Hello, everybody, and welcome to Medical Practice Operations, Business Fundamentals 101. This is Module 2A, Finance and Physician Compensation, and I thank you for joining me for what should be between 30 minutes and 45 minutes on this presentation today. I am your host for the day, Jeff Gorky, and I appreciate the AOA and AOIA for working with me on these presentation modules. So this is 2A out of, actually it ends up being 10 modules, but we have two pieces, Section 2, Finance, and Section 3, which is Revenue Cycle, which are, as you see, they're data-heavy and explanation-heavy and still very topical, as in not diving too much in the weeds. And so those two modules, we decided to split into more than one. So Jeff Gorky here, your host, nothing to disclose, just wanted to remind everybody as I do with all of these modules, this is not legal advice, should not be construed as such. Any decisions involving legal aspects of healthcare should be vetted via qualified legal counsel. So that's anything that's entering into a contract or buying a practice or mergers and acquisitions or a compensation plan, those should all be vetted by qualified counsel. And I am not that person vis-a-vis the law. Minor language, I will skim past. Move on to Whitley. Whitley is an accounting firm that is 105, 110 years old. We specialize in a variety of different business verticals. You can see healthcare, agribusiness, construction, auto, financial institutions, financial services. I fall under the healthcare umbrella, and in healthcare, we do a variety of different things from physician compensation plan design to fair market value, so valuing practices or surgery centers or health systems, to operational work, which is essentially where I land, and that leads us to our practice management 101 modules. A little bit about me, I've been in healthcare 32 years. If you've listened to the first couple of modules already, you know that, and you can skim through this if need be. I have really a bifurcated history in the healthcare space. Half of my time was running private practices. Half of my career was spent running private practices. The other half has been in consulting, or what I prefer to term semantically is advisory. I work with partners. I don't dictate to them, and I look at the work I do as very much a collaborative effort, so in those terms, I think of this as more of a collaborative relationship. So the educational series, as I said, is broken down into eight modules, but really, it's 10 modules net. And today, we're going to dig a little deeper into the finance piece, too. We're going to go into 2A and do a little bit of a look-see into physician compensation. And the learning objectives for today's module are to really understand a little bit about the history of physician comp and how comp plan design and development has evolved since the 80s. And then relative to Module 1, where we contemplated different employment opportunities, we're going to look at how physicians are paid in the private practice, health system, economic med centers, and private equity-funded practices. Then we're going to understand how revenue impacts compensation. We do a lot of work in Modules 3 and 3A discussing the revenue cycle, and you will get more of a sense of how the revenue is generated and then how it flows through to impact physician compensation. And then broadly, as with all of these presentations, we're going to discuss broadly old, current, and new, or the forward-thinking compensation models, if you will. And as I've said in all the modules to date, and I will continue to say as we unveil these, there is not one-size-fits-all. I'm sure that given the details and the data I submit to you today, there are variations and hybrid models that can be derived to fit a clinician's compensation needs or a health system's needs. So my clinic ecosystem, which you have seen, you will continue to see during these modules, again, really painting a picture of the delivery care model in the ambulatory space. Where we will start to dig into a little more detail with the physician comp is coding documentation and how the revenue is generated by the physicians. We do, again, talk about those in greater detail in Module 3 and Module 3A, and we will get into a billing and coding section in later modules. So compensation, a little bit of a brief history. A lot has changed since the 80s. In the 80s, a majority of clinicians were in private practice. The same cannot be said today, where just slightly over a majority of clinicians are employed in some sort of health system model or private equity model or what have you. The private practice space, dollars in or dollars out. We had talked before about cash accounting versus accrual. Private practice, we will get into a little more detail again about how the compensation flows through to the bottom line. And then health system and hospital evolution, we will talk about a little bit more. In the 90s, there was a move afoot to acquire medical practices. Health systems, when managed care, for those of you who were practicing in the 90s or were privy to this, in the 90s, there was a move afoot to managed care, and the way to manage care was to, for hospitals, was to employ and own private practices, generally speaking, the primary care. So family practice and IM, internal med docs to physicians, to manage the network of referrals, candidly. So managed care in its purest form was managing a body through a gateway. So the gatekeepers, in this instance, would be your primary care physicians, and if