By Dr. Jim Dahle, WCI Founder

The world of physician compensation is bizarre, to say the least. Yet too many doctors don't have even a rudimentary understanding of it. This generally results in them being paid less than they are worth and having a more difficult time building wealth. So, if you're sick of working too hard for too little, read on and learn the truth about physician compensation.

 

“Compensation”

Let's start with the word “compensation.” In every other field, this is called salary or pay. Only in medicine do we try to hide the fact that we're all actually in business and trying to make money. Get over yourself. If you're not willing to talk about what's actually going on here, why would anyone bother “compensating” you fairly for your work? And if you don't care about being paid, why are you reading this article?

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No Employee Is Ever Paid What They Are Worth

The next truth you need to understand about physician pay—or any pay, really—is that employees are, by definition, NEVER paid what they're worth. At least not for long. If you generated $300,000 per year for my company and I paid you $300,000, how much profit would my company have as a result of your work? That's right: $0.

If I want to have a profitable company, I HAVE to pay you less than you're worth. How much less is highly variable and based on things like overhead, how much other people are paying employees to do your kind of work, and how little profit I'm willing to take for my efforts and risk as the employer. But it will be less. It HAS to be less long-term. If there are multiple employees I could pay a few dollars more than they're worth, I'd have to make up for it by paying most of the employees even less than I could otherwise afford to pay them if I weren't overpaying those few.

 

The Fairest Pay Goes to a Solo Practitioner

Want to be paid fairly and get every dollar you earn? Open your own practice. That's not even possible for many specialties, but if it is for yours and you really want to be paid fairly, this is what you need to do. That doesn't mean you'll be paid more, but you will be paid every dollar you earn. Your hard work, the patients you choose to treat, the types of work you agree to do, and your ability to run an efficient practice will determine your income. Sick of being discriminated against by employers because of your gender, nationality, type of degree, residency program, or the color of your skin? Insurance companies and Medicare don't care about any of that. Medicare will pay you $700 for an appendectomy no matter what you look like.

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Beyond this, fairness is purely in the eye of the beholder. Are you willing to trade your time for some amount of pay? Is the employer willing to pay that much for your time? There may be a range within which employer and employee would both be happy with the arrangement; if you're in that range, then your pay is, by definition, “fair.”

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People Respond to Incentives

The first law of economics might be that people respond to incentives. This is a general truism. Obviously, everybody responds in a different way. I'm amazed that some nurses voluntarily choose to work night shifts for an extra $1 an hour, but it happens. Many employee pay structures, including those for physicians, are set up in hopes of incentivizing the employees to work harder. Doctors working harder can be a win-win-win. More patients get treated. The doctor makes more. The employer makes more.

 

Compensation Structures Are About Risk Control

There are business risks involved when you hire an employee. There are risks to being an employee. The compensation structure is about balancing those risks. The more risk the employer takes on, the less the employee should take, and vice versa. The riskiest pay structures for the employee should also be those that result in an income closest to that of a sole practitioner, who is taking all of the risk. The least risky pay structure should theoretically result in the lowest overall pay.

Consider an emergency physician working in a brand new free-standing emergency department for $220 per hour. There is very little risk for this doctor. They show up for a 12-hour shift, see whatever patients come through the door, and go home with $2,640 in their pocket. If no patients show up during those 12 hours, the employer is out $2,640, but the doctor still gets paid. If 28 patients come in during those 12 hours, they still get just $2,640 (although the employer makes a killing). There's no risk there for the doctor other than the fact that some days they might have to work really hard, wolf down a quick lunch at their desk, and have no time to empty their bladder. On the other hand, if they were willing to accept some sort of productivity-based compensation, they would make more money on that 28-patient day but make less on the zero-patient day. The employer would be shifting risk toward the employee. In return, the employee should demand additional compensation for taking on that risk.

 

RVUs Are a Good Idea Gone Bad

Relative Value Units (RVUs) are a method of quantifying a physician's work. The idea behind an RVU is that a doctor should get paid for the amount of work they do, not necessarily the amount of money that they generate. That seems wise, right? We don't want doctors doing wallet biopsies on patients and only taking care of those with good insurance who need profitable procedures, right?

