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Rapidly changing internal and external environments continue to pose significant financial pressures and challenges to leaders of academic medical centers. With increasing internal budget constraints and decreased governmental funding and compensation, leaders face difficulties in resource management.1 External drivers of quality and safety accountability, potential structural changes in compensation, and the likely consequences of financial discussions at a time of slow economic growth and massive debt intensify the pressure as local and national governments define financial changes for the future.2,3 Increasingly, leaders of academic medical centers are recognizing the importance of aligning resources and compensation in support of all academic missions: education, clinical, and research/scholarship.4
Physician compensation in support of the clinical mission is evolving in academic medical centers. Faculty in clinical departments are experiencing a shift in compensation philosophy as departments evolve from a belief that guaranteed salaries enabled academic freedom to a model where compensation plans need to incentivize productivity.5 Although the compensation plans are diverse with multiple goals, the majority have as their primary goal the improvement of financial accountability at some level of the organization and offer monetary income to modify behavior, largely in the form of bonus payments. A few compensation programs reward both monetarily and with subsidized education, and a nonmonetary compensation program that incents scholarship has been also described.6–8
The Department of Internal Medicine at the University of Kansas School of Medicine has been engaged in aligning faculty compensation singularly with each academic mission, initially with the educational mission. Recently we described and implemented the educational value unit (EVU), which describes and measures the specific types of educational work done by faculty such as core education, clinical teaching, and administration of educational programs.9 The EVU is a simple, prospective, and time-based system for compensating the educational efforts in our department. The EVU resulted in the alignment of expectations of physician’s educational efforts with compensation and accountability, dramatically changing how our department paid for the educational mission and how our faculty understood its funding Application of the EVU resulted in a total realignment of $1.6 million, or $29,072 per faculty member. A survey found that faculty perceived a more equitable alignment of teaching effort with funding.
After implementation of the EVU metric, and in response to declining state revenues, state support of education decreased, thereby increasing reliance on clinical revenue to support faculty compensation. On reviewing clinical compensation across the department, we found significant variations between faculty compensation for clinical work, even between those doing essentially similar work.
In this article, we review the development and implementation of the financial value unit (FVU), a mechanism to align clinical income with clinical productivity, standardize clinical income across specialties, and normalize data across the department in a fair, transparent, equable manner using national compensation and work productivity metrics.
The Rationale for Developing a New Metric
Multiple sources fund faculty compensation in the Department of Internal Medicine. State budgeted dollars support the educational mission via the EVU. Research grants may fund a portion of compensation, that is, the research salary. The clinical practice component of the total faculty compensation is paid from the KU Internal Medicine Foundation (KUIMF), a not-for-profit, C-3 foundation. All clinical revenue and expenses are managed by KUIMF, including nonstate staff and faculty compensation.
In the past several years, state educational dollars have decreased, thereby mandating an increase in foundation dollars to maintain the total faculty compensation, acknowledging the reality that faculty compensation is increasingly dependent on clinical income. However, there were significant variations between faculty compensation and clinical work, often even between those doing essentially similar work. The primary objective in seeking a new clinical-based productivity compensation model was to fairly compensate all faculty for their work, so as to not to “underpay” or “overpay” relative to clinical productivity.
In 2006, a multidivisional committee was formed to develop a productivity compensation model for the department of medicine. Components of the FVU included standard national metrics of compensation and productivity, the Medical Group Management Association (MGMA), and the work relative value unit (wRVU). We used the MGMA Physician Compensation and Productivity Survey Report to establish national standards for comparison.10 The survey reports are the leading compensation and productivity benchmark references for physicians. Also, they have one of the highest respondent rates for internal medicine generalists and specialists. The survey data represent clinical income and productivity of private practitioners and academic providers. In our case, the committee reasoned that clinical work in our academic medical center should be compensated as closely as possible to clinical work in private practice.
A total relative value unit (RVU) is a nonmonetary comparative unit of measure which assigns relative values or weights to medical service to standardize work. Total RVUs are composed of wRVUs (actual work), malpractice RVUs, practice expense RVUs, and a geographic practice cost index. We used wRVUs as a standard metric for measuring actual clinical work that is comparable across specialties.
The FVU committee’s goals were to link compensation to clinical productivity, be well defined and easy to administer, support individual choice regarding work, compensate consistently with market norms relative to market work benchmarks, promote cohesiveness and teamwork, and reward high producers.