a service needed to be provided and referred out, the idea was that the gatekeeper would manage it through the system where that made sense. Obviously, you cannot refer or cannot be contractually obligated to refer to a health system. That's against the law. But the hope was, if we manage these guys, they're in our network, then they will refer internally. And so health systems acquired a lot of these medical practices, and a lot of them were acquired with income guarantees, which got a little bit dangerous for the health systems because the guarantees sometimes outpaced the revenue that was generated from the medical practices. And that was not by design. It was by accident. What tended to happen is physicians no longer had to worry about their profit and loss statement, their income statement. And so with income guarantees, it didn't matter if you saw 50 patients a day or five, you still made X hundred thousand dollars a year. Then came WorkRVUs in the late 90s. Actually, I did work with WorkRVUs in the early 90s, but really, it took off on its own in the late 90s and into the 2000s. And then as things started to evolve, we realized that a WorkRVU model wasn't necessarily the end-all, be-all. There were other things we needed to incent to drive performance and compensation for clinicians. So as I alluded to earlier, a lot has changed. Hospitals acquired practices and offered guarantees. There weren't really expectations in production. And a lot of the benefits packages were far richer under the imprimatur of the health systems versus the private practices because health systems were able to purchase just greater and provide just richer benefits packages for the practices they acquired. In the 2000s, the hospitals acquired practices. So what we had is we had an evolution of acquisition in the 90s. And then as managed care sort of petered out as a general construct and hospitals were losing money, they divested of a lot of these practices. And then in the 2000s, there was a move afoot again to start acquiring practices, but it wasn't purely the primary care bent. It involved a lot of specialty care or health systems that saw competition gobbling up practices. Some of them had these nascent approaches to strategy, which was anyone who comes to me, I'm going to take so my competitor can't take them, which is generally speaking, probably not a great strategy to have. Nonetheless, in the 2000s, hospitals began to acquire and build out productivity packages, and generally those are performance driven off of work relative value units. And I had alluded to that, I believe I alluded to one of the first few modules that work our views, whether they're your friend or your enemy, as you move along in practice, they will be there for at least the next five, 10, 15, 20 years because they are so ensconced in health care performance metrics. And then the benefits packages had a different and better and leaner design. And then, as I alluded to earlier, the productivity had, quote, unquote, other aspects to it. And we'll get into those incentives outside of pure production. Guarantees were few and far between. Just depends on where you are. And as you know, from from listening to me already, if you've if you've listened to some of the other modules that if you've seen one, you've seen one. That is to say, the trite adage health care is local is absolutely true. And so these designs are, in many instances, impacted by the demographics of the market. So we covered this, basically, the guaranteed comp, no production expectations, the divestiture. Forgive me, I got a little over my skis. We've covered this slide. And so now we'll get into comp in the physician private practice. Cash accounting dollars in dollars available to spend. So what's left over is paid out to the shareholders. Theoretically, the physicians who are employed and not yet shareholders should be paid above the line. That is to say, they should be paid as part of the normal expenses of the medical practice. And I will get into that private practices can work with health systems without being employed. There are different model models, such as a professional services agreement where you are paid a fair market value for a I won't get into those in detail in this presentation, but those are out there. Additionally, you can run a service line. Let's say you're a cardiology practice and your hospital or health system needs a cardiology service line director. You can run at a fair market value rate, a service line, but the work must be fair market value rated. And you can't run a service line without a cardiologist. That is to say, if you're a cardiologist running a cardiology service line for a health system, but you're not employed by them, they cannot pay you $2,000,000 a year to do that. There's just no way that running a cardiology service line for a health system is going to pay you $2,000,000 a year to run a service line for a health system. And that's not going to be a fair market value rate, but it's not going to be a fair market value rate for a health system. And so, if the government saw that, they would look a little bit sideways and wonder why the hospital's paying you more than what the market should bear for a service line leader. In any event, we get into some of that, some of the FMV-related aspects of those topics or the topic of fair market value when we get into some of the other topics. Private equity deals create different comp structures such as dollars up front in the deals, but that also can cut back on shareholder ongoing