Posted By John Kastor On December 20, 2010 @ 11:07 am In All Categories,Health Reform,Innovation,Payment,Physicians

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In July, 2009, President Obama visited the Cleveland Clinic [1]and praised its ability to provide hospital care less expensively than some other famous hospitals. This claim was bolstered by a recent study [2] demonstrating that large multispecialty practices have lower cost and higher quality in treating Medicare recipients compared to other practitioners in their regions.

One of the hypotheses for this result [3] is that physicians in such practices are paid by salary rather than on the basis of how much revenue they generate. This claim prompted us to discover which forms of compensation are typical for multispecialty group practices and how such compensation might be linked to medical cost expenditures.

The Multispecialty Group Practices We Studied

We contacted leaders at 12 multispecialty group practices—eleven of whom participated in the Medicare study cited previously [2]. Ten of the twelve group practices pay physicians on the number and type of clinical services they provide with total compensation competitive with private practice. We conclude that cost savings demonstrated by group practices do not appear to be related to a fixed form of compensation.

The twelve practices we surveyed were the Billings Clinic; the Cleveland Clinic; the Geisinger Clinic; the Guthrie Clinic; the Henry Ford Medical Group; the Intermountain Medical Group; Kaiser Permanente of Northern California; the Lahey Clinic; the Marshfield Clinic; the Mayo Clinic; the Ochsner Clinic; and the Virginia Mason Clinic. (Short descriptions of each practice are included in an appendix at the end of this post.) The twelve practices were arbitrarily chosen because of their large size and scale, their longstanding experience and success in health care delivery, and their geographic diversity. While several of these clinics have research and education enterprises, none is a medical school faculty practice plan.

What We Found

Among the group practices studied for this report, most pay their doctors based on clinical activity, often measured with relative value units (RVUs)(1) which report physician’s clinical activity based on such factors as the number of patients seen, the intensity of the service provided, and the number and type of procedures performed. Many practices assign a guaranteed base salary—often calculated from data provided by organizations such as the American Medical Group Association (AMGA)(2,3) and RSM [4] McGladrey [5] — with additional incentives or bonuses based on clinical volume. The following practices pay partially or in some case, totally based on RVU methodology: Billings(3), Geisinger(4), Guthrie(5), Henry Ford, Intermountain(6), Lahey(2), Marshfield(7,8), Oschner(9,10) and Virginia Mason.(11) At the Cleveland Clinic, volume is one of the criteria used to determine future salary, but bonuses are not awarded.(12)

Two of the practices provide fixed salaries where the volume of clinical services performed is not a factor of importance in developing compensation. This model applies at Kaiser Permanente of Northern California(13) and the Mayo Clinic.(7,14)

Most of the groups give financial credit for time spent on research, teaching, and administration, and some consider patient satisfaction in determining part of the compensation.(1) None of the practices compensate on the basis of the number of consultations or tests the physicians order. Doctors in each of the multispecialty group practices studied do not realize income from facility fees since it is the practice or the hospital, not the physicians, who own the equipment and charge for their use.

Most of the respondents told us that they pay salaries that are equal to, nearly equal to, or greater than the amount the doctors could earn in private practice in their regions. Furthermore, many of the groups provide benefit programs and support structures that often exceed those available in many practices. Consequently, when one includes all the costs of employing physicians in large, multispecialty group practices, the total for most physicians is probably not significantly less than the amount they could earn practicing privately.

Lessons Learned

Volume is a significant factor in determining compensation in many multispecialty group practices. As more physicians seek the advantages of working at large multispecialty group practices [6] over remaining in, or joining, individual or small group practices, the question arises whether physician compensation in such large groups is uniquely different from compensation in other forms of practice. As best we can tell [7], in the absence of much literature directly dealing with the subject, the answer is “no.” Only two of the 12 large multispecialty group practices that we studied—Kaiser Permanente of Northern California and Mayo Clinic—pay their physicians with fixed salaries in which income does not depend on clinical productivity.

