Physician Compensation with a Percentage of Collections | Physician Compensation
Physician compensation models that are a 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 Services
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 with 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.
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What are the Most Common Physician Compensation Models?
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 physicians 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.
Pay Through Production
However, there are also different ways to compensate physicians that introduce some productivity in practice. 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 physician compensation model will switch completely to RVU performance compensation. 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 on the Job
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 income guarantees a straight RVU compensation model. 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 in their practice.
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 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 physician 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 physician compensation models: straight-based salary, RVU-based production, and net-collections. And then there are so many permutations that would be a hybrid model of all three of those.
What Is the Best Physician Compensation Model?
What is the best physician compensation model? I wish I had a black and white answer, but it depends. Let’s work through the different types of physician compensation models and who can benefit from each. There are three main types of physician compensation models.
3 Main Types of Physician Compensation Models
First, just a straight-based salary. You work for an employer. They pay you 300,000 a year. You do the work, that’s it. You get the straight base, no productivity incentives, compensation, nothing. Second, you could earn on net-collections. Whatever your services bring into the practice, you would get a percentage of that. Typically somewhere between 35% to 45%. And then lastly, RVUs. The physician produces work RVUs for every encounter and generates a certain amount based on the schedule released by CMS. Then there is the compensation factor. An actual monetary value multiplied by the RVUs generated times that compensation factor. That’s how much physicians will make.
There are certainly hybrid models that combine one or all of these. It would be rare to have a compensation model with both net-collections and RVUs. That seldom happens. Maybe there would be a half-based salary minimum. And then the rest of your compensation would be tied to either net-collections or RVUs. I find that most physician-owned practices will have some productivity compensation and use net-collections. And then most hospital-based health network employment would utilize RVUs.
Why do they separate them? Not sure. But that’s just how it works in this industry. Which one is best? I think having a straight base salary with absolutely no performance incentives or productivity incentives doesn’t make sense to me. Now, if you’re a new physician coming into a new job. I’ll say, with the hospital, you’re establishing a practice in the area. There will almost always be an income guarantee for the first few years.
Most Ideal Model for Young Physicians
It usually takes 12 to 18 months for a practice to reach maturity. So, it only makes sense that physicians wouldn’t be placed on productivity compensation immediately. Especially primary care, cardiology, and any specialty where you must build up a patient base like ED or hospitalists. Those types of things where you’re just doing the work before you. You’re not building up a practice. You can hit the ground running. In those scenarios, it’s okay if it was in the RVU-based productivity model. But it makes no sense initially if you’re building up a practice. Many organizations will have an income guarantee for the first year or two. And transition into a hybrid of base salary plus RVUs.
Let’s first take net-collections. The main point of negotiation in the net collections-based agreement is the percentage. When I speak to physicians, they’re taken aback upon seeing they’ll only make 35% of anything collected by the practice. However, overhead is expensive. 60% is not an unusual amount in physician practices. If the employer is going to have profit, they need a percentage within that area. As I said, usually somewhere between 35% and 45% is normal. You will not see a net collections-based agreement over 50%. And if they’re a good businessperson, honestly, anything over 40 to 45 wouldn’t make financial sense unless they’re efficient.
Negotiate the Percentage of Collection
One thing to negotiate would be the percentage of collection the employer gives. It can either be calculated monthly, quarterly or yearly in some instances. And then it’s tier up, or there’s reconciliation at the end of those periods. So, the percentage will be the negotiating point if it’s a net collections-based agreement.
It can be just pure net-collections, meaning everything you bring in that’s what you make. Or maybe you have a base salary. And let’s say that any quarterly collected over $200,000. You get a percentage of whatever it is, in addition to your base salary. As far as RVUs are concerned, once again, you could be paid monthly, quarterly, or yearly if it’s reconciled. You’re not getting paid yearly, but they could reconcile it at that period. Usually, in an RVU-based contract, they would come up with a draw.
Let’s say you’re taking home 10,000 a month, no matter what. And then, at the end of the month or quarter, there’ll be a target. And then any RVUs generated above that target would be multiplied by that compensation factor. Then that’s what you would take home. So, what is the best? Well, as I said at the beginning, it depends upon the setting for the physicians. Net-collections based do not work in a hospital environment. So, if you are in a healthcare network hospital, it simply doesn’t work. RVU is the only thing that works in that environment.
It All Depends on the Setting and Practice
I think RVUs are fair, but you also must consider this. If you’re in a specialty like ED or hospitalists, and you’re only getting on RVUs. You could be completely screwed if the volume of the hospital is very low. If the sense is slow, if the ED is slow, there’s nothing you can do. In that scenario, you would not want to be paid purely on production. And honestly, it doesn’t happen very often, but I’ve seen it before. And it’s just a bad idea.
Now, if you’re in primary care, you’re at the mercy of, is the office manager good? Is the office set up well, and are they efficient? Is the billing and collection department on top of it? If you’re on a net collection base agreement and the billing and collections department is terrible. Well, you’re the one going to suffer from that. So, I always try to work in a hybrid where you’ll get a guaranteed base. But if you perform over a certain amount, you’ll also reap the benefits of the production. I mean, it’s just human nature. If you can get a bonus, then most people are incentivized to work harder to get that bonus.
That’s why most of these employers provide something like that. When you’re on a base salary, with no opportunity for production, you’re just doing work that’s in front of you. It’s just human nature that you likely won’t focus or work as hard if there’s no opportunity to make more. So, which one is better? It depends upon the setting. But all three can work perfectly for physicians if it fits the practice that they’re in.
What is a Physician Base Compensation Plus Productivity Model?
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.
Base Salary Plus Net-Collections
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 practice would say, okay, once you cover your base pay, 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.
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