compensation. Okay, when we look at or contemplate the private practice compensation, if you'll recall, we talked a little bit about that earlier. If you'll recall from our earlier analysis of profit and loss statements, my example here on the right side of the slide just gives you a very rough sense of the flow from a cash-based perspective. As you'll recall from Module 1, private practice is cash-based, generally speaking, cash-based. So, you collect a quarter of a million dollars, you have $100,000 in expenses, your net revenue is $150,000. So, let's just say you're a solo doc. These are your numbers. You can take a salary of $150,000. If you're a solo doc, you can take a salary of $150,000. If you're a solo doctor, you can take a salary of $150,000. It's a very simplified example, but as you know from my other modules, if you've listened to any of them, I try to keep these models very simple, easy to use, and understand for argument's sake. As I noted, usually employed physicians will fall in the general expenses category. So, I call that above the line. In the net revenue here, I call below the line. However, I have seen medical groups, private practices that pay all the physicians technically below the line. The difference in this model would be if you have an employed physician, you're going to pay him or her a fixed salary and maybe even an adjustment for productivity or something akin to that. So, loading them below the line in terms of your analysis of your overhead doesn't make a lot of sense. As I've said before, in this model, shareholders are paid less, theoretically. So, it is in their best interest to run an efficient practice, to manage cost very well, and revenues. But what I have also seen in my students is that if you have an employed physician, you're going to pay him or her a fixed salary and maybe even an adjustment for productivity or something akin to that. So, it is in their best interest to run an efficient practice, to manage cost very well, and revenues. But what I have also seen in my 30 years of doing this, 30 plus years, in private practice from time to time, there will be an underinvestment in critical infrastructure components like human resources, i.e., really good administrators, really good nurses, or healthcare technology where we want to cut corners and save money. And inevitably, we save a dollar, we'll end up spending three, four, five, six on the back end to remedy what we didn't invest in on the front end. So, compensation in the hospital and health system during the 90s, again, talked about this. Here is your private practice on this slide, Practice X. We went over this on the prior slide. But look at the health system and how this is different. First of all, as we talked about in earlier modules, health systems are accrual-based accounting. So, what you charge, they log in as revenue, gross revenue. But then they take out adjustments like contractuals to come up with their net revenue. For argument's sake, private practice X collected $250,000, and employed practice, so practice owned by the hospital, collected $250,000 as well in cash money. Same expense structure, and the revenue that dropped to the bottom line, same. However, and this might be our example from the 90s, when you take out a guaranteed $300,000 in physician comp, the hospital is upside down. Or you'll recall from our earlier module, we call this subsidizing the practice. So, the hospital is eating the loss, and they're subsidizing the practice, and they're upside down. So, this would be a tune of $150,000. And again, the physicians in this employed model, generally speaking, will get paid regardless of what this bottom line number looks like. So just a rehash, income guarantees in the 90s, RVUs in the 2000s, and then different models in the 2010s. So newly designed compensation plans included work relative value units and production. And then maybe there are some guarantees. So let's look at these models in the 2000s. And I will tell you this, most health systems have a work RVU component. In fact, many practices in the private equity space do as well. So you will see this, a smattering of this all over the place. Private practices, in some instances, do have work RVU models. Some physicians in private practice shy away from that. Another story for another time. But let's look at this. Let's look at this health system where we have, and again, I'm gonna call this cash in the door. This is actual physician revenue. So take out the fact that this is a cruel based model. Then the expenses to this practice in this health system are 250,000. So the health system has generated $500,000. Our doctor here has a guaranteed base minimum comp of $75,000. So he or she doesn't have to see one patient, he or she will make $75,000 a year. They've also got a $25 per work RVU incentive plan. And they produce 10,000 work RVUs. So you can see that generated another $250,000 in incentivized compensation. Adding the guaranteed comp to the work RVU incentive, you come out with a total physician comp of $325,000. And the system pays that out of their net revenue, leaving the system in the black to the tune of $175,000. So there's a little bit of a hybrid model where you have a base guaranteed and you have work RVU incentive. There are some systems that purely do work RVUs with no guarantees. And again, another story, another time that gets very much into the weeds and that's beyond the purview of our goal to offer a macro view of what's going on. So we look at what a work RVU is. And the work RVUs were derived