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Publication: Hospitals & Health Networks
Author: Jeff Peters
Date: Monday, July 11, 2005
 Paycheck Power, Part 1
If your physician group is bleeding money from the hospital, don't just quash it. A better physician compensation plan can dramatically reduce the losses.
Editor's note: This article is the first in a two-part series on physician compensation. This week's installment explains the link between physician compensation and a hospital's market share and describes the elements of a successful pay plan. Next week, the author will show how to involve physicians in developing a compensation plan that can improve the hospital's strategic position.
Here's a quiz: Your hospital's employed physician group loses $50,000 per doctor every year. Should you (a) reduce the number of physicians? Or (b) eliminate the group altogether?
Before you answer, consider the following case history:
A large teaching hospital in Illinois was losing $10 million annually on its 100-member physician group. Recognizing the need to gain financial control, the hospital drastically cut the size of the practice. The physicians who were eliminated from the practice began admitting half their patients to other hospitals. They also started referring patients to specialists at competitor providers. Within two years, the hospital's bottom line shrank by $60 million.
What this organization failed to take into account is that the average physician generates net revenue of more than $1.8 million every year through patient referrals and admissions (Merritt, Hawkins & Associates, 2004 Physician Inpatient/Outpatient Revenue Survey). Doctors are a hospital's most important asset. If losses are unacceptable, the solution is to turn the group around. Reducing or eliminating the practice is as good as locking your hospital's front doors.
Turnaround Tool
In any turnaround, the trick is to boost revenue while controlling expenses. But can you do that without alienating physicians? Yes. Successful hospitals have significantly benefited doctors while restoring the health of the group practice. The key is compensation. The following case shows the strategy in action:
A nonprofit, multifacility system in Michigan was absorbing annual losses of $7 million on its employed group of 50 physicians. Eliminating the group was not an option--a large multispecialty practice in the community was already squeezing the system's market share. Leaders decided to take a hard look at the physician compensation plan, a salary-plus-bonus model tied to relative value units (RVUs) but not bottom-line performance. In cooperation with doctors, the group implemented a new pay plan based on net income by practice site. Within 24 months, group losses were reduced by nearly two-thirds. The practice not only became financially viable, it eventually began to add new members and gain ground against the competition.
This is not an isolated case. Some of the most successful hospitals in the country consciously use physician compensation to build strong group practices that drive hospital performance.
Six Traits of a Successful Pay Plan
To use compensation successfully, you need to design a pay plan that aligns the goals of the hospital with those of the group practice and individual physicians. Following are the six attributes of a successful physician compensation plan:
1. Alignment between physician and hospital incentives. The single most important function of a compensation plan is to link physician pay to bottom line performance. By aligning doctors with this basic financial goal, you enlist them in the effort to control costs and boost revenues.
The potential for reducing losses is great. Nationwide, the average annual net loss for group practices is $63,000 per physician (Cost Survey for Integrated Delivery System Practices,[Englewood, Colo.: MGMA, 2003]). In contrast, consider the case of a physician group affiliated with a tertiary hospital in the Southeast. By adopting a compensation plan with a strong bottom-line component, this group has been able to limit annual losses to only $5,000 per doctor.
2. Physician involvement in developing the plan. While the bottom line is important, a compensation plan cannot succeed without the understanding and good will of the doctors. Several years ago, a community hospital system on the East Coast decided to adopt an incentive-based pay plan for its employed physician group. The move was made without doctor input--hospital leaders simply informed doctors one day that their compensation plan was changing. The result? Mass resignations.
Nobody likes to be told what to do. This is especially true when it comes to compensation. When you're developing a new pay model, be sure to involve physicians in every step of the planning process.
3. Fairness and objectivity. Physicians are no different from anybody else--they need to see that the playing field is level. One common pitfall is basing regular or bonus pay on the discretion of the group manager or department chair. The results are often subjective. At worst, the whole process can be vulnerable to gamesmanship. Instead of tying the physician more closely to hospital objectives, the compensation system ends up making him or her feel frustrated.
To get buy-in and keep physicians oriented toward the bottom line, base your compensation plan on factors that are quantifiable and justifiable. Think hard numbers, not discretionary evaluations. The plan needs to be squeaky clean.
4. Clarity. The danger in designing a new compensation plan is making it too complex. For a plan to be successful, physicians must know where they stand at all times. Effective compensation plans are built on well-defined parameters that physicians can keep at the top of their minds. They should easily be able to understand the goal and what they must do to reach it.
When developing a new compensation plan, take communication into account. Agree on precisely defined measures that can be conveyed clearly. Decide how often and in what format you will communicate those measures to physicians.
5. Simplicity. This is not simply a money-saving issue for the hospital; it is a plan design imperative that goes hand in hand with the last point. If a compensation plan is difficult for the hospital to manage, it will certainly be hard for physicians to understand.
Again, the workings of a successful pay plan should be transparent to everybody involved. You should not have to hire extra staff to crunch the numbers and handle the reporting. Drive the plan off of existing financial reports. It should be a matter of dropping information into a spreadsheet.
6. Group orientation. Some compensation plans pay physicians strictly on the basis of RVUs with no incentive to help others in the group grow their practice. In contrast, successful compensation plans help build "unit cohesion." The key is to base a portion of pay on the doctor's individual success and a portion on the success of the group.
Tying compensation to group income gives physicians an incentive to refer patients within the group and use the group's ancillary services. In addition, it puts peer pressure on individual physicians to keep expenses on track.
Survival Strategy
Maximizing physician assets through the right compensation plan is the ideal strategy for hospitals that need to survive in a tough market. It supports bottom-line goals and enables a hospital to work with physicians instead of against them.
Next week: Learn the five basic compensation models, discover how to engage doctors in the planning process and find out how to develop the best compensation plan for your physician group.
Jeff Peters is president of Health Directions, LLC, a health care consulting firm based in Chicago. He is also a speaker and author on hospital-physician integration issues. | 