Base salary supplemented by incentives dependent on productivity is a common model. In some groups, volume is even the principal determinant of compensation; in others it plays a lesser, though still significant, role. This productivity model is typical of most organized practices [8]. The American Medical Group Association reports that, of its membership of 370 groups and about 110,000 physicians, the “vast majority” pay at least partly by volume measured in RVUs.(1) These data come from a collection of groups with widely different sizes and structures, some single specialty groups, and some in a for-profit structure.(1) 

From these observations, it appears that many, if not most, large multispecialty group practices take volume into consideration in compensating their physicians. Though these large groups may provide higher quality at lower cost—as some studies [9] assert [2] – their compensation programs do not appear to differentiate most of them from other group or private practices.

Our study did not examine distinguishing features such as practice culture, governance, insurance contracting, and payment for performance. Any combination of these factors [10] can motivate practices to improve quality and reduce cost.(15,16) It does not appear, however, from our data, that the method of compensating physicians, many of whom can increase their incomes by generating more business for the group, directly contributes significantly to these savings. More comprehensive data from further, more detailed studies are required to prove whether this thesis is correct.

Compensation based on volume presents challenges at group practices, as elsewhere. Compensating doctors wholly, or in part, on volume has its problems. Such systems may encourage use of those tests and procedures that pay well. Leaders at the Marshfield Clinic have found that the RVU system “encourages doctors who do procedures to do procedures.”(8) Accordingly, Marshfield has had difficulty providing enough specialists to provide consultations since the RVUs generated for consultations are much less than those for procedures. It also leads to “running patients through,” seeing as many as possible even if this short-changes patients with complicated problems and those who want to spend more time with their doctors.(8)

What doctors earn in multispecialty group practices can be similar to what they can earn in private practice. As a general rule, physicians in multispecialty group practices earn as much as, or slightly less than, they could in private practice. However, some groups recruit by emphasizing that they provide better and more comprehensive financial and administrative benefits than most doctors in private practice can afford when working independently. Groups may employ a larger professional support staff [11]of nurses, nurse practitioners, and physicians’ assistants to make the physicians’ work more productive and give patients more effective long-term care for their chronic diseases in particular.(17) Consequently, the total cost to the group of employing the physicians may be greater than the cost to the doctors to operate their practices privately even though the salaries may be somewhat less.(17)

As for the income of physicians in multispecialty group practices appearing to be somewhat lower than in many private practices, one CEO writes: “That may have been the case in the past, but I do not believe that it is significant now. The private practice model in years past was able to manage expenses and payer mix better, so I think there was better pay. However, with complex billing processes, rising expenses through inflation and stagnant reimbursements, I think this has leveled off. That is furthered by the recruiting marketplace.”(18)

In joining a group, doctors give up charging for use of equipment that they or their groups may own. Of course, the doctors must spend or borrow capital funds to buy or lease the equipment if they want to collect facility fees for their use. Nevertheless, the return on these investments can be quite sizeable for some specialties. In private practice, physicians, either individually or in specialty groups, who own such equipment have a strong financial incentive to use it more.(17) This incentive does not apply to physician compensation in any of the groups that we studied where the groups or the hospitals own the equipment and collect the facility fees.

Our study has implications for health reform.

Most organized group practices, known for lower cost and higher quality, reward physician productivity. Some health reform proposals, like capitation and bundled payments, will change revenue flow and may disrupt the conventional RVU metrics. For example, physicians may be asked to perform “non-RVU” work, like coordination of care. Health policy makers should be aware that even among practices cited as exemplary, physician procutivity is embedded deeply in the current system of rewards.

In conclusion, our study reports that, in the 12 groups we studied, salary without supplements or consideration for volume is the exception rather than the rule. We also learned that, driven by competition to recruit doctors, most of our multispecialty group practices compensate at levels that approximate or nearly approximate what the physicians could earn in private practice.

 As one of our participants told us: “Simply paying all physicians in the US on a salary basis will not be a panacea for our current [financial] ills.”(19) Two others added, “The real meat of the issue is the self-governance and ability to review and influence practice through physician leadership and organized systems of care,”(15) and “Physician engagement in the process and a commitment to the outcomes of our patients is the best solution.”(20)