Thoughts on Physician Compensation Models

doctor-medical-medicine-health-42273.jpegConcerns Regarding Employment Model

In the past fifteen years, health systems moved to a physician employment model in many of their markets.  Intermedix estimates the number of hospital-owned physician practices has tripled since 2002.

Unfortunately, health systems are not effective physician practice managers.  As Jeff Goldsmith  noted in a recent Harvard Business Review article: “For many health care systems, physician “integration” — making physicians employees of the system — seems to have become an end in itself. Yet many hospitals are losing upwards of $200,000 per physician per year with no obvious return on the investment.” Mr. Goldsmith believes the poor returns on investment are due to the lack of focus on the key drivers of practice profitability: compensation models, centralized revenue-cycle functions and negotiation of health plan rates, and the reduction of needless variation in prescribing and diagnostic-testing patterns.

To make matters worse, a comparison of hospitals which switched to an employment model to hospitals which did not switch showed no demonstrated improvement in quality outcomes for the switching hospitals.

Physicians are not happy either. Burnout is a significant concern: “The spike in reported burnout is directly attributable to loss of control over work, increased performance measurement (quality, cost, patient experience), the increasing complexity of medical care, the implementation of electronic health records (EHRs), and profound inefficiencies in the practice environment, all of which have altered work flows and patient interactions.”

Losses in a physician practice also put the health system at risk under the False Claims Act.  This theory of liability is attractive because it is easy to show the subsidies exist.  The hospital subsidizing the practice then has to show the arrangement is fair market value and commercially reasonable. If this burden is not met, the subsidies can be found to violate the Stark law, which does not require any showing of intent.  Any claims submitted to Medicare in violation of the Stark law are often considered false claims.

Other Models to Consider

Given the pitfalls of the employment model and experience to date, health systems and physicians are looking for alternatives to the employment model which can meet the following goals:

  • Give physicians more control over their practice and encourage entreprenuership.  Giving physicians more control and encouraging their input to make practices more efficient should reduce physician burnout.
  • Reduce or eliminate practice subsidies, which will improve health system financial stability and reduce compliance risk.
  • Provide alignment between health system goals and physician practice goals.
  • Provide incentives to improve patient satisfaction and quality outcomes.

Virtual Private Practice

In this model, the physician practice (JV) is jointly owned by the health system and the physicians.  The health system provides management and other services to the JV.  The health system does not directly subsidize the physician practice, but may pay the JV for intangibles, such as a fee for using its brand.  This approach works best if the income of the JV is sufficient to meet the physicians’ compensation demands or the benefits of the professional management provided by the health system result in reduced operating costs.  Alternatively, the relationship can identify alternative sources of income, such as  ancillary services or value-based payments.

Professional Services Agreement

In this model the health system enters into contract with independent group and “leases” its physician employees. The physicians maintain their independence through continued ownership of the group’s professional corporation, which decides how the compensation from the health system will be distributed among the physicians. A PSA usually includes additional compensation for taking emergency room call, administrative medical director duties, and coverage of distant clinic sites. If structured appropriately, a PSA can bill for the services furnished by the physicians as provider-based services under the tax identification number of the hospital and qualify for the additional facility fee.

Co-Management Agreement

A co-management agreement is a type of professional services agreement. Under a co-management agreement, physicians are still independent contractors of the hospital, but typically, the hospital pays the physicians fixed fees for professional and certain management services. The hospital can also pay the physicians a variable fee based on quality outcomes. The hospital itself provides administrative and certain other managerial services to support the physicians. If desired, physicians may form a separate corporate entity that enters into the co-management agreement with the hospital—this allows for physicians to remain in private practice but align with the hospital’s quality and safety goals.


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