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Special Theme: Complementary, Alternative, and Integrative Medicine: RESEARCH REPORTS

Using a Productivity-based Physician Compensation Program at an Academic Health Center

A Case Study

Andreae, Margie C., MD; Freed, Gary L., MD, MPH

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Academic health centers (AHCs) have faced budget constraints due to many factors over the past several years.1 The perceived need to be competitive in an arena increasingly saturated by managed care precipitated the integration of health care systems. AHCs responded by creating large primary care networks to support their hospital bases. This movement required tremendous start-up costs associated with practice acquisitions and the establishment of ambulatory care centers.

Many AHCs that were unprepared for the differences in operations, finances, and third-party reimbursement (compared with those of inpatient care services) have not recovered their capital investments.2 Their unrecovered investments, coupled with reductions in reimbursements, variable payer mixes, and less government support for graduate medical education, have resulted in many AHCs' experiencing significant financial deficits overall and in primary care in particular. Health care consultants have documented budget losses of $30,000 to $125,000 per physician per year for primary care networks.3

Unfavorable physician-employment contracts and a lack of or ineffective incentives have placed AHCs at increased financial risk. In a 1994 physician-compensation survey of hospitals, integrated health systems, physicians' group practices, and HMOs, 56% reported using incentive pay plans.4 However, the variable (incentive) pay component comprised only about 15% of total compensation, and over half revealed they rewarded performance through discretionary bonuses based on subjective standards. Furthermore, many employment contracts were developed that placed all of the financial risk on the employer by guaranteeing a fixed salary for several years regardless of performance. These strategies have contributed to the economic disadvantage of AHCs, forcing them to now focus their attention on the costly expenditure of physicians' compensation.

The actions AHCs have taken in response to this focus on physicians' salaries have varied. Some have applied salary freezes or reductions in hopes of minimizing losses.5 Others have chosen to cut salary expenditures quickly by reducing their physician workforces, primarily by divesting their physician networks.6 The impact of these actions on the academic mission of these centers is unclear. Some AHCs hesitate to make changes in their physicians' salary structures, possibly because they are uncertain of the optimal strategy. Many academic leaders are concerned that revenue-driven compensation programs will have a negative impact on education by imposing financial incentives for faculty not to teach. With physicians' compensation being the single largest expense in the operation of any physician network, most ACHs have come to recognize that physician compensation programs need revision to reflect economic realities.

A few innovative compensation plans have recently been described in the literature. Many of these focus on ways to measure and reward academic performance but fall short in linking their clinical performance measures and compensation with national standards. For example, the Department of Family Medicine at the University of Buffalo State University of New York School of Medicine and Biomedical Sciences created a relative-value—based incentive plan that allowed quantification of faculty's efforts in the areas of clinical care, teaching, and research.7 The relative value scale was devised internally and was not linked to any national data set. Thus, the plan did not enable the department to measure objectively faculty's performances in relation to national trends. Brigham and Women's Hospital, Boston, Massachusetts, developed a salary-incentive program for general internists that sought to increase productivity and reward faculty for efficient medical management, improved quality of care, teaching, and seniority.8 The program used the work component of the relative-value unit (wRVU) as the measure of clinical productivity, but it set compensation levels and productivity targets based on internal averages, not national norms. They were able to demonstrate an increase in productivity but, without comparison with national data, it is difficult to gauge the relative impact.

In our region, a large AHC facing budget constraints laid off 2,000 employees and ended many physicians' contracts.9 In response to concern regarding the consequences of changing market forces on the financial health of our primary care network, we proactively examined our own salary expenditures for general pediatrics physicians and conducted an initial productivity assessment. In response to our findings, we developed and tested a productivity-based physician-compensation program with the goal of improving productivity to align with our salary expenditures while maintaining our teaching and research missions.


Initial Productivity Assessment

We conducted an initial clinical productivity assessment July 1998 through June 1999 (FY99). At that time our practice consisted of 35 primary care pediatricians employed by a large AHC in the Midwest. These physicians were practicing in 12 multi- and single-specialty clinical sites operated by the university health system. Each physician was a faculty member in the Department of Pediatrics and was active in both patient care and the education of residents and medical students. Clinical teaching responsibilities included staffing the continuity clinic for 45 pediatrics house officers and precepting the required pediatrics clerkship for 176 third-year medical students. At the time of the initial assessment, each faculty member spent an average of eight hours a week in ambulatory clinic-based education. Some faculty also had research or administrative responsibilities.

For our productivity assessment, standards for productivity and compensation were obtained from the Medical Group Management Association's (MGMA's) Physician Compensation and Productivity Survey.10 We used the nonacademic survey because it provided a practice model closer to the economic reality we were trying to achieve. We chose the wRVU to define productivity because it most closely reflects physicians' efforts and is standardized for the complexity of service.11 For the compensation measure, we used wages exclusive of benefits.

