At the Margins

What CFOs need to know about employed physician compensation

by Hamza Hasan and Sarah O'Hara

Is your health system employing more physicians these days?

If so, you're not alone. According to one recent study, the number of physicians employed by health systems grew by 50% between 2012 and 2015. And this trend is only expected to continue, as physicians seek greater work-life balance and protection from the challenges of a changing reimbursement landscape.

As the ranks of employed physician swell, so too do questions about the best way to compensate these providers. Many system financial leaders still bear scars from the 1990s, when—anticipating a widespread shift toward managed care—hospitals last attempted to employ physicians at scale. With little experience in practice management, many chose to pay physicians through a straight salary model, but suffered heavy losses when physician productivity dropped.

So health system leaders are justifiably concerned about designing more effective compensation models this time around. This wariness has, in recent years, led many to create compensation plans that mimic the incentives of private practice, tying pay directly to productivity as measured either through actual revenues or through work Relative Value Units (wRVUs) as a substitute.

Yet with the shift to value-based care and the rise of consumerism, systems are now finding that paying physicians purely based on volumes can be a barrier to achieving new goals around quality, costs, access, and service. As a result, many hospital-owned medical groups today are evolving their compensation models once again, blending production-based pay with other incentives for non-production goals.

This kind of compensation redesign can be challenging in many ways. For starters, health systems must strike the right balance between productivity- and non-productivity based pay given their unique reimbursement and recruiting environments. Administrators must also work with physician leaders to ensure that the incentives they select are measurable and manageable.



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