Although benchmark data can provide insight on physician compensation and productivity levels in a particular market, overreliance on such data could result in continual increases in pay that cannot be sustained.
At a Glance
In using benchmark data from physician surveys to establish physician compensation, hospitals should follow six guidelines:
- Know what the benchmark data represent and how they are computed.
- Use all resources available in setting physician compensation.
- Carefully determine whether the median work relative value unit should be used.
- Beware of applying consistent compensation models across specialties.
- Be careful not to change the compensation rates annually.
- Think holistically.
The current trends of hospitals’ heavy—and often sole—use of benchmark data in establishing compensation is inadvertently increasing physician compensation, presenting a situation that is likely to undergo mounting scrutiny as healthcare organizations face increased pressure to lower costs.
Today, many physicians are employed by hospitals and health systems—and this change has had a significant impact on how physicians are compensated. In these organizations, the emphasis is on providing compensation at fair market value, whereas in physician practices, there is greater focus on the net revenue generated by physicians after expenses are taken into account. Physician compensation that is based on industry benchmark data often exceeds net revenue per employed physician—leading to compensation levels that cannot be sustained over the long term.
The most common physician compensation models in place at hospitals and health systems are work relative value unit (wRVU) models. These organizations can make a number of modifications when developing wRVU-based compensation models that will promote better alignment of compensation for employed physicians with productivity levels, general market trends, and organizational strategic goals.
Taking a Closer Look
Compensation models based on wRVUs can take on many different forms, but the most basic wRVU-based compensation structure is described using the following formula:
wRVUs Produced x Conversion Factor = Compensation
A physician’s wRVUs are multiplied by a conversion factor that translates the raw measure of productivity into cash compensation. For example, with 5,000 wRVUs produced and a conversion factor of $45, compensation would amount to $225,000 (5,000 x $45=$225,000).
There is no set approach for deriving conversion factors, and each hospital or health system approaches this process differently. However, the most common approach involves the use of industry benchmark data.
A number of key industry surveys provide physician compensation and productivity data. The three most frequently used and accepted surveys are those published by Medical Group Management Association (MGMA) in Englewood, Colo.; the American Medical Group Association in Alexandria, Va.; and Sullivan, Cotter and Associates, Inc., in Chicago.
Because the MGMA survey is the most frequently used of these, we will use MGMA data for the examples described in this article, but the same results could be achieved by using the other surveys.
Industry benchmark data can be a valuable tool in establishing physician compensation that aligns with productivity levels and general market trends. However, hospitals and health systems have tended to over-rely on such data, and some have used the data improperly in determining compensation for employed physicians.
What to Consider
Industry benchmark data primarily is used to establish the conversion factor, or compensation per wRVU ratio. Although there is no “rule” for establishing the conversion factor, the most common approach has tended to involve using the median market data in determining compensation for a specific specialty. For example, if an organization is seeking to determine compensation for physicians who specialize in general surgery, the survey’s median rate per wRVU for general surgery would be used.
In many respects, this approach is sensible. Specifically, using the median conversion factor tends to result in an alignment in compensation and productivity. Consider the example detailed in the exhibit below, using data for cardiology.
As illustrated, using a rate per wRVU below the median results in wRVU productivity that outpaces compensation, while using a rate per wRVU above the median produces the opposite trend. However, using a median rate per wRVU results in a rather close correlation between productivity and compensation.
The example helps to support the premise of using the median rate per wRVU. It makes sense when considering the correlation of compensation and productivity. There is nothing wrong with this approach when considered in isolation from any other compensation component. The issues arise as other forms of compensation are added to the model.
It also is important to note that the correlation between the productivity and compensation tables is only assumed, because the tables are populated separately. In other words, not every physician who is generating median wRVUs is receiving median compensation. Some physicians might be producing 75th-percentile wRVUs and generating 25th-percentile compensation. Other tools, such as the MGMA Pay to Production Plotter, will help an organization’s leaders understand the true correlation between wRVUs and compensation.
