How to Design an Effective Physician Compensation Plan on Nashville Medical News

How to Design an Effective Physician Compensation Plan

By: LUCY R. CARTER, CPA and SARA L. LANKFORD, CPA

Follow four principles to be successful

Compensation can be a powerful motivator. An effective physician compensation plan encourages physicians to share resources and work together as a team. It influences and directs behavior when a practice faces challenges such as changes in reimbursement, more regulation, and increased costs. It contributes to overall practice success.

To realize these benefits, the design of a successful physician compensation model requires the buy-in of the entire physician group. However, to achieve this buy-in, certain basic principles must be in place.

Principle 1: Physicians in the Group Must Trust the Formula

When change occurs, the natural response is apprehension. This is especially true in the case of compensation formulas. In many cases, the physicians may already be apprehensive as to the equality and fairness of the existing formula. However unpopular the existing formula may be, any change may be perceived as threatening.

The key to success and acceptance of change depends on the degree of physician involvement in plan design. If the physicians are not involved in the change process, buy-in will most likely not occur. As part of the plan design, sample formula computations should be prepared based on budgetary expectations so that the physicians can see the effects of the new formula on physician compensation. If the sample computations are not prepared, the physicians may reach philosophical decisions that do not equate to the desired financial results.

Not only do the physicians need to trust the formula, they must trust the individuals assigned the task of administering the formula. The group must have faith in the integrity and competency of those providing the computations.

Additionally, the physicians must trust the data used in the compensation computation. If data regarding production, collection, and expenses is continuously flawed and suspect, the physicians are unlikely to rely on the results of the model. Underlying financial data must be consistently reliable in order to garner the trust of the physician group.

Finally, the physicians must trust each other. If there is inherent mistrust among the physician group regarding patient scheduling and workload, use of resources, or quality of care, the formula is likely to fail. The group must develop a cohesiveness and sense of equity regarding core values.

Principle 2: The Formula Must Be Clearly Understood

All too often the classic flaw of a compensation model lies in its complexity. In an attempt to achieve equity in allocation, the practice sometimes creates a plan that, for lack of a better description, "splits hairs." The model may result in numerous, complicated spreadsheets and calculations. As the formula becomes more complicated, the purpose of the calculations may become lost in the computations.

Complex formulas lend themselves to error and manipulation. In order for the physicians to trust the formula, the calculations must be reliable and must bear resemblance to the overall financial results of the practice. If the computations are too complex and there is no reconciliation to verifiable financial data (billing reports and financial statements), the results can be manipulated to shift income inappropriately.

Additionally, human nature directs us to distrust those things we do not understand. If the physicians do not understand the formula, they may have the perception that they are being taken advantage of and treated unfairly.

If the formula is so complex that no one understands the calculations or the purpose of the calculations, the formula cannot be used as a tool to direct behavior. The physicians must understand the calculations and, most importantly, they must understand how their behavior affects their compensation.

Principle 3: The Formula Must Be Equitable

Compensation models may be equitable; however, as expressed in the book Animal Farm -- "some may be more equal than others." The basic premise must be to establish equality in the computations.

Principle 4: Group Incentives Must Be Promoted

The fourth principle may very well be the most important in maintaining a successful practice. Physician practices are in a state of transition due to changes in reimbursement, escalating costs, and increasing government regulations. Compensation can be a critical force in supporting change and moving the practice forward and should play a key role in motivating the behaviors needed to accomplish the desired change. There is no doubt that money directs behavior.

A fundamental objective of all compensation plans should be to maintain the financial viability of the group. Without careful, appropriate financial planning and budgeting, practices may set compensation in excess of financial resources, thus setting the group up for failure. Without planning and efficient management, losses may occur. Physician compensation models should be designed in a manner that does not jeopardize the financial stability of the group.

In summary, remember these points when designing, implementing and maintaining a physician compensation plan:

Model the plan before implementation to make sure it encourages the desired behavior; Make certain the data used in the computation is accurate; Communicate frequently and regularly because building consensus is essential to success; Review the plan frequently in light of organizational or industry changes; and When change is indicated, do not be afraid to change gradually.

Lucy R. Carter, CPA, and Sara S. Lankford, CPA, are principals of Nashville accounting firm, Carter, Lankford CPAs, P.C.