Case Study | Financial Sustainability

From chaos to unity: 6 steps for building a compensation plan for employed physicians

Case Study | Financial Sustainability

From chaos to unity: 6 steps for building a compensation plan for employed physicians


Health systems and large physician organizations continue to purchase physician practices today as components of their competitive growth strategy for the future, looking beyond the pandemic. Yet with every acquisition comes the reminder that the purchase is not an end but a beginning of what can be a challenging process.

After the provider contracts are signed and sent to the finance and human resources (HR) departments for payment and processing, most acquiring organizations face challenges stemming from the sheer variety and inconsistency of their employment arrangements with physicians.

To circumvent these difficulties, health systems must develop and embrace a consistent approach to physician compensation. The experience of RMG, a large medical group in the Western U.S., offers a case example of how to manage such a transformation.

Problem: Inconsistent pay practices, little documentation, no structure     

Prompted by challenges in recruiting new physicians and an inability to articulate how they would be paid, RMG began its journey to implementing a standard approach to physician compensation with an assessment of its approach to compensating employed physicians. Leadership from the organization’ finance and HR areas were charged with designing the compensation surveys that would be used for this assessment.

The leadership team found that — not surprisingly for a large group practice — physician compensation approaches were designed as if from scratch each time a physician group was acquired or the practice brought in a new hire. They identified provider group practices whose compensation had not been updated for over 10 years, with payment unchanged for physicians and practice staff alike since the year the practices had been acquired.

On examining RMG’s over 350 providers, the team found 50 different pay practices. Moreover, they had no access to existing data on provider payment. No database had been built and little documentation had been kept.

The common approach was for a financial analyst to calculate compensation on an Excel spreadsheet and then provide it to the payroll department for keying in the corresponding amounts. Some larger provider groups that had been purchased retained their own administrative teams who continued to prepare the payroll, with no intervention or double-checks from RMG’s finance or HR groups. Payment did not match hours worked. The system lacked information on where providers worked. Little structure was in place. At times, the practice manager team could override the payment calculations simply by calling payroll to make an adjustment.

To make matters worse, the organization lacked any core metrics on staff-to-physician ratios,  because it lacked a true count of its employed providers. Providers had a different taxpayer identification numbers (TINs) for employment purposes but were all employed by the same medical group. Building a consistent FY budget projection to match to actual compensation expense seemed impossible.

To address these challenges, RMG undertook a six-step process aimed at creating a standard approach to setting physician compensation. 

1. Start with the basics

RMG began by reviewing results of two compensation surveys, sorting providers by job title and then layering them within each title according to details. Work relative-value units (wRVUs) were converted to current year levels (providers variously were being paid based on wRVU levels for  2006, 2008, 2010, 2013 and 2015). The conversion factor was different for every provider.

The team ran the two models based on the compensation surveys to project the costs for compensation, finding that RMG’s compensation levels were far from the survey midpoints. This finding prompted them to focus on midpoint compensation ranges. Prior to the analysis, the team had budgeted $2.5 million as the amount needed to correct the plan, and planned to implement changes at mid-year to determine six-month impact. Based on the models, however, they found the amount needed to fix to midpoint for the group was substantially higher than budgeted, at about $11 million and up to $14 million depending on the source of the midpoints. The team settled on one of the surveys (by IHS Gallagher) to serve as the basis for the new compensation plan.

2. Convene providers, but set a goal and timeframe

RMG convened a group of providers to guide the plan design. Specialties represented were urgent care, primary care, cardiology, hospitalist care, pediatrics and physiatry. The group was charged with establishing quality metrics. This process proved cumbersome, taking more than a year, and the metrics are still subject to debate. In hindsight, a better approach might have been for leadership to define the initial quality metrics and then allow specialty providers to customize.    

3. Create guidelines and guardrails

The core physician planning team established five guidelines for setting employed physician compensation levels going forward:

  1. Be fair and transparent.
  2. Use national benchmarks and update them every year.
  3. Use market-based compensation benchmarks to support recruitment and retention.
  4. Focus on value-based care and closing gaps in CMS care guidelines.
  5. Ensure system is financially sustainable for the long-term.

The modeling process took two months, with support from an analyst who was engaged to build the model, import the data and assist in demonstrating the new compensation model for each provider. RMG used a CARTS approach (Clinical, Administrative, Research, Teaching and Strategic) to simplify the language and process for communicating the new model. 

