Productivity by Charges or Collections? That Is the Question

Last Updated: Feb 24, 2015

In two previous articles, we discussed productivity measurement based on Relative Value Units (RVUs).  This time we will focus on two, perhaps more traditional, methods of compensation related to productivity - charges and collections. Charges and collections are financial measures related to revenue generation that are commonly used in productivity-based compensation systems.    

How common are these two ways of determining physician compensation? According to a 2010 survey by the Medical Group Management Association (MGMA), gross charges were used to determine compensation for approximately 14 percent of respondents, while 44 percent reported compensation based on collections. Similarly, the American Medical Group Association (AMGA) reports that approximately 34 percent of compensation systems based on productivity measures use collections while about 9 percent use gross charges. 

Productivity by Collections
Let’s start with net collections since that measure is more widely used. Net collections, 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 physician. However, this method may not accurately reflect the work performed. The following scenario—although almost impossible in everyday medical practice—demonstrates this point.

Scenario:  Two pediatricians saw exactly the same number of patients and performed exactly the same procedures during 2010. Dr. A saw mostly Medicaid patients (with a lower fee schedule) and Dr. B saw a combination of Medicare and commercial patients.

  # of Patients
# of Procedures
Total Collections
Avg. Collections Per Procedure
Dr. A
2,596
9,527
$352,022.65
$36.95
Dr. B
2,596
9,527
$446,816.30
$46.90

The compensation methodology used in their practice is a base salary of $125,000 plus a productivity bonus. The productivity bonus is calculated by taking the total earnings to be distributed minus the base salary. The remaining earnings are then allocated to each physician based on the percentage of collections. In this case, total earnings to be distributed are $367,583. 

 

Result:  Because Dr. B’s payer mix results in higher collections, his compensation is almost $14,000 higher than Dr. A’s.   

  Total Collections
% of Collections
Base Salary
Productivity Bonus
Total Compensation
Dr. A
$352,022.65
44%
$125,000
$51,815
$176,815
Dr. B
$446,816.30
56%
$125,000
$65,768
$190,768
Totals
$798,838.95
100%
$250,000
$117,583
$367,583
Median compensation for pediatricians reported in the American Medical Group Association (AMGA) 2010 Compensation and Financial Survey was $181,662.

 

Both physicians are doing exactly the same work with the same amount of effort but are compensated differently. Each physician generated substantially different revenue due to differences in payer mix.  Because reimbursement varies by payer, productivity measured by collections will also vary.

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. 

Using the same example as above, Dr. A and Dr. B saw the same number of patients and performed the same procedures. 

 
# of Patients
# of Procedures
Gross Charges
Avg. Charges Per Procedure
Dr. A
2,596
9,527
$902,492.71
$94.73
Dr. B
2,596
9,527
$902,492.71
$94.73

Using gross charges, the physicians are compensated equally based on the work they performed, as shown below. 


  Total Charges
% of Charges
Base Salary
Productivity Bonus
Total Compensation
Dr. A
$902,492.71
50%
$125,000
$58,792
$183,792
Dr. B
$902,492.71
50%
$125,000
$58,792
$183,792
Totals
$1,804,985.42
100%
$250,000
$117,583
$367,583

 

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. 

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