Incentive pitfalls in physician hospital employment agreements

More and more physicians are seeking hospital employment. Health care reform and widely anticipated federal Medicare reimbursement cuts are fueling another round of physician employment fever in hospitals.  Some observers predict that as many as eighty five percent of physicians will be hospital employees in the next ten years. There seems little doubt that there will be tremendous pressure from a variety of sources to rein in unrestricted “fee for service” retail medical practices in the future.

Many hospitals that toyed with physician practice acquisitions in the 1990s, found that they were ill equipped and inept in the management of physician practices. They didn’t understand the physician motivation, culture and mindset. They turned many of the acquired practices into non-performing assets. One of the major mistakes was the lack of incentive for physicians to perform. Greg Piche of Holland & Hart ( reminds us of these three major incentive pitfalls experienced by hospital in their physician employment contracts.

1. Failure To Incentivize Productivity . Pure salary contracts isolate a physician from the reality and impact of his or her economic performance. Without a bonus or financial incentive based on Relative Value Units (“RVUs”), collections or other form of personal productivity measure, employed physicians had a compelling tendency to move toward the performance levels of the lowest common denominator. If productivity is not rewarded, it is not valued and it does not materialize. The productivity threshold must be reasonably reachable, otherwise it has the same discouraging impact of no incentive at all.

2. Failure To Collect Physician Revenues . The collection rates for physician practices tend to plummet significantly when the billing and collection is taken over by hospital billing departments. These departments tend to drop below national regional norms for percentage of collections as a ratio of billings. Hospital billing and collection departments often do not grasp the urgency or efficiency of physician billing and followup and a lot of things fall through the cracks. Both hospitals and their employed physicians have an economic interest in the production of physician income revenues consistent with national and regional norms. Failure to fully glean the collection potential of physician billings will reduce hospital revenues, reduce potential physician  bonuses and devastate physician morale. Even those physicians on a fixed salary will be in a diminished bargaining position when contract revision time arrives. While astute negotiation of physician employment agreements can include “cover” for physicians requiring that they be credited for revenues on the basis of historic, national or regional collection percentages, the gulf between physician compensation and tepid collection performance can raise serious tax and regulatory issues as well as internal organizational dissonance. Physician billing and collection should be outsourced if it cannot be efficiently and effectively done in house.

3. Overloading Hospital Cost Structure into Bonus Compensation Formulas . Hospital incentive compensation formulas tend to load physician practice costs into a recovery obligation before bonus incentive compensation is distributed. Hospital overhead, including personnel compensation, rent, management and other costs trend substantially higher than in physician practices. It is not uncommon for hospitals to deduct their higher expense structure costs  as a reduction prior to calculation of physician incentive compensation. Where possible, hospitals should keep the physician expense structure consistent with private practice models. Otherwise the charging of physicians with the hospital expense structure substantially in excess of physician practice norms will chill incentive to produce more. Physician practices need to be mean and lean and hospitals and their employed physicians have an overarching need to keep them so and to reward the reasonable productivity of physicians who generate their revenue, separate and apart from the hospital revenue generated  by physicians, who just happen to be employees.

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