Sidebar 1

5 CARTS components used to define elements of physician compensation

The CARTS approach that RMG used to set physician compensation accounts for the following five components of a physician’s activities for which a physician may be compensated:

  1. Clinical activities comprise any patient care activities for which professional fees are generated.
  2. Administrative activities include assigned oversight responsibilities, such as section chief, as well as accountability for a clinical program. At RMG, administrative work is paid at the median specialty-specific rate. Certain medical directorships require time sheets.
  3. Research activities include efforts supported by grants or other delineated funding source. RMG compensates such activities at a median specialty-specific rate.
  4. Teaching activities included major teaching roles such as clerkship director or residency program director. At RMG, these roles are defined by the clinical department chair. They are paid at specialty-specific rates based on the median rate, and they require time sheets.
  5. Strategic activities include those in which physicians are engaged in institutional efforts to advance the organization’s mission, such as development of a new service or provision of care to an underserved or remote population. At RMG, assignments are made by the clinical department chair with approval from the CEO. Strategic work is paid at the median specialty-specific rate.

RMG also created a compensation philosophy, which was referenced throughout the conversion to the new plan. 

Sidebar 2

Elements of  RMG’s physician compensation philosophy

Fairness

  • The program will be understandable and transparent, and made available to providers upon request.
  • Core work and citizenship expectations will be defined in advance. Expectations include access, production, call, administrative committee contributions and other factors as determined by chair.
  • Levels of compensation will vary with work effort and outcomes.
  • Compensation approaches may vary across specialties but within specialty have one defined model.
  • Compensation will be competitive at a national level.
  • The program will support recruitment and retention.

Affordability and Sustainability

  • The compensation program must be synchronized with healthcare reform and position the organization for success in both population health and CMS value-based models.
  • Value-based metrics form a material component of compensation.
  • Overall program must be affordable and sustainable for the organization.

Team Orientation

  • Program will support the RMG care model.
  • In a value-based environment, effective patient care requires a coordinated effort across the continuum of care.
  • Compensation will support teamwork, as achievement of desired outcomes is a function of the work of many.

Compliance

  • Compensation and pay levels will be administered in a manner that ensures compliance with applicable laws and regulations. Periodic reviews will be conducted and could result in changes.

 

4. Preserve the core

The plan design required that all compensation for providers had to represent one of five core plan types to ensure RMG would no longer support “additive” pay creep. Core plan types were as follows.

Production 90/15. Providers would be paid 90% of the midpoint for all wRVUs with a 10% withhold for quality to be earned back. An additional 5% quality match would be paid when providers hit quality metrics. Each specialty had five quality goals:

  • One metric assigned to RMG by its ACO partner
  • One metric for patient satisfaction goals as one measure
  • Three specialty-specific goals

The 5% additional was spread by 1% for each goal.

Guarantee 90/15. Providers in this category were primarily employed by the clinic devoted to the Medicaid population and rural healthcare. RMG did not want to penalize these providers for  serving these population, given that Medicaid patients tend to have high no-show rates and the rural clinics may not have enough encounters to support staff. As with the production group, 90% of compensation was guaranteed, with a 10% withhold for quality. Providers similarly had an opportunity to receive an additional 5% quality match for hitting their five specific quality metrics.

Guarantee 100/5. This group mainly comprises newly recruited providers and some advanced level practitioners. The physicians can earn an additional 5% quality based on the group scores for achieving quality metrics.

Shift Pay 90/15. This pay code is used for the inpatient core of physicians, hospitalists, intensivists, trauma staffing teams who tend to work alternate-week schedules (one on, one off). Each benchmark level established a baseline for wRVUs per shift; at each quarter end, the shifts would be pulled and multiplied by base wRVUs assigned per shift. If excess wRVUs were generated, providers would be paid those wRVUs based on their specialty-specific conversion factor. This group also had a 10% withhold for quality and an additional 5% match for achieving quality targets.

Pooled wRVUs. This modelwas reserved for obstetric providers only. Given the nature of the practice, RMG determined it made sense to pay this group a draw at midpoint levels, and then pool all wRVUs and settle each quarter on production. This approached enable providers to perform clinic, surgery and laboring shifts without worrying about loss of wRVUs due to rotations within the group. This group also had low patient satisfaction scores, so RMG believed encouraging the group to perform as one unit covering all areas could yield improvements in patient experience.  

5. HR and leadership communications partnerships

The role of the finance team was to model and convert systems, while HR leadership would evaluate the benefits structure and performing an inventory of various practices. Every specialty had different levels of paid time off, CME allowances and various pay practices.

As RMG moved through the final stages of building a unified compensation plan, the medical group’s leadership team had a weekly standing agenda item to discuss and approve policy guidelines. By hearing the rationale, department chairs could prepare for upcoming changes in payment practices. The team held one quarterly meeting for all medical group providers, so the leaders could review the new compensation plan, timelines, benefits and the CARTS form developed to educate the providers on how their compensation would be tallied. Another session was held for administrators and their dyad partners to delve deep into nuances so that they could explain them to their providers should questions arise.

