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January 08, 2021
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Provider compensation success factors, part two

This month covers seven more factors to increase provider satisfaction and lead to a more aligned cohort of owners.

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“I am indeed rich, since my income is superior to my expenses, and my expense is equal to my wishes.”
– Edward Gibbon

“Wealth — any income that is at least one hundred dollars more a year than the income of one’s wife’s sister’s husband."
– H. L. Mencken

Last month in this space I started to discuss the challenge — even with the most compatible partners in the most successful practices — of finding a perfectly fair compensation model. Consensus is hard to find in this area. More often doctor boards have to be satisfied with a compensation model that everyone hates equally. I described 10 success factors.

John Pinto
John B. Pinto

This month I will cover the last seven success factors. If you work in a group practice, as you read through these, consider if any of these factors are missing from your compensation approaches.

Seven more factors to consider

11. The best compensation approaches result in all providers of a given class receiving roughly the same income when expressed as a percent of their net revenue. Consider the example seen in the Table of providers in a single practice.

Providers table

A few observations:

  • Drs. B and C make nearly the same income as a percent of their net revenue, which is probably appropriate; they probably use the same resources per patient. If one were paid 30% and the other 40%, this spread would likely indicate a need to review and revise the compensation model.
  • Dr. A makes a higher percentage of his revenue, but this is in keeping with the higher profit margins that are typical in retina. In some practices, it would be deemed more appropriate for Dr. A to be making a somewhat lower income and to mildly subsidize a pay raise for Drs. B and C.
  • Drs. D, E and F are associates; they would typically be paid under a different formula from the owners, whose time and capital have been put at risk to form the group. It is typical for most associates to take home a smaller percent of their net revenue than most owners.
  • Dr. D is paid a much higher percent of his net revenue than all the providers, save Dr. A. This is commonly seen because pediatric specialists are hard to recruit and must be paid at market rates. The partners probably lose money on every pediatric patient, but this is often a conscious decision to provide a needed service in the community or help lock in referral support.
  • Dr. E is paid a higher wage than the typical associate OD in an ophthalmology practice (who makes $150,000 or less), but he is an unusually high producer, so the higher compensation is reasonable.
  • Dr. F brings home a higher percent of his net revenue than Dr. E, but like the pediatrics doctor, he has a floor set by the market value of optometric labor. As Dr. F’s practice grows, his compensation as a percent of collections would reasonably decline to the typical ±25% range.

12. Practices with significant capitation contracting face a special burden in crafting compensation. While there are various ways of dividing up the incoming capitation fees (eg, pro rata to the number of “lives” one is the chief provider for or pro rata to each provider’s imputed collections had services been provided on a fee-for-service basis), it is important to track utilization and assure that services are ethically metered. As it is under most cap contracts and most compensation models, providers can end up receiving only about half of their accustomed fees and personal income for a given service, so the human tendency to “make it up in volume” has to be discouraged, lest your cap contracts become even less profitable than they already are.

13. It is important for managing partners and other physician leaders in practices to keep their eyes open for any emergence of provider dissatisfaction with the compensation model and to act early when questions or complaints surface. Compensation grumbles are often the first warning bell of provider dissatisfaction. Do not let these complaints accumulate.

14. Avoid undue drift in your compensation model. This happens innocently enough when the board says, “Let’s incentivize X behavior,” such as boosting premium IOL rates. Just like a nation’s tax code, a practice’s compensation model can become gummed up with so many carrots and sticks that everyone focuses on gaming the system rather than being productive and collaborative.

15. The compensation model should be examined formally every year for continued fairness, and in some settings, it may even be appropriate for the model to sunset periodically and have to be voted back into place. Above a certain size, a practice should have a formal, standing compensation committee of the board to handle doctor compensation grievances. Any doctor should feel free to come to the committee at any time and say, “Conditions have changed in my segment, or the overall practice, and the current methodology is no longer fair.” The best compensation committees are commonly composed of a mix of high and low producers, along with the practice’s CPA. While the practice’s administrator or executive director can be a useful technician aiding the compensation committee’s work, wise administrators avoid getting too involved or expressing their support of one model over another. Any change in the compensation formula creates relative winners and losers, so it is imperative that the administrator remain neutral.

16. No perfect compensation model has ever been developed; doctors who need perfect fairness should be in solo practice. Like a marriage or close friendship, you have to be able to say, liberally, “I can live with that.” Accordingly, hire and partner with doctors who are reasonable, affable, generous people. Avoid or dismiss providers who will never be satisfied with any reasonable compensation model and who will unjustifiably create group conflicts.

17. Keep in mind that compensation is just one basis — one of many dependent variables — for a doctor thinking they are being handled fairly in a practice. Other elements include:

  • Access to patients
  • The dynamics of internal cross-referral
  • The level of marketing support
  • The ability to pursue lucrative subspecialties, academics or research
  • The ability to control the admission of competing providers to the group
  • Work hours
  • Satellite assignments and the burden of commuting chores
  • Staff assignments
  • Equipment and technology decisions
  • Size and location of one’s personal office
  • Time off
  • Fringe benefits
  • Voting rights
  • The percent of the practice owned (as compared with one’s percent of total production)

Partnership buy-in and buy-out provisions

We commonly come across a client who reports that their chief complaint is their compensation model. But after the model is reworked to everyone’s apparent satisfaction, new complaints arise. If you lead or manage a group practice, it can be an interesting exercise to ask the providers in your group to rank, on a 0 to 10 point scale, their level of satisfaction with each of the above less-financial dimensions. You could learn that while compensation is everyone’s hot button, it may be just the surface manifestation of deeper grievances. These need to be addressed concurrently with compensation modeling.

Click here to read part one of this series.