In applying a median rate per wRVU in a compensation model, many organizations reset the median rate per wRVU annually (per the terms of the employment agreement) to be consistent with the most recent survey data. This reset makes a big difference in compensation, because compensation per wRVU historically has climbed each year.
The exhibit below uses MGMA median data to illustrate the year-over-year inflation for six key specialties: cardiology (noninvasive), family medicine (without obstetrics), internal medicine, obstetrics-gynecology, orthopedic surgery, and general surgery.
Each noted specialty experienced at least a 6 percent total increase in physician compensation between 2009 and 2013—and in the case of orthopedics, the total increase was more than 17 percent. Also, the rate of increase from year to year has been variable: Internal medicine increased consistently over the five-year period, for instance, while orthopedics spiked in 2013.
Physician reimbursement, in general, has declined over the past several years, which begs the question of how compensation can be increasing in an era of reduced payment. Costs of running a medical practice have certainly not declined to allow for this phenomenon. Likely, the increases are largely being driven by the influx in hospital employment and the use (or misuse) of benchmark data in developing employed physician compensation models.
As the overall healthcare environment has continued to shift from a volume-only focus to a value-based focus, hospitals and health systems have moved away from compensation plans that pay only based on wRVUs and are beginning to build quality incentives and other forms of compensation into their physician compensation models in addition to the production-based component. In many situations, the starting point for the physician compensation model remains the “median” rate per wRVU. As a result, the overall effective conversion factor (dividing total compensation by wRVUs) is much higher than the median.
Based on the details within the MGMA survey data definitions, we know that the compensation data reported is total cash compensation. The survey defines total compensation as the amount reported as direct compensation plus all voluntary salary reductions and states that the amount should include salary, bonus or incentive payments, research stipends, honoraria, and distribution of profits (MGMA Physician Compensation and Production Survey: 2013 Report Based on 2012 Data). Further, if we look at the compensation per wRVU data definitions, we can determine that compensation per wRVU is total cash compensation divided by wRVUs. Thus, all forms of compensation, including quality incentives and other forms of payment, are reflected in the compensation-per-wRVU data. Therefore, the median rate per wRVU includes some element of other forms of compensation.
To further understand the impact, see the exhibit below, which illustrates a typical compensation model for family medicine physicians. Basic compensation models will pay wRVUs at a set rate per wRVU (i.e., conversion factor) with the addition of incentive pay. Due to the Affordable Care Act, many compensation plans are incorporating a quality-based payment wherein the payment is tied to meeting certain quality metrics. Another common addition is a stipend for midlevel oversight, as the use of physician extenders also is on the rise (Japsen, B. “Amid Doctor Shortage, Hospitals Turn to Dwindling Supply of Nurses, Physician Assistants,” Forbes, March 21, 2013).
The exhibit shows the effect of paying the median rate per wRVU over the five-year period, before and after the addition of a quality incentive and midlevel oversight. We have kept the wRVUs consistent and illustrated clinical compensation as paid at the MGMA median rate per wRVU.
This exhibit illustrates that there has been an inherent increase in clinical compensation as a result of consistently paying at the median. The values of 5,000 wRVUs in 2009 and 2013 are $195,550 and $218,138, respectively, before the addition of incentive pay. The other key factor to note is the difference between the clinical-only rate per wRVU, which is consistent with the median, and the total effective rate per wRVU, which is $5 higher and consistent with the 65th percentile. The addition of incentive pay increases the total compensation by $25,000 and results in an additional 10 percent increase to the overall effective rate, on top of the 12 percent increase in the median rate per wRVU reported via MGMA over the five-year period.
The issue lies in the fact that the median is used as the starting point; all other components are then added to the model, which inflates the total-cash-compensation-per-wRVU ratio. The result is reported back to MGMA and other survey resources, yet what is being reported is not the clinical-only rate per wRVU. This and other factors result in the median rate per wRVU increasing year over year simply as a result of how the data is used, not necessarily because there is a need for compensation to increase. Ultimately, this pattern will become unsustainable, with health systems unable to afford the perceived built-in increases in compensation.
