What are the most common types of physician compensation models? Spoiler alert! There is no common model. I’d say from contract to contract the way that people are compensated varies the most, it’s kind of the most variable part of any kind of physician contract across contracts. I mean, I review hundreds of physician contracts a year, and it just blows my mind how many ways the different organizations compensate physicians. But there are probably three main types and I’ll go through those right now. The easiest and simplest way of compensating a physician is just a straight-based salary. There is no productivity attached to it, no volume expectations.
Physician Salary Considerations
It’s just you do the work; you get paid a base salary and that’s it. For people who are just coming out of training, it’s not uncommon for them to receive a guaranteed base with no productivity for the first year or two. And there are many jobs where they just pay the base and that’s it. However, there are also different ways to compensate physicians that kind of introduce some productivity. I’d say the first one is RVUs. When someone enters an organization, they just said, no matter if they’ve been out for a long time or just coming out of training, if you’re entering an organization and 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 many times will then switch completely to RVU production.
Meaning, how much they make each year is entirely dependent on how many RVUs they generate. I’m not going to get into what an RVU is or how it’s calculated. I do have a couple of videos. If you’re interested, you can look at it. I go through kind of what an RVU is and how a physician is compensated for it. But on the basic level, they just multiply the number of RVUs you generate times compensation factor, like a monetary amount that kind of varies by specialty. Usually, it’s somewhere between 40 to $80. And then they just multiply that times your RVUs, and that’s how much you make for the year. Now, obviously, there must be some details that go into that. Usually, there’ll be base draw, so the physician will continue to get a normal salary each month, but then it’s reconciled quarterly.
Physician Compensation Models
For instance, let’s just 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 do a look back on how many RVUs they generated times the compensation factor if there is a surplus. Meaning, they generated more RVUs than they made, then usually they’re then given a bonus. Most employers in that scenario will not give a full percentage with a base draw. Let’s just say in the previous year, someone just via RVUs generated like $240,000, right? So, it’s 20,000 a month. The employer is not going to just give them a base of 20,000 a month because there’s going to be variables involved. If someone takes a two-week vacation, but they keep getting paid 20,000 per month. Other blogs of interest include:
- What is a Physician Base Compensation Plus Productivity Model?
- Physician Compensation with a Percentage of Collections
Well, then there’s going to be a deficit that either they’re going to 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 carry forward. Most physicians do not like that at all. That’s one way of doing it is just after the income guarantee straight RVU compensation. There are others that will do a hybrid of a guaranteed base in addition to RVUs. They’ll give target: monthly, quarterly, yearly target of RVUs. And then once the physician hits that amount, then they can then receive a production bonus. And as I said before, it would be just the RVUs generated above a certain number of times the compensation factor. That’s primarily used in hospitals and healthcare organizations. A different model is net collections-based and that’s used, I would say primarily from physician-owned groups from smaller practices. How that would work is, the amount collected by the practice that is a direct result of the physician’s services would be calculated. And then the physician would get a certain percentage of that.
Usually, the percentage would be between 30% to 40%, somewhere in there. Now, if you’re a physician, you think, well, that’s completely unfair. I only get 30% to 40%, but when you consider overhead staffing, supplies, payroll taxes, all that kind of stuff, it does work out mathematically to being equitable for both parties around that amount. You are not going to get net collections-based compensation. It is like 50% or anything, it’s just not going to happen. In a net collections-based compensation model, it’s like kind of an RVU based model and the fact that there’ll usually be reconciliation monthly. And then, if you were to generate whatever a hundred thousand dollars in a month, then they would just do the calculation.
If you’re on 40%, then you’d get $40,000, usually paid within 15 to 30 days of the end of the month. And that’s what you make. There are some more variables that go into and this is the tricky part, is if you just go into a job and it’s just pure collections from the very beginning, you obviously aren’t going to make a lot in the first couple months because the average accounts receivable cycle from when you do a service to when you get paid through the insurance companies can be anywhere from 30 to 90 days. 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 draw so that the physician isn’t just making a tiny amount in the first few months. What’s my opinion on what’s fair and what’s not, it really just depends upon the job and the specialty of the physician.
I think all the different compensation models are fair if the compensation is right. I think on a kind of motivational level, it makes sense to incorporate some production into the contract. Someone who just has a base salary and there’s just absolutely no bonus or upside in producing more, 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 a physician who’s ultra-productive, there’s no downside to that. It’s just, I guess probably a matter of whether the employer’s creative or not, 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 then kind of be a hybrid of all three of those.
Percentage of Collections Model
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.
Individual Incentive Pool
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.
Productivity Bonus System
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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