Defining the FVU and Salary Gaps
The FVU was developed and proposed as a nonmonetary, comparative unit of measurement of clinical compensation and productivity. It is a ratio of the faculty clinical (KUIMF) salary compared with the total wRVUs generated for a defined period of time against the MGMA median salary to median wRVU of a comparable specialty physician in our area (Southern region). (See Box 1, formula A.)
For an individual faculty member, the closer the FVU is to 1.0, the closer the faculty is to the salary paid to an MGMA physician performing similar clinical work and productivity as defined by wRVUs. The goal of the department’s clinical compensation was to increase the FVU on a yearly basis to a value approaching 1.0.
After institution of the FVU as a method to describe the ratio of faculty compensation and work relative to MGMA compensation and work, the ensuing salary gap between faculty and MGMA compensation was defined by three formulas (see Box 1, formulas B–D).
A divisional salary gap was calculated for each division within the department by the addition of each individual faculty salary gap in the division (Box 2, formula E). The percentage of salary gap for each division within the department was calculated by the divisional salary gap divided by the total departmental salary gap (Box 2, formula F). That divisional percentage was multiplied times the total available KUIMF distribution dollar amount to determine the divisional production payment (Box 2, formula G). After applying a 5% assessment to each division in support of the department’s research and/or education mission, the division director determined the production payment distribution to each faculty in the division by either wRVU productivity or equal share of the distribution (Box 2, formula H). At year end, after all production payments, the FVU was recalculated.
Implementing the FVU Metric
Once the FVU and salary gap metrics were developed, the committee monitored and adjusted faculty salaries. Significant variability in physician compensation existed across faculty and divisions in FY 2006 (Figure 1). Although the median department FVU was 0.46, some faculty were compensated at a level as high as 1.65, suggesting overpayment relative to clinical work, whereas others were less than 0.15, suggesting underpayment relative to clinical work. Physician compensation was thought to be the likely primary driver of the low FVU because nonphysician costs—that is, total support staff, total general operating, and total operating costs—were less or similar to the cost as percent of revenue in the MGMA Southern region, multispecialty group median benchmark. Analysis of net collections showed our gross collection rate at that time to be 46% as compared with 54% MGMA.
The Department of Medicine experienced considerable clinical growth in the six years from FY 2006 to FY 2011. Total FTEs increased 29% from 72.5 to 101.5 in 2011. Imputed cFTE also increased from 57.6 to 79.7 during the same time period (Table 1). Clinical work increased more dramatically, with total departmental wRVUs growing from 214,057 to 415,142 by 2011. Increased work was disproportionate to increased faculty as wRVU/cFTE increased 53% from 3,712 to 7,922 in 2011 for the department as a whole (Table 2).
Total clinical revenues rose 48% from $21.9 million to $42.1 million (Table 3). Professional fees increased 29% from $16.3 million to $22.9 million. Professional service agreements (PSAs) with the University of Kansas Hospital Authority rose dramatically from $5.5 million to $19.1 million in 2011, a 71 % increase. Faculty retention rates of 92% in 2006 remained high, sustaining rates of 95% or greater in two of the last three years. In 2010, faculty retention dropped to 89%, largely attributed to increased turnover of hospitalists entering subspecialty fellowship training.
Production payments were distributed annually. Initially the methodology for dissemination was department chair discretion, and then based on wRVUs. From FY 2008 forward, the distribution was based on the salary gap calculation. Distribution payments have increased from $514,000 to almost $4 million in 2011.
As a result of the above changes with implementation of the FVU process and salary gap calculation, the overall departmental FVU increased from 0.46 in FY 2006 to 0.90 in FY 2011. Physician compensation was much less variable (Figure 2). All divisions achieved an FVU of at least 0.80, and others (i.e., general internal medicine) achieved an FVU as high as 0.97.
Discussion and Implications
Our compensation model, the FVU, considers the relationship of actual physician compensation and work productivity compared with national benchmarking standards. In our application, the FVU provides the basis for calculating a derived salary gap to determine physician production payments that moves clinical work compensation in closer alignment to national standards while decreasing physician compensation variability.
