How Do You Get Paid? | Compensation | MD&D #20

Evidence based insights into physician compensation, RVUs, contracts, healthcare economics, and personal finances. For residents, fellows, and early-career attendings.

Life and Finances, in Medicine.

You received a job offer. The salary looks good. It may even be great. You are happy. Now, before you start comparing the offer number with another offer, there is a much more important question you need to ask: How will you actually get paid?

Because your salary is not necessarily equivalent to compensation. A physician earning a $300,000 salary is not necessarily being compensated the same way as another physician whose contract also says $300,000.

Let me explain. One physician may receive a guaranteed salary regardless of productivity. Another physician may need to produce a certain number of RVUs to earn that same amount. Yet a third one may be paid based on collections. And a fourth one may have a combination of all three. Your salary matters, but the compensation model behind the number matters just as much. Let me address each of these options:

1. Straight Salary

This is probably the easiest compensation model to understand. You are paid a fixed amount of money for doing your job. That’s it. If your salary is $300,000 per year, you receive $300,000 per year, assuming you meet the requirements of your contract. Your paycheck is not directly tied to the number of patients you see, procedures you perform, RVUs you generate, or dollars the organization collects.

For someone coming directly out of residency or fellowship, this could be an attractive model. You know exactly how much you are going to make, which could be particularly helpful during the first few years of practice, while you learn how to manage your clinical workflow, build a patient panel, develop referral relationships, and figure out how long it takes you to do your job. But there is a downside to it. First, inflation. If your income is not adjusted for the average inflation rate (about 3% annually, on average), and you make the same amount every year, then $100 of income may suddenly become $97 the following year.

On the other hand, if you become a very productive provider, your income may not reflect your high production. Imagine two physicians working for the same organization. One generates 5,000 work RVUs. The other generates 9,000 RVUs. If both are paid the same salary, the more productive physician is generating substantially more clinical work without necessarily receiving additional compensation for it. One provider’s production balances the other’s for the overall benefit of the practice.

This is not a bad scenario, nonetheless. The convenience of a fixed salary allows you to focus on other aspects of your job. For example, this is the compensation model used by many academic institutions. Salary compensation is not inherently bad. It simply means that you need to understand what is expected in return for that salary.

But always consider asking: Is there a productivity requirement? Because sometimes a contract that looks like a straight salary is not really a straight salary at all. There may be an RVU threshold hidden underneath it.

2. RVU-Based Compensation

This is one of the most common physician compensation models, particularly in private practice. Your compensation is tied, at least partially, to the number of work relative value units, or wRVUs, that you generate. The basic concept is simple, in theory:

wRVUs × compensation per wRVU = physician compensation.

For example, if you generate 6,000 wRVUs and your compensation rate is $50 per wRVU, your productivity compensation, in theory, would be $300,000.

This seems simple enough, but this is not exactly how it works. There are other factors, like your specialty, geography, experience, and previous productivity, among others, that also play a role in the value of the work RVU offered to you. I talk about this in detail in our other series, The Truth About RVUs.

Now, this is exactly where physicians need to be careful. The important number is not just the $300,000. You need to know the other two parts of the equation. How many RVUs are you expected to produce? And how much are you being paid for each work RVU?

A contract may guarantee you $300,000 but require 7,500 wRVUs. Another organization may pay the same $300,000 for 6,000 wRVUs. Those are very different compensation arrangements. This is also why comparing physician salaries without understanding productivity expectations can be misleading.

There is yet another question that you may consider asking: What happens if you exceed your RVU target? Suppose your contract requires 6,000 wRVUs to earn your base compensation. What happens when you produce 7,000? Or 8,000?

Some contracts use a threshold model: you receive a base salary associated with a certain wRVU threshold, then a fixed $/wRVU for production above that threshold. For example, you may receive a $270,000 base salary with an expectation of producing 6,000 wRVUs, then $50 for each wRVU produced above 6,000. Others offer a tiered model: the $/wRVU rate continues to increase as your production increases. A third group may offer productivity bonuses (not necessarily a higher wRVU value) only after you reach a particular level. And a fourth may provide very little additional compensation at all. It is important for you to understand this before signing the contract, not after you have already produced the RVUs.

At this point, another question comes to mind. What happens if the opposite happens? What happens if you do not reach the target? Is your salary truly guaranteed? Can your compensation be reduced the following year? Many practices protect your income for some time after you join the practice, usually for a couple of years. First, because they understand it takes time to build a new practice. And second, because it usually takes a couple of years for institutions to break even on the investment of hiring you.

So, what happens after the protected period? Does your income go down? Is there a limit to how much it can go down?

After this period, your compensation may become almost entirely dependent on productivity. It is important, then, that you ask whether the compensation plan has a cap or a floor. That means: Is there a limit on how much your compensation can increase (cap) or decrease (floor)? Some organizations place limits on how much physician compensation can change from one year to the next, while others do not. You need to understand whether those protections exist in your contract and exactly how they are calculated.

3. Collections-Based Compensation

Instead of paying you according to the work you perform, an organization may pay you according to the money your work actually generates.