from a Harvard doctor. They really came out in 1989, 1990. Dr. Xiao, I think it's H-S-A-I-O built out the work RVUs that are comprised of medical malpractice, work and practice expense components that are then weighted based on geography. So broadly speaking, and these numbers move a little bit. You can see I have 2017 in there. The mathematical formula is the same thing. However, some of the component pieces can change. So let's look at this for a minute. The work RVU for, let's call it a 99202, which is a level two office visit. It's a new patient visit requiring minimum work. 99202 in Atlanta has 0.92 work associated with it. And then it's got a GIPC, Geographic Practice Cost Indices, for all of these index or indices for all of these of 1.0. And then you add that to the practice expense in Atlanta. So this is saying that the practice expense to do this 99202 is 1.02. And the cost to do this 99202 in Atlanta is 1.001. Then you add that to the malpractice exposure of a 99202. So theoretically, if this was a surgical procedure, that malpractice might be a 0.38, right? So theoretically, less malpractice exposure on a 99202. The GIPC for that in Atlanta is 1.106. And then you take those products and the sum of those products, and you multiply them by what's called a conversion factor, which changes annually. And then you get a Medicare reimbursement rate of $72.44 for a 99202. Now, again, the numbers in this slide are outdated, and you can see on the right-hand side, I put the work hour views for the CPT codes in 2021. But the mathematics behind driving the Medicare allowable are accurate, and you can plug in the numbers to fit. So you can see here in 2021, a 99203 at a 1.6 work hour view, a 1.0 GIPC, practice expense of 1.51, 0.998 of practice expense GIPC, malpractice hour view of 0.15, malpractice GIPC of 0.904. You can see here, the conversion factor for 2021 has dropped a dollar. And so though, this is a 99203, a little more work, a little more expense, a little more malpractice exposure. For Medicare in 2021, if you did a 99203, you would collect 100, well, you would bill, theoretically collect $113.14. So a work hour view is a measure, quote, unquote, measure of work assigned to a CPT code. There are thousands, I want to say there are up to 10,000 CPT codes, which are created by the American Medical Association, which I have to give credit for. I think I'm obligated if I use those in a presentation that they're copyright AMA. But they are used very widely throughout the healthcare delivery continuum. And so the more labor intensive the procedure, the more work hour views assigned to it. So you can see logically and intuitively, as you play this out for surgeries, versus seeing a bunch of 99203 office visits, a lot more work, theoretically, goes into a surgical procedure than goes into a level three office visit. So let's look at sort of the 2010s and on, kind of going forward in some of these hybrid models. You can see here, our physician revenue, we kept, I'm sorry, we kept all of that the same. However, this health system wants to reward on efficiency, however they define that, and quality. So they kept this same production incentive. They kept the income guarantee. Then they built out an efficiency rating where they had, let's call it six benchmarks of operating efficiency. They wanted to reduce operating costs by 5%. This physician played his or her role in helping to do that. So freed up $25,000 for him or her. Then they had quality impact. So let's say there were four quality measures that had a pool of $40,000 that were measured. And monitored that freed up another $10,000 times four measures, hitting all of those measures for 40,000. So net net for this year, you have guaranteed COMPAS 75, $250,000 in work productivity, $25,000 in operating efficiencies, and then 40,000. So the compensation incentive package leapt to 315,000, giving this physician $390,000 in COMP. And again, the health system's okay because they still made a profit of 110,000. And that's not to say they're not taking this data and then marketing, you know, maybe next year they can market this to the commercial insurance companies to show their quality measures. So you can see how this starts to evolve into a value-based care quality metric and managing disease state, how that stuff all comes together, comes to play with regard to physician compensation. So a lot has changed as we've talked about. A lot of quality measures, again, this is where we lean towards, what do we do in our COMP modeling? What do you want to incentivize? What do you want to build out? There's quality measures, expense control, which we talked about, coding compliance. You can build out a citizenship reward or patient SAT scores or targeted cost savings for the hospital where, you know, you do your part and hopefully all the other physicians do their part. And if the health system has hit their mark, maybe they spread that revenue out to all of the physicians. Maybe there's a call coverage piece or administrative adherence piece, i.e. getting your charts done timely. These are things that I alluded to earlier that go into not one size fits all. What do they want to incentivize and what can you manage with regard to your COMP? So, I won't belabor these pieces. If you have gone through levels one through two, you should have seen this and it should be familiar. And we did talk about subsidizing in the practice space, in the hospital employee practice space. But do remember, any outside medical directorships when you are not employed by the