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    Timothy Smith, CPA, ABV
    Series: Examining Losses in Health System Physician Practices

    This installment of the article series runs counter to popular trends when it comes to setting physician compensation for physicians in health system practices. Many health systems pay their physicians solely based on data from physician compensation survey data or on valuations prepared using such data. Sole use of survey data in setting physician compensation levels, however, can lead to practice losses. Health systems that fail to consider the full range of physician practice economic factors are at-risk for never-ending red ink from their physician enterprise.

    We should first note that practice losses resulting from survey usage is not the fault of the survey data. It’s a user problem! Survey data are designed to provide information in statistical format (also known as descriptive statistics) about respondents to the survey. As such, surveys are highly useful for general benchmarking, providing a range of data for comparison purposes relative to the survey cohort.

    The problem arises, however, in the ways survey data are used in physician compensation-setting for health system practices. Two broad approaches for using survey data are observed in today’s marketplace.

    In the simplest approach, a specific percentile for compensation is selected as the appropriate level to pay a physician. Typically, the median or 75th percentile is selected for total compensation or the compensation per wRVU ratio. In practice, these rates may be blanketly used for all physicians with no consideration of the facts and circumstances for the physician’s practice. Such blanket use of this or that percentile is usually supported by claims about market conditions, regulatory guidance, or appeals to common practice (e.g., “this is how everybody does it”).

    The second approach attempts to match compensation with a physician’s production, typically based on wRVUs. A highly common form of matching involves paying a physician at the total compensation percentile that corresponds with the physician’s benchmark level of wRVU production. For example, a physician whose wRVUs benchmark at the 65th percentile for wRVUs is paid at the 65th percentile for total compensation.

    Another form matches the compensation per wRVU ratio to the benchmark level of wRVUs. Under this variation, the physician’s whose wRVUs benchmark at the 75th percentile is paid at the 75th percentile compensation per wRVU ratio. Yet another form uses the median compensation ratio for the quartile of production level for the physician as the blanket rate for paying a physician.

    This second approach is based on the belief that production is the only critical driver of compensation levels in the marketplace. No other economic factors impact market compensation for physicians. So, if you can track or benchmark a physician’s wRVU production, you can predict the market compensation for that physician.

    This view, however, doesn’t square with the reality of the data. Below is a scatter-plot diagram taken from MGMA’s pay-to-production plotter report from the 2016 Provider Compensation report for non-invasive cardiology.

    This diagram maps the physicians for whom wRVU and total compensation data were submitted to the survey. Each dot represents what a real-world physician made in total compensation (X axis on the left) based on the level of wRVUs he or she produced (Y axis at the bottom).

    The diagram also plots the three commonly used methods we just discussed for establishing compensation based on wRVU production:
    • The “Compensation Match” black line plots the compensation level based on matching percentiles of total compensation with percentiles of wRVU production.
    • The “Ratio Match” green line plots the compensation level based on matching percentiles for the compensation to wRVU ratio with percentiles for wRVU production.
    • The “Quartile Tool” plots the compensation level based on using the median compensation to wRVU ratio for the quartile of the wRVU production level.
    As the diagram indicates, all of these methods plot a line through a widely arrayed dataset in which the majority of physicians plot well above or below each line.  No line encompasses or reflects the majority of the actual datapoints.

    What does this mean? This diagram shows the reality of the data is that at any given level of wRVU production, physicians earn a wide range of total compensation amounts. Production based solely on wRVUs is not a definitive predictor of what a physician will earn. In other words, these commonly used methods do not correlate with the data.

    Not only are these methods out of synch with the data, they also ignore other factors that can impact the economics of a physician practice. These factors include:
    1. Payer rates in the local market;
    2. The level of ancillary net earnings;
    3. The use of nonphysician providers in the practice;
    4. Compensation from various nonclinical services, such as call coverage, medical directorship, clinical co-management, and research;
    5. Compensation from alternative payment models, quality bonuses, and pay-for-performance plans;
    6. Cost structure, cost efficiency, and cost allocation; and,
    7. Group practice compensation models that distribute group earnings using nonproduction formulas.
    Applying these survey-based compensation methods and ignoring all the other factors affecting the economics of a physician practice is a formula for creating red ink on the bottom line. A practice cannot simply pay its physicians in the abstract using only these methods and not run the risk of practice losses.

    As we noted in the second installment in this article series, physician-owned practices have to live within their means. Thus, we do not observe the loss pattern in such practices in contrast to health system practices. This difference in outcomes is also reflected in survey data usage by physician-owned practices. They may benchmark their compensation levels, but they cannot afford to turn benchmarking into the sole basis of their compensation planning.

    The opposite is frequently true in health system practices: benchmarking sets compensation levels, while overall economics are set aside. But, as many health systems have found, their practices are always in the red.

    In our next installment, we’ll begin to look at the various enterprise-level risks associated with practice losses, beginning with regulatory enforcement risk and the history of practice losses as a factor in whistleblower cases involving physician compensation.

    Click the following to read previous articles in the series:

    Physician practice losses: A tale of two owners

    Physician practice losses: Why physician-owned practices break even or make a profit

    Physician practice losses: Why losses are typical in health system practices

    Physician practice losses: Losses from revenue issues in health system practices

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