Over half of our physicians were below the MGMA's 25th percentile for wRVU production for a general pediatrician; however, nearly three fourths received compensation exceeding the 25th percentile (see Figure 1). We found no correlation between individual clinical productivity and compensation. Those faculty with compensation exceeding the MGMA's 75th percentile were not necessarily those with the highest productivity. The factor corresponding most to the variation in compensation appeared to be years since completion of training.

Figure 1
Figure 1:
Baseline clinical productivity and compensation assessment figures for 35 primary care pediatricians at one Midwest AHC. Individual faculty measures were correlated with Medical Group Management Association data.

When AHCs expanded into the ambulatory care marketplace, they were unprepared for the market challenges. They were unaware of the need to set performance expectations because of their historical isolation from competition with private-sector providers. Considering this, we were not surprised by the poor findings from our baseline productivity assessment of faculty. No prior productivity expectations had been established. The physicians were required to work a defined number of hours, but they were not evaluated on the volume of work they performed. There was no incentive to build a practice, improve patient access, or enhance revenues. There was no disincentive to cancel clinics, turn patients away, or not charge for services rendered.


New compensation program. We developed a novel RVU productivity-based salary program that compensated physicians based on their clinical productivity and teaching activity.12 The basic tenets of the program included a defined minimum wRVU production expectation to cover base salary, with any excess wRVUs being applied to an incentive payment, and an “RVU credit” for teaching efforts. We used a dollar-per-wRVU ($/wRVU) conversion factor from the MGMA's Physician Compensation and Production Survey. Initially, we chose the MGMA's median wRVU productivity for general pediatricians as the productivity benchmark, and the minimum productivity expectation for each faculty member was set at 70% of that benchmark. Thus, every faculty member was expected to generate at least 70% of the MGMA's median wRVUs. Using the $/wRVU conversion factor, a base salary was set that correlated with the minimum productivity expectation. This base salary was the same for all faculty regardless of academic rank or years of service. Once sufficient wRVUs were generated to cover the base salary, all additional wRVUs generated were paid, using the same $/wRVU conversion, as an incentive portion of salary. This productivity-based method of compensation applied to a physician's clinical effort only and not to his or her research or administrative activities. The program allowed for annual adjustments in the $/wRVU conversion factor and the minimum wRVU productivity expectations in conjunction with market changes.

Teaching credits were included in the compensation program to offset estimated losses in productivity incurred while precepting medical students in the clinic. This was based on the assumption that medical students have a net negative impact on primary care clinical productivity.13 The Department of Medical Education at our institution estimated this loss in productivity to range between 10% and 20%,14 which we used to develop a formula to credit faculty for clinical teaching (see Chart 1).12 The wRVU teaching credits were added to the wRVUs generated in patient care and converted using the same $/wRVU as above.

Chart 1. Two-step formula for calculating wRVU teaching credit for 35 general pediatrics faculty at a Midwest AHC, fiscal year 1999–2000. Reprinted with permission from Medical Group Management Journal.

Faculty were compensated for efforts applied to research or administrative activities based on their negotiations with the department chair or other unit director that funded the position. If faculty had agreements for protected time or extramural salary support to cover portions of their time, the productivity-based compensation program did not alter this. No incentives or benchmarks were established for non-clinical activity as part of this program. The expectations for clinical productivity for these faculty were prorated in conjunction with their clinical efforts.

Implementation. The leaders in the Division of General Pediatrics worked with representatives from the medical center's legal and taxation offices to ensure the compensation program was in compliance with federal and Internal Revenue Service regulations. A clear and thorough document addressing all components of the program was provided to all faculty members prior to implementation. Large-group and one-on-one education sessions were conducted to introduce faculty to the program and its expectations. The program was implemented only two months after introduction for those already meeting the minimum productivity expectations (21 of 35 faculty). The remainder were provided a six-month transition period.


Productivity and Compensation

We performed a clinical productivity assessment measuring wRVUs for the first year of the program (FY00) and compared it with the baseline assessment conducted in FY99. We did not include the teaching-credit wRVUs implemented in FY00 in this comparison because we wanted to directly assess changes in actual clinical productivity. We also measured and compared compensation data for FY99 and FY00. Two faculty were excluded from the comparison because they moved out of the area prior to the end of the year. Neither stated dissatisfaction with the program as a reason for relocation.

One year after implementation of the program, all but one of our faculty were at or above the MGMA's 25th percentile for wRVU production for a general pediatrician. Further, nearly twice as many of the faculty from the previous year had reached the median for wRVU production (see Figure 2). In all, 89% of the faculty had increased their clinical productivity from that of the prior year. Measured as a group, clinical productivity increased 20% in the first year of the program. This increase in wRVU productivity exceeded the market's growth trends for primary care physicians.10,15

Figure 2
Figure 2:
Comparison of clinical productivity measured in work relative-value units (wRVUs) for 35 general pediatrics faculty at one Midwest AHC before (FY99) and after (FY00) the implementation of a compensation program. Medical Group Management Association data for general pediatricians are provided for comparison.

