Last Updated: Jul 6, 2017
For both physician practices and health care systems alike, physician recruitment is getting more difficult: practices are competing with health care systems to attract physicians, and demand is outpacing supply. According to projections by the Association of American Medical Colleges, in all scenarios, demand exceeds supply, and shortfalls are predicted to widen year after year through 2025.
If you are recruiting for a physician in your practice, how can you be sure the compensation package you are offering is attractive? Or, if you are looking for employment, how do you know if the compensation you are being offered is competitive?
Compensation can be calculated in a variety of methods and is not always equitable. Many times, compensation can be based on productivity solely, or in combination with a base salary, and productivity is not always straightforward.
Productivity By RVU
The most common use of productivity, the relative value unit (RVU) system, is often used by owners of medical practices to measure physician productivity and to set compensation.
The Resource Based Relative Value System (RBRVS) was established in 1992 by the Health Care Financing Administration, predecessor of the Centers for Medicare and Medicaid Services (CMS). The system was based on a study conducted by Harvard University and the American Medical Association, the purpose of which was to estimate the relative amounts of "work" physicians contribute to the services they provide. The definition of "work" took into account the physician's time, mental effort, judgment, technical skill, physical effort, and psychological stress.
The RBRVS system assigns an RVU for each service provided by a physician. The relative value of each service is the sum of RVUs representing the following three components:
- Physician work expenses — accounts for roughly 52 percent of the total relative cost of each.
- Practice expenses — cost of staff, facilities, and overhead, which accounts for an average of 44 percent of the total relative cost of a service.
- Malpractice expenses — accounts for around 4 percent of total relative costs.
Each of these components is factored for geographic differences based on the area of the country in which the service is provided. The sum of these geographically adjusted RVUs for a particular service comprises the total RVU of that service. To convert the RVU into a fee schedule expressed in dollars, the total RVU of a given service is multiplied by a "conversion factor" — a dollar amount per RVU applied to all services in the relative value schedule. The conversion factor is updated each year using a formula that takes into account:
- Growth in the Medicare Economic Index
- A projected productivity gain thought to be achievable by all physicians
- Growth in the gross domestic product
Although the RVU system is the basis used to establish payments to doctors for Medicare and Medicaid services, all insurance companies utilize some iteration of this system as well.
The Medical Group Management Association (MGMA) produces an annual report called "Physician Compensation and Productivity Survey." Data is categorized in this report by specialty and can be used as a starting point for benchmarking using a variety of measures.
PRODUCTIVITY BY COLLECTIONS
Net collections, more widely used and sometimes referred to as net production, is the actual cash received for services rendered. In many practices, cash received is recorded as the actual revenue so this method is directly tied to the bottom line. It is also relatively simple to capture this information by physicians. However, this method may not accurately reflect the work performed. Two physicians performing the exact same work with the same amount of effort could be compensated differently. Reimbursement varies by payer, so productivity measured by collections will also vary. The practice's payer mix will have a direct result in collections.
Another consideration is that often the collections process is out of the physician's control, particularly where there is a centralized billing office or the physician is an employee. If there is a collections issue with a particular payer or accounts receivable follow-up is not up to par, physician compensation could be negatively affected.
PRODUCTIVITY BY GROSS CHARGES
Gross charges are defined as the full, non-discounted fees charged for all services provided before any contractual, charitable, courtesy, bad debt, or other adjustments are applied. Because charges are unique to every practice or group, they are often thought to be meaningless in the context of revenue generation. While it is true that charges generally do not directly translate into revenue — as it is rare that full charges are collected — charges put physicians performing similar work on an even playing field.
This method can also minimize competition between physicians for more lucrative patients as there is no incentive for treating a commercial patient versus a Medicaid patient.