For emphasis, we have created a sample scenario whereby 40 percent of survey respondents reported a rate per wRVU below the median to the survey resources for a given year, and 60 percent of physicians reported a rate per wRVU at or above the median for that given year. This distribution makes sense in that we more frequently see rates per wRVU at or above the median being applied as a starting point. The assumption in the exhibit below is that, for those physicians who are compensated above the median, the starting point each year is the median, with other components of pay being added on top of this baseline. Then, the rate is updated each year to reflect the new median.
As illustrated in this simple (and clearly non-statistically valid) example, the median rate increases each year over five years, increasing pay for all respondents, a pattern that then repeats itself annually.
The impact on the compensation model is shown in exhibit 5 , with the median rate per wRVU values based on the median calculated below. In this exhibit, the median rate per wRVU is rising based on the values reported for the previous year. Further, the physician’s total cash compensation continues to be well above the median, resulting in compensation that outpaces the level of productivity.
Although other trends and factors are at play, in our opinion, the reliance on median survey data, especially in determining a baseline conversion factor for production-based pay, is inflating compensation throughout the industry. This inflation is occurring despite the fact that all other factors point toward downward pressures on payment and, in turn, less availability of the funds for physician compensation. Using benchmark data to build a physician compensation model is not a bad practice, but healthcare leaders should be smarter about how they use benchmark data to determine compensation for employed physicians.
Developing the Right Compensation Model
As increased focus is placed on value-based care, more physician compensation will continue to be based on incentives outside of productivity—leading to further increases in benchmark data if the current cycle is not broken. Healthcare leaders should consider the following modifications when developing wRVU-based physician compensation models.
Know what the benchmark data represent and how they are computed. Users of industry data should carefully review how the data are compiled as well as the definitions for key metrics.
Use all resources available in setting physician compensation. Certain surveys offer more tools than simply the rate-per-wRVU data, for example. The MGMA survey provides the MGMA Pay-to-Production Plotter, which plots the total compensation and productivity of each survey respondent on a graph and then calculates a linear regression that shows the “best fit.” Use of this tool in evaluating the projected total compensation under the proposed model will help establish an appropriate baseline rate per wRVU when considering the other components in play.
Carefully determine whether the median wRVU should be used. Remember that 50 percent of respondents will be compensated below the median, and 50 percent will be compensated above the median. Not every situation is a median-or-above situation, and not every physician should be compensated as such.
Beware of applying consistent compensation models across specialties. Paying all physicians at the median rate per RVU for their particular specialty, down to the rate per wRVU, may backfire. The challenge lies in the application of “add-ons,” which may differ by specialty. Some specialties may have no add-on compensation components and, therefore, the median rate per wRVU may be appropriate in setting compensation; other specialties may have significant add-ons, which may warrant a lower clinical rate per wRVU.
Be careful not to change the rates annually. Many believe that the rates per wRVU must be continually updated as soon as new benchmark data is available. However, it may be reasonable to establish rates per wRVU and then leave them intact for two to three years with the understanding that future changes will be made in response to a fair-market-value analysis.
Think holistically. When establishing the rates per wRVU, consider all the components being included in the compensation model and whether it is realistic to assume that they are inherently built into the baseline rate per wRVU being applied. Call compensation is a great example.
It is a reasonable assumption that a baseline level of unassigned call coverage is built into a median rate per wRVU. Thus, having call pay begin with the first day of coverage may warrant establishing a rate per wRVU that is below the median to account for the added call-pay component. Organizations should first consider the total model and then build up to (or back into) an appropriate rate per wRVU.
Justin Chamblee, CPA, is a vice president, Coker Group, Alpharetta, Ga.
Publication Date: Tuesday, July 01, 2014