One form of collections-based compensation is based directly on insurance payments. For example, if you perform the work but the insurance company denies payment for that specific encounter, you may not get anything for the encounter. This is a collections-based model. And in this model, it is paramount that you learn how to appropriately document and code to avoid insurance denials.

Another form of collections-based compensation involves giving you a fixed percentage of professional collections attributable to your work. For example, if the practice collects $600,000 from your services and your compensation is 45% of collections, your compensation would theoretically be $270,000.

You generate revenue. The practice collects the money. You receive a percentage. But collections-based compensation introduces something that RVU compensation does not. You may become financially dependent on things you do not completely control. You can perform the service correctly. You can document appropriately. You can submit the correct code. But what happens afterward is out of your control. You will not know if the practice submitted the claim correctly, if the claim was denied, if there was an appeal, or what percentage of the organization's charges are actually collected.

Suddenly, your compensation depends not only on your productivity but also on the effectiveness of the entire revenue cycle. That does not mean collections-based compensation is bad. In a well-run practice, it can strongly align physician compensation with the economics of the organization. But if you are going to be paid based on collections, you need information on the details of the collections process.

Furthermore, you should also know exactly what the contract means by collections. Gross collections? Net collections? Are certain expenses deducted first? What happens to money collected months after you leave the organization? These details matter.

4. Hybrid Compensation

And then there is a model that has become increasingly popular. A little bit of everything. The hybrid. Just like the name implies, it is a mix of different forms of compensation.

Or almost any combination you can imagine. This is where organizations become creative and look for models that benefit both the organization and talent retention. For example, you may receive a guaranteed base salary of $250,000 with an expectation of producing 5,000 wRVUs. Anything above 5,000 wRVUs might then be paid at $50 per RVU. So, if you generate 6,000 wRVUs in this example, your base salary would be $250,000. And your additional productivity compensation would be 1,000 × $50 = $50,000, for a total compensation of $300,000.

But keep in mind that there could be another $20,000 available for meeting quality metrics, for example. Then your potential compensation becomes $320,000.

Hybrid models can work very well. They provide some financial stability while still rewarding productivity. But they can also become extraordinarily complicated. And when compensation formulas become complicated, physicians sometimes tend to avoid the nuances of following up on these changes. I wouldn’t recommend doing that. Look at it this way: If someone asks you how you get paid, you should be able to explain your compensation formula yourself. If you cannot explain how your paycheck is calculated, you need to work on it as soon as possible.

The Salary Number Is Only the Beginning

Be mindful of the following. When evaluating a job, it is very tempting to compare offers based on the initial dollar offer. Imagine three hospitals in the same city. Hospital A offers you $300,000. Hospital B offers $325,000. And Hospital C, $350,000. If you look at these three offers without much consideration, Hospital C must obviously be the best. But this is not necessarily true. You must look beyond the initial dollar offer. What if Hospital A expects 5,000 RVUs, Hospital B expects 6,500, and Hospital C expects 8,000 for the same salary? In this scenario, Hospital A would be paying you $60 per wRVU, Hospital B $50 per wRVU, and Hospital C $43.75 per wRVU. Suddenly, Hospital A becomes the best option. If you join Hospital C, you would have to work harder to keep up with the initial offer.

But that is just the tip of the iceberg. Let’s dig deeper. What if Hospitals A and C guarantee the same income regardless of your production for the first five years of your employment? Your income cannot go up or down. It sounds tempting, right? But suddenly, Hospital B becomes the best option because they offer to account for cost-of-living expenses and inflation.

Now, let me mention other scenarios. What if one position includes six weeks of vacation while another includes four? What if one has substantially more call? Not everything in life is money (although some may beg to disagree). You may make more money with one option, but it may take time away from your family.

You follow me? Suddenly, the largest salary may not be the best compensation package. This is why physician compensation should never be evaluated by salary alone. You need to understand the economics behind the number. And you need to set up your priorities prior to scrutinizing an offer.

Questions You Should Ask

Before signing, make sure you can answer these questions:

And perhaps the organization can show you an example of how your compensation would be calculated by running hypothetical numbers with you. If you produced 5,000 RVUs, what would you make? If you produced 6,000 or 7,000?

Compensation calculations should be no mystery. Transparency is key, from both sides, for the success of an agreement.

Your physician contract may contain a large salary number at the top of the page. Do not stop there. Find out what you are expected to do to earn it. Understand what happens when you produce more. Understand what happens when you produce less. Find out which parts of your compensation are under your control and which are not. Because there is a very big difference between knowing your salary and understanding how you actually get paid. And before you sign your contract, you should understand both.

✓ Your salary is not the same as your compensation model. Two physicians can have the same salary but very different productivity expectations and earning potential.

✓ Understand what happens when you produce more or less. If RVUs are involved, know your target, $/wRVU, bonuses, thresholds, caps, floors, and what happens when you miss the target.

✓ You should be able to explain exactly how your paycheck is calculated. Whether you are salaried, RVU-based, collections-based, or hybrid, the formula should not be a mystery.

“There is a very big difference between knowing your salary and understanding how you actually get paid.”

Have a question about compensation, contracts, personal finance, or life decisions in medicine? Send it to MD&D. Your question may be answered in a future article, podcast, or Q&A.

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Life and Finances, in Medicine.