Physician Compensation – Pros and Cons of Cost Structure Models

I was recently asked the following question: Presently, our physician compensation model is productivity based with allocations of expenses set as 50% equally shared by the number of physicians and 50% prorated on production. We also have a 20% equal share pool on the revenues. Our physicians are considering changing our compensation model to reflect more individual revenue and cost centers. In fact, they want to implement some detailed costing on various expenses such as occupancy, supplies, lab and personnel. Can you provide us with the pros and cons of implementing such a strategy?

Answer: Beginning with the cons, the number one disadvantage (In my opinion) to compensation models that institute a detailed cost approach is the high risk of creating solo practices within a group practice. When that occurs it gives the physicians a short term focus and decisions will tend to be made entirely based on how they will affect an individual physician rather than the group as a whole. Having said that, I must add that there are also several advantages of a compensation model like this. For one thing it tends to create a higher cost consciousness within the group, and provides accountability while providing an illusion of fairness – at least initially. Also, the fact that it employs objective criteria sometimes can help ease dissention within the group. As a result of these factors, many groups experience an increase in short term profits with this strategy.

The downside, however, is a very slippery slope. Allocation methods are arbitrary at best and can result in constant bickering over the long run. Group synergy generallysuffers while management's overall influence is often diminished. It is also very time consuming and expensive to administer such a plan. Key management resources are expended every month on the allocations rather than on other – more important - strategic initiatives. The group will also tend to be discouraged from investing in loss leaders or new services due to their focus on the short term cost picture. Profitability of an individual physician center becomes more important than the group's overall profitability or long term success.

In sum, this is a strategy for physician compensation that should be analyzed carefullybefore implementing. The group's culture will change as a result of implementing a cost model for physician compensation.