Compensation for the group increased by 8% after we implemented the program, however, the percentage of increase in clinical productivity was 2.5 times greater than was the increase in compensation for the group—in part because of the relative underproduction for their level of compensation recorded earlier.

Education of Residents and Students

In addition to measuring clinical productivity, we recorded the number of hours each faculty member worked precepting a third-year medical student or resident during clinical sessions. Third-year medical students were required to complete an evaluation as part of their core pediatrics clerkship. The evaluation contained several questions about their primary care experiences. The responses are made on a five-point Likert scale and then averaged for each question at the end of the year. The scale's limits were 5 = excellent, and 1 = poor.

The number of student and resident sessions was unchanged, which indicated that faculty did not reduce their teaching efforts to enhance their clinical productivity. Comparisons of the average Likert-scale scores for three questions specifically related to students' educational experiences in primary care in FY99 and FY00 are shown in Table 1. No significant difference existed between the two sets of evaluations. The process of residents' evaluations of continuity clinic preceptors was undergoing transition and not regularly conducted during this time period.

Table 1
Table 1:
Average Scores for Medical Students' Answers to Evaluation Questions Related to Their Primary Care Experiences at a Midwest AHC, Fiscal Years '99 and '00


The assessment of our productivity-based compensation program shows that in a short period of time we were able to measure and modify physicians' performances to enhance their clinical productivity while maintaining our teaching mission. Productivity increased due to increases in visit volume as well as the improved coding of visits. Physicians enhanced their productivity by improving their use of office visit codes because each visit code, or Current Procedural Terminology (CPT), has a corresponding wRVU. Review of our data on the volume of visits showed an increase, but not one on the order of 20%, suggesting that this alone did not account for the increase in wRVUs for the group.

The increase in clinical productivity was significantly greater than was the associated increase in salary cost. We attribute this variance to the baseline inflated salaries of our physicians relative to their baseline productivity, and the need for many individuals to substantially increase their productivity simply to retain the salaries to which they had become accustomed. We do not, however, believe that our program's success is limited to correcting this baseline under-performance. Preliminary results of the second year of the program already show a 14.5% increase in clinical productivity for the group compared with the prior year. This is consistent with the market's trends showing physicians are working harder for the same compensation.16 By adjusting the $/wRVU annually in accordance with the MGMA's trends, our program has the flexibility to stay aligned with the market's forces.

We sought to ensure that any modifications in our salary program would have no adverse impact on our educational mission. Faculty opine frequently that educational efforts are neither rewarded nor valued in an academic medical system. To address this issue, we ensured that faculty received the wRVUs generated by the residents they supervised in clinic and the wRVU teaching credits for precepting medical students. It is clear from our findings that our faculty can maintain benchmark productivity and not compromise the quality of education in our teaching settings.

We believe the best measure of our faculty's ability to maintain the quality of their teaching efforts in this new program is their evaluation by their trainees. Because the evaluation scores from medical students did not decrease significantly following implementation of the program, we believe our trainees experienced no adverse educational effect. Further, the time actually spent with trainees (as determined by the number of clinic sessions with trainees) did not change following institution of the program. Thus, the program likely had a neutral effect on our educational mission and not the negative effect that many opponents predicted. It may even be that the “real world” practice environment provided for a richer experience that will more closely approximate the environment trainees will experience upon entering practice.

The success of the program can be attributed in part to several key adjunct components. The health system's billing infrastructure already contained a computerized charge-entry database that captured wRVUs for each CPT code generated by individual faculty. A support staff team was developed to track wRVU productivity data on a regular basis and generate reports to each faculty member, including feedback on individual and group performances. Ongoing billing and coding workshops were provided to faculty every six months. We examined local and national trends for productivity and compensation each year and adjusted the program accordingly. We believe this program is applicable to other AHCs and other medical specialties that have similar infrastructures and willingness to be flexible.

The ultimate assessment of the success of any compensation program must relate outcomes to the overall financial status of an institution, but each institution differs in accounting for costs, direct revenues, and downstream revenues. Therefore, the best measure of the adequacy of a productivity-based compensation program and its financial impact on an AHC must be an objective measure based on market conditions (e.g., wRVUs). If the faculty productivity creates profits in a market-based environment with comparable salaries, then any financial losses must be due to institutional accounting issues or other market inefficiencies of the AHC.

Successful productivity-based physician-compensation programs that still allow faculty to achieve their educational and research goals can be developed and implemented for AHCs. The program's incentives need to be aligned with the goals of the health center. Care must be taken to tie the program to national norms for productivity and compensation to ensure that it reflects economic realities and has a positive financial impact on the institution.


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