Physician compensation plans in academic medical centers are diverse but increasing in number. A recent review found only 14 studies that met inclusion criteria—namely, the description of at least one measure of financial impact, productivity, and quality of educational services or faculty satisfaction.5 Characteristics of the programs varied from simple tracking to complex systems; however, the goal of the vast majority was to improve financial accountability largely by offering monetary incentives either by bonus payments or salary withholdings. Plans that also described the quality of educational experience did show productivity improvement without an effect on the educational experience. More recent data confirm this experience.11
The language of physician compensation plans is interesting relative to “productivity-based” versus “incentive based” compensation plans. Some describe an incentive plan as one that incents only those activities that are not done.12 In contrast, others describe a productivity-based system where all activities that are being done align with the department’s mission and would be included, valued, measured, and ultimately compensated.13
Our compensation plan is clearly a productivity-based plan where clinical work was analyzed, benchmarked, and compensated. However, unique differences from other plans exist, especially relative to the intrinsic goal inherent in the FVU. The FVU was designed with the intent that clinical work at our academic medical center would be ultimately valued as closely as possible to clinical work in private practice. We reasoned that clinical work was clinical work, no matter the location of practice, and that it therefore should be compensated as much as possible.
Also, the FVU is limited only to clinical work and productivity, unlike other compensation plans that include education and/or research metrics.5 Early on, we decided to develop and align each service mission with a compensation plan. Initially, we developed the education value unit (EVU) which aligned educational work with educational compensation.9 When education dollars decreased with increased emphasis on clinical dollars, we thought it was imperative to decrease the variability among physician compensation and compensate at national benchmarking standards. Our next step will be to fully implement an academic value unit, the goal of which will be to ensure that the value of scholarship is properly reflected within the Department of Medicine’s compensation plan.
Clinical revenue has increased dramatically since the beginning of this study. Although professional fees increased almost 30%, the primary driver of increased revenue was the PSAs between the department and the University of Kansas Hospital. Multiple types of economic integration arrangements exist between hospitals and physicians, including physician employment, service line gain sharing, equity joint venture, part-time compensation, and purchase of services.14 The PSA arrangement is used widely at the University of Kansas. The dramatic increase in PSA contracts, and thus revenue for the Department of Medicine, is largely attributed to the transparent, data-driven, and equitable nature of the FVU methodology. Clearly, other factors are quite important, especially the solid financial position of the hospital and the collaborative working relationship between the university and the hospital.
Potential negative consequences from our production compensation plan are possible. Increased focus on clinical productivity might reduce emphasis on education. We feel that is less likely because our EVU compensation plan clearly values education; medical student clerkships, clinical teaching, and time associated with the administration of education are valued in a detailed and transparent manner so as to ensure that our compensation model is aligned to appropriately reflect the importance of the educational mission. However, we do recognize that the dollar value of educational time is less than the dollar value of clinical time, especially for those specialties with the highest clinical compensation. Also, although the EVU does recognize education with learners, it does not distinguish between learning in the hospital setting and learning in the ambulatory setting. Although it would be helpful to more precisely determine the impact of the FVU on the education mission, we did not quantitate the educational impact of the FVU system. The EVU remains an important mechanism for us to categorize and compensate educational work in a transparent and equitable manner, and we will consider further how to monitor the impact of the FVU on educational work.
We are concerned about the impact of the production compensation on scholarship, especially in a department with a majority of faculty on the nontenure clinical educator faculty track. In response to that concern, the department has developed and funded a centralized mentoring division, the Office of Strategic and Academic Research Mentoring, whose goal is the promotion of junior faculty by providing resources to increase scholarship.15
The overarching goal of most physician compensation plans is to make the group successful, however that success is defined. We recognize that when it comes to reports about an individual compensation plan, the “n” is always 1, and essentially all reports are case reports.16 Our data and compensation process is unique to our institution and not likely to be completely replicated elsewhere. However, we believe that our approach is nonetheless helpful to other institutions whose goal is to better align compensation and productivity. Other institutions might have alternative compensation goals. Our goal was to value clinical work as closely as possible to private work. Also, others using this methodology might decide on a lesser FVU goal and on using those resources for other departmental priorities. We think it would be helpful to see various compensation plans based on the FVU methodology to understand how variations could influence the outcome. We think the greatest benefit resulting from the adoption of the FVU compensation methodology is derived by the ability to explain how a unique physician’s production directly affects his or her individual compensation and the financial performance of the department as a whole.
In summary, we have developed a unique compensation plan which aligns clinical productivity to physician salary while decreasing individual variation in compensation in a transparent and fair manner. Not only have physician salaries been improved in relation to actual wRVU productivity, but our department is more valued within our academic medical center as the FVU system has enabled us to demonstrate improved clinical productivity in a transparent and equitable manner.
Acknowledgments: The authors thank the initial FVU committee of 2005, whose work was the inspiration for the FVU concept. The authors also thank the ongoing and continuing work of the division directors of the Department of Internal Medicine throughout these years to continue to refine and improve the FVU model.
Ethical approval: Not applicable.
Other disclosures: None.