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Physician Compensation: What to Expect in the Future

December 15, 2016


Determining physician compensation can be challenging, especially since it depends on a variety of factors, such as area of the country, whether a physician is part of a group practice or is hospital-employed, and the level of ancillary services in which the physician participates.

To establish fair market value (FMV), the healthcare industry relies on independent, national survey data regarding compensation, including the annual survey Katz, Sapper & Miller conducts in conjunction with the Neurosurgery Executives’ Resource Value and Education Society (NERVES), among others.

In an environment where healthcare is continually evolving, what FMV trends are emerging, what is influencing compensation and what can providers expect in the future?

Factors Influencing Compensation

In an effort to expand and improve market share, hospitals are hiring physicians to help grow hospital service lines. At the same time, escalating overhead, growing complexity of management and ensuring compliance with healthcare regulations have quickly increased the financial and administrative burden on smaller physician groups, making many of them financially unsustainable.

As smaller practices become rarer, physicians are seeking employment in large group practices or at hospitals. Many physicians find hospital employment beneficial because there are additional resources to handle electronic health record (EHR) requirements as well as the administration of bundled payments. Increasing malpractice costs and equipment expenses can be more easily absorbed by larger institutions, and because of their size, hospitals can often negotiate more favorable reimbursement rates and offer higher compensation.

Hospitals, however, are finding it more difficult to recruit and retain qualified physicians, often resulting in contracting leverage for the physicians. There is a growing supply challenge in almost all specialties that is putting a lot of upward pressure on starting salaries, particularly for hospital-employed physicians. Hospitals must pay FMV, but when there is greater demand than supply, it can drive up compensation.

What to Expect Going Forward

Some specialties are continuing to do well and are seeing moderate compensation increases. However, there are some practices that are still operating in a fee-for-service environment; that will inevitably be changing as healthcare reimbursement moves toward value-based reimbursement. Compensation will continue to move away from production-based models, which pay physicians for services they render by basing compensation on work relative value units (wRVUs), and will move toward basing a larger percentage of compensation – as much as 30 percent – on factors such as value, quality, care management, patient satisfaction and cost reduction.

In the future, physicians will likely be asked to take on more responsibilities, including participation in some form of medical administrative services and in expanded call coverage responsibilities. Physicians will continue to be asked to help streamline care, improve efficiency, reduce cost and improve patient satisfaction. They will likely be tasked with taking an active role in process redesign as well as in the selection of new technologies and changes to existing technologies, equipment and supplies. As physicians spend an increasing amount of time in administrative activities, they will continue to leverage and supervise advanced care practitioners such as physician assistants (PAs) and nurse practitioners (NPs).

What You Can Do

In the midst of a rapidly-changing environment where physicians are taking on more responsibilities, what should you do? For those who are in the midst of finding new employment or negotiating new contracts, there are items you should review:

  • Determine whether compensation levels are sustainable over the medium-term and long-term. This involves determining the financial health of the employing entity, including its operational efficiency and profitability.
  • Ask probing questions about the sustainability of the promised income. Sometimes candidates who are evaluating opportunities are not asking the right questions about hospital-employed positions. In light of the pressures on hospitals today, candidates should ask questions about what the organization’s market position is and whether the practice is the optimal size for the organization and market. In the case of private practices, it is important to know how the practice is positioned in the marketplace and what its relationships are with payers and health systems.
  • Look at the complete picture of potential compensation, including call coverage. Offers should not be evaluated by comparing base salaries to one another; instead, physicians should compare and contrast the entire benefits package and compensation. Also, physicians should understand the compensation structure beyond the initial starting period.
  • Consider the long-term compensation potential. For those who consider entering a private practice, they may have a lower initial salary than their hospital-employed counterparts, but the earning potential could be greater over the long-term.
  • Evaluate the practice’s or hospital’s readiness to weather the transition toward value-based reimbursement. As emphasis is increasingly put on quality-based incentives and penalties, it is important to understand how prepared the organization is for this shift. One way to do this is by asking where the hospital or practice envisions the organization in the future, ensuring they are equipped for the shift in the way it pays its physicians.
  • Consider how many currently employed physicians have renewed their contracts or plan to renew their contracts. This factor is telling about a practice’s or hospital’s working environment.

If you need help assessing the viability of a compensation arrangement or recruiting physicians for your practice or health system, our Healthcare Resources Group is happy to help.

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