Compensation calculators can be effective tools because they consider multiple valuation approaches and demonstrate that a consistent compensation methodology is applied across an organization. In general, they are easy to use and can help speed negotiations. These tools are often meant to cover the majority of physician compensation arrangements, although they do not preclude health executives from making exceptions when unique credentials, experience, or other circumstances exist.  

Certain types of arrangements, such as call-coverage arrangements and administrative services, are well suited for simpler calculators because the valuation drivers can be automated. On the other hand, clinical compensation arrangements will require a more robust calculator model with various compensation drivers. Ideally, any calculator should consider relevant valuation factors such as: 

  • Type of services provided (e.g., medical director, clinical, on-call) 
  • Specialty required for the services (e.g., cardiology, urology, orthopedic surgery) 
  • Credentials or expertise required for the services (e.g., years experience, number of publications) 
  • Time required for the services (hours per week) 
  • Contracted status of physician (such as independent contractor or employed) 
  • Other terms of the agreement that could change the risk of the compensation (such as payer mix)   

There are several types of calculators available in the market. The more conservative calculators (which use median compensation data) are a helpful compliance tool for health systems and are often controlled from within the health system but issued by a third-party valuation firm. However, these calculators may be frustrating for initiatives that target high-producing physicians who warrant more than median compensation. In such instances, a more robust calculator may be a better solution because it can take into account factors such as productivity, third-party reimbursement, and experience. When a calculator is built with a multitude of relevant valuation drivers, it has more flexibility to support higher indications of value without requiring the health system to obtain a full, third-party FMV opinion.   

Another consideration for health systems is whether to use a web-based compensation calculator developed internally or to access one through a third-party firm. When calculators are controlled from within a health system, the process is quick and provides consistent FMV opinions, but risk increases due to the possibility of user error and lack of a third-party quality review process.   

Some health systems opt for an external calculator simply because the conclusion is generated by a third-party valuation firm. These external calculators require that the health system submit a short, standard information request addressing the specific facts and circumstances of the arrangement. The written FMV opinion can be produced within days, as opposed to the weeks it can take to obtain a typical FMV opinion. The opinion is supported by a licensed FMV report detailing the methodologies for the valuation of the specific type of arrangement (that is, on-call, medical director, clinical). The process limits user error by allowing the valuation firm to confirm the inputs are reasonable and verify the conclusions make sense, while providing a true third-party report.   

Clearly, there are various options in the market, and the risk tolerance of the health system should be considered when implementing a calculator initiative. Typically, it is less costly to use calculators than to obtain third-party opinions on each arrangement. Regardless, the calculator strategy helps leaders demonstrate that they have developed a consistent methodology for establishing compensation. Calculators also can reassure physicians that an unbiased third party was involved in establishing their compensation and that many valuation factors were considered. 


Jen Johnson, CFA, is a partner, VMG Health, Dallas (jenj@vmghealth.com). 


For more information, see Jen Johnson's "The Risk and Rewards of Setting Physician Compensation Internally," hfm, January 2013

Publication Date: Tuesday, January 01, 2013

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