Provider compensation model not working? Here’s how to fix it.

Learn five best practices in physician and APP compensation redesign.


There is no such thing as a perfect provider compensation model. But adhering to these universal best practices increases the chance of successfully developing a new provider compensation model that works for both clinicians and the organization.

The truth of provider compensation is this: if you’ve seen one provider compensation model, you’ve seen one provider compensation model. That is because an organization’s compensation model is fundamentally determined by local forces.

Local forces that shape provider compensation models


Organizational strategy

Whether it’s driving new patient growth, fostering service line collaboration, or reducing physician burnout, compensation models reflect the organization’s broader goals.

Amount of reimbursement
at risk

Organizations with considerable fee-for-service reimbursement are more likely to base compensation on productivity while those with more reimbursement tied to risk are more likely to consider straight salary or panel-based incentives—with medical groups in mixed financial models likely to have a hybrid model including both.

Competition during provider recruitment

Given the national demand for physicians and advanced practice providers, compensation models allow organizations to attract talent, compete during negotiations, and retain their existing workforce.

Medical group culture

Organizations with stronger cultures rely less on financial incentives to motivate physicians and more on performance transparency and communication of
employment expectations.

Fair market value (FMV)

Though the Advisory Board does not provide legal advice, federal law requires an organization’s compensation model cannot exceed the going rate for that specialty in that market.

Five universal best practices in provider compensation redesign

These local forces mean there’s no national standard to copy-paste—which makes compensation redesign a major undertaking. Even good compensation models can fail. But every organization can develop a model that is right for them or “least wrong.” Here’s how.

If there is one thing that sets an organization up for success or failure when designing a new compensation model, it’s whether they have an agreed upon compensation philosophy or not. For medical groups, a compensation philosophy serves as a guide—preventing conversations from becoming arguments.

Effective compensation philosophies articulate what their model should be, such as:

  • Aligned with the organization’s performance and strategy
  • Competitive for new and existing talent
  • Reflective of the work done by individual clinicians and the broader enterprise
  • Fair across physicians and specialists
  • Compliant with relevant national or state laws

This philosophy should be transparent within the organization, referenced throughout the process of developing a new model, and used to evaluate new incentives and resolve disputes. Without a philosophy, a medical group runs a far greater risk of failing to design a model that accomplishes its goals.

The good news of physician compensation is that “you get what you pay for.” And medical groups have options of different models and incentives. But this makes it that much more important that physician executives ask “what happens if we get what we’re paying for?” because any incentive can come with unintended consequences.

One potential consequence of over-incentivizing any one aspect of compensation is it can lead to the detriment of other initiatives. For example, it’s very easy for a medical group to unintentionally reward provider productivity at the expense of other goals like quality, patient experience, or provider burnout.

Incentivizing some types of metrics also inherently involves risk. A classic example is tying incentives to time—do x within y period—because it can lead to providers prioritizing the short-term to achieve their incentive and not worrying about the equally or more important long-term. For example, if a physician’s compensation is tied to seeing a portion of new patients within a week, they’re likely to prioritize new patients. This isn’t inherently bad, but it can be negative if it results in less attention to their existing patients, causing them to go to a competitor.

Medical groups have options to minimize the impact of this—modifiers, threshold requirements, selecting good metrics, balance of incentives, etc. But it’s crucial to ask what those unintended consequences could be before rolling out a new model.

Most of a provider’s compensation is tied to their individual performance. But as the practice of medicine becomes even more of a team sport, medical groups should consider implementing incentives at the unit level. These collective incentives can be done at the practice, department, service line, or even group or system level. A significant portion of a physician’s compensation should still be based on their individual performance. But these collective level incentives are especially good for driving performance on major strategic initiatives like access, service, quality, and cost. They also foster a “we over me” culture within the unit and broader organization.

No matter how enticing an incentive, it must also be attainable. If providers feel the bar to achieve an incentive is too high, they will prioritize other areas. First, you’ve got to set attainable targets. But doing that alone isn’t enough. Executives also need to pave a way for physicians to achieve those targets. Some examples include:

  • Reward the most improved as well as the highest performers. This creates two ways for physicians to see reward on a compensation incentive. Even if a physician struggles to achieve top performance, they can still see increased reward if they’ve improved significantly. Plus, the organization sees reward by raising the floor—not just trying to lift the ceiling.
  • Enable clinicians to share the load. This is especially relevant for collective incentives where if the incentive is at the unit level, a physician can help others achieve the target even if they themselves cannot. For example, a physician with a full panel can direct patients to other providers in their practice as a way of improving growth.
  • Measure success using projects instead of metrics. There are some specialties where metrics or data leave much to be desired as valid elements of a compensation model. Especially with quality. In such cases, some organizations allow their physicians to execute quality improvement projects to fulfill their quality incentive.

Most medical groups rely on incentives and rewards in their compensation model to drive provider behavior. But penalties can work well too, especially for behaviors that are just the expectation. A prime example is citizenship. Many physicians get incentivized for “good citizenship” behaviors like attending meetings, completing charts on time, and being courteous with their care teams. Physician executives should consider, though—if that’s the expectation, why do we incentivize it?

Paying for expected behavior comes with consequences. It’s bad for group culture—how we act—and diminishes the perceived importance of other elements of the compensation model. Physician executives can allocate the portion of the compensation plan that would have been held for citizenship to more meaningful strategic initiatives and incentives. Executives should explore other avenues for penalizing poor citizenship like 1:1s, counseling, coaching, restricting privileges, or even decreasing compensation for physicians who fail to meet basic behavioral expectations.

Parting thoughts

Creating and rolling out a new compensation model is only half the battle—organizations must align compensation redesign with operational changes that support it. Transforming incentives without a corresponding change in practice fails consistently. As you’re redesigning compensation, consider what enablers providers will need to both execute on and benefit from your updated model.

Ryan Furr-Johnson also contributed to this article.

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