgiven each month. And then until the end of the three-year initial term. After that point, the physician doesn’t have to pay anything back. You don’t have a ton of leverage coming out of training. The only leverage someone would have from training would be their specialty. 

Negotiation Is About Leverage

Once again, if it’s harder to staff, an area that’s difficult to bring in certain specialties. You have much more leverage than in a big metropolitan area, where many people want to live and have plentiful specialties. You don’t have as much negotiating power. So, can you negotiate a signing bonus? Absolutely. You can. It’s just a matter of whether the employer will meet you in the middle. Or whether they’re going to move at all from what the initial offer is. Any negotiation is about leverage. And if you don’t have it, getting the employer to move in any way is tough.

Negotiating a Physician Employment Contract

In my mind, there are three different scenarios. One, you’re just coming out of training. Two, you’re switching jobs to an area of the country you’ve never been to, or three, you’re moving from somewhere within the area where you already live. So, negotiation depends upon leverage. Do you have it, or do you not? Let’s take coming out of training, for instance. The only leverage someone has when coming out of training is in a specialty that’s hard to recruit for. I mean, that’s just the truth.

You are not bringing in any established patient base. You’re also relatively new to being out on your own. So, a learning curve will go into moving into any position. If you are in an area that’s very difficult to recruit, that could apply to any specialty. Or you’re in a specialty that’s difficult to bring in and is super profitable. Those are two things. When you’re looking into it, how do I negotiate? And when people say negotiate, most of the time, they think about the bottom line, what is my base salary. But I think that’s a narrow mind. And this will apply to anybody. When looking at a job, at least in my mind, some things are more important than just the base compensation. One, what are the restrictive covenants?

Important Parts of a Healthcare Contract

If someone lives in an area, they have family in the area. They have kids in the area. They absolutely cannot move after the contract ends. Sometimes, the non-compete could be the most important thing in a contract. A non-compete says you cannot practice for a period within a specific area. Another important piece is who pays for tail insurance—depending upon specialty. That could be an enormous part of a contract. If you’re an OB-GYN, you must pay for your tail insurance, and your underlying premium is $40,000 a year. Your tail insurance’s probably going to be around 80,000. So, who pays for tail insurance certainly could be the most important thing in an employment agreement for an OB-GYN. If you’re getting paid based on production, let’s say you’re in a contract that’s just pure net collection.

Like an average range for a physician is 35 to 40% of net-collections is your total comp. Is there language in the contract that states that when the contract terminates, you will be able to collect for a 60-to-90-day window after the contract terminates? If you don’t have that, you work for free for two or three months, which nobody wants to do. Going back to what is important, it depends upon the person. Having the numbers is important when you’re looking at base compensation. So first, they’re not always easy to obtain. Most places or most of the places use MGMA numbers. It’s a medical group management association. And most of the time, you must pay for that, and it’s expensive. So, no physician, at least most physicians, will not do that.

What Advantage Can You Get from Being an Established Professional?

You could find someone with access to those numbers or try to get them. Or if you kind of Google around on the internet, sometimes you can find them the average RVUs production, average compensation. It is specific to areas of the country. I honestly don’t think those are accurate when determining exactly how much and what part of the country. There’s just a feel for what someone is getting in this area. But then you also have to consider all the other things I just said. If someone has a base that’s $10,000 less, they don’t have to pay for tail insurance, or the non-compete is extraordinarily small. Well, that’s worth way more than $10,000 in some instances. Those are a few factors to think about.

Suppose you’re coming out of training. You’re well-known in the community as a primary care PE or cardiology. You have an established space, and you’re just moving into a new practice. Well, this is the highest leverage you can have. There will be no, or at least there shouldn’t be much time needed to ramp up the practice. You’re just bringing people with you. Plus, when you have numbers in a community. These were my net-collections, the RVUs I produced, or the patient encounters I had every week. Those are absolute hard numbers you can use to negotiate compensation, moving to a different practice.

Physician Contract Negotiations

And in that case, you have the highest leverage possible. Then, you can negotiate all the ancillary things I’ve already spoken about. The last thing would be, if you’re moving, you’re out of training, you’ve been in practice for a while. And you’re moving from one city to another without an established patient base, which removes some leverage. There are two factors that kind of work for you. One, are you moving to an area of the country that’s difficult to recruit? Rural communities pay more simply because it’s harder to find physicians in certain specialties to come and move and live in those areas. Or two, if you’re in a specialty that is simply hard to recruit or extremely profitable. So obviously, surgeons are difficult to find, or some other GI subspecialties are always difficult.

If you’re moving to a different part of the country, then the same analysis applies to coming out of training. However, you benefit from having some numbers of what you produced in your previous position. You can tell them; that this was the net collection I generated in my last position. Now, it doesn’t always translate from one state to another or situation to another. Maybe you’re going from private practice into an employed group. But having any data to back up what your production was is essential in determining your new total compensation in a new position. So hopefully, those are some tips on things to think about. Honestly, I can think of breaking this into ten different videos. But this is just kind of an overview of negotiating.