To start the dialogue for actual implementation and prepare for a complete overhaul of payroll practices, the project leadership team engaged IT, payroll management, time keeping, corporate finance, corporate human resources and recruitment, as well as the medical group’s finance and HR teams. This part of the process took only four months to complete.

New pay codes were created to match the CARTS model and map into the general ledger, and a timekeeper platform was used to create schedules, develop pay rules and build each provider schedule. Employed physicians would only be paid from a schedule (like every other employee within the system). Building schedule builds for the 5% of providers who had administrative, teaching or strategic time allocations posed a challenge, but RMG was able to use a grid in in its timekeeper/HR system to map specific pay rules down to provider level. 

One limiting factor was that the system could hold only two different rates of pay. The first rate of pay held in each provider record was for “clinical activities” in the CARTS model. The payment of the remaining “ARTS” activity was a calculation consistently applied across the group by taking the specialty-specific midpoints divided by 2,080 to arrive at an hourly rate for the non-clinical portions of the job. The payroll department was instructed that no one could change pay or request additional compensation or special allowances. Any requests for changes went directly to the medical group finance leader or HR business partner. This rule became effective with the implementation of the new plan.

6. Implementation

Four months prior to the start of the new plan year, it was decided that every provider’s existing contract would be terminated to give 90-day notice. Each provider would then receive a new contract outlining the benchmark position used, a statement of their total FTE status and the specific CARTS components defined in their contract. Conversion factors were outlined for production-based providers, and the base wRVUs were outlined for shift pay. Among the medical group’s roughly 350 providers, only three chose not to sign the contracts and end their employment with the organization.

A short-term policy was added for providers during this process and continuing medical education (CME) allowances were made for up to two specialties for physicians. Primary care, pediatrics, production midlevel providers received to up to seven weeks off (not paid but banked through production). These weeks included vacation, CME and 10 holidays. The department of medicine adjusted team members to nine weeks off. Leadership decided that those providers who perform emergency department call and weekends should have additional time off.

The corporate finance, payroll, HR and IT teams carried RMG through the final builds, testing  the whole process in only one week prior to an actual payroll run. Only nine providers encountered issues on go live.

The newly developed reports providers receive each month show the details of their wRVUs directly from EPIC and display the amount of advance each has taken by pay period. The report shows the amounts being held for the value portion, with a net to show what is due for incentives or what is overdrawn. The new policy allows HR to quickly drop a provider’s draw if the provider goes two consecutive months without hitting wRVUs. In the first quarter, only two providers needed to drop their draws, demonstrating the value of involving stakeholders throughout the organization to establish proper baseline draws during the build process.

Primary takeaways

RMG gleaned three primary lessons learned from this process for guiding such efforts in the future:

  1. Develop and hold standards for the value metrics. Stay true. 
  2. Assign a single project manager. RMG’s team concluded this approach would have been very useful. Sharing responsibility between finance and HR was challenging, given these teams’ already had heavy workloads.
  3. Be prepared for difficult work. Do not underestimate the complaints you will receive on changing or standardizing pay. In the end, RMG’s medical group leadership team held the line and reinforced the policy, but that outcome should not be expected in all instances.

Although portions are still in development (e.g., value metrics for holdout areas), RMG emerged from this process with a unified and standardized approach to provider compensation and has established a sustainable and solid foundation for future success.

COVID-19 impact on future compensation plan development

This article was written and submitted for publication just prior to COVID-19, and then our world changed. Although the approach and principles described in this article hold true, the experiences during the pandemic offer new insight into compensation models for future plan development.

Many providers in RMG’s production models saw significant erosion of their pay during the early period of COVID-19, when many clinics and surgical procedures were closed, along with the overall economy. Most hospitals were at capacity and expanding medical beds/ICUs into areas that would normally be procedural functions. Smaller groups could obtain payroll protection funding, but larger groups were not able to obtain such funding, although they could receive funding through the Cares Act.

Some medical groups and or hospital systems shifted pay policies and pushed productive providers into a soft guarantee model to preserve their medical staff, protecting surgical specialties and anesthesia teams until they could safely reopen their clinics and procedural areas.  Some providers who were more guarantee-based, would help their systems with slight pay reductions to match what other employees were giving up, to help their systems through the pandemic. Most of this shift occurred from May through October, with easing back to normal operations, as the impact of COVID-19 began to stabilize.

This experience offers on important lesson for organizations that are setting out to develop a comprehensive plan: Consider including a provision in writing outlining how the organization and medical professionals are to be protected amid such a crisis.

 

About the Author

Robin Nichols, CPA, MHA,

is director and senior CFO consultant, Warbird Consulting Partners, Columbus, Ohio.

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