However, the problem with an RVU-based compensation structure is that it is incredibly opaque. Unless you know the payor mix and the procedure/visit/coding mix, you can't convert RVUs into cash. Well, guess who has all that information? That's right, the employer. Prospective employees come in and get presented with an RVU-based contract. Should they sign it? Not without having all of the same information the employer had when they drafted it. And what are the odds of getting that in an honest and transparent manner? Not too high. So, lots of doctors sign RVU-based contracts, and then they are shocked after a few months or even a year or two to realize they're making a lot less than they were led to believe they would make. That might not be the employer's fault. Maybe the payor mix went bad or people stopped coming in because they all got insurance that can't come to that clinic. Or maybe the doctor is lazy and inefficient or won't chart right. But nobody is happy in this situation. The doctor leaves. The employer has to spend tens of thousands to replace that doc. Meanwhile, patients can't get in, and even if they can, they lose continuity of care. It's bad medicine all around.

There are some situations where productivity-based pay can make sense. Imagine a big emergency department where four or five doctors are working at a time and it is left up to them to pick up new patients when they're ready for them. If they were all just paid by the shift, they might find that a few doctors took advantage of the system and only saw eight patients in a shift while their partners were seeing 18. A productivity-based system uses incentives to encourage all of the doctors to work hard and to be efficient by actually rewarding those who do so.

However, a more transparent way to do this is simply to pay people a percentage of what was billed or even collected on their behalf. Sure, that will encourage people to pick up the quick, high-reimbursing nursemaid's elbow reductions and avoid the painfully exhausting weak and dizzy, non-English speaking 90-year-old, but that's no different from an RVU-based system. The only reason to use an RVU-based system is to hide from the doctors how much of the money they're generating with their work is being taken from them for overhead and profit.

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Some Doctors Are More Efficient Than Others

Here's another news flash for you. Some doctors are actually more productive than others. That doesn't mean they're better doctors. Heck, patients love a doctor who sits down and chews the fat with them and then goes over all eight of their acute and chronic medical problems over the next 45 minutes, then spends another half hour the next day on the phone with them going over results for free. But the doctor doing that isn't generating much income for the practice.

When considering a job and its compensation structure, you should really consider how you and the way you practice stack up against your peers. Do you usually finish cases 25% faster than your peers? In residency, could you admit three patients at once while keeping the other 25 patients on the service moving along? Or were you the “black cloud” that always seemed overwhelmed on call night? Or wondered how anyone could possibly see a patient and chart in just 20 minutes. Guess which type of doctor should choose a productivity-based compensation structure and which one is likely to do better on a salary or flat hourly rate. Know thyself.

 

Information Is Power

physician compensation structure

Comparison might be the thief of joy, but it really is the only way for employees to know they're being paid fairly. You should look at every salary survey you can get your hands on and talk about compensation with everybody else in your specialty who will talk to you about it. If the average income in your specialty is $275,000 per year, why are you still only making $150,000 working full-time, doing your charts at home in the evenings, and being the laughing stock of the hospital administrators behind your back? Bad jobs go away when doctors stop taking bad jobs. You're hurting all of us when you work for less than you're worth.

Get your contracts reviewed, too. There are two benefits to using a contract review firm when considering a job change or partnership. The first is to understand all of the terms in the contract. The second is to get more information. That firm just reviewed six other contracts in your specialty and geographic area in the last week. Wouldn't you like to know how those contracts compared and contrasted with yours? Contract reviewers also usually have access to proprietary (paid) databases of physician compensation, such as the MGMA database. You can buy access to that database yourself for $3,200, or you can hire a firm for $500, get the data relevant to you, AND have your contract reviewed and explained to you. The choice is yours, but it doesn't seem like a hard decision to me.

The best returns on investment that I know of are

  1. Spending a few hundred dollars to have your contract reviewed by one of our recommended firms, and
  2. Spending a few hundred dollars to get advice on a complex student loan situation.

Both of those have the potential to be worth hundreds of thousands of dollars in exchange for very little time and money. Knowing more is a good thing, not a bad thing, and the information you get using these services would require many hours of your valuable time to obtain. It may not be obtainable at all. Don't be penny wise and pound foolish.

What do you think? What do you think are the best and worst physician compensation structures? How have you been burned by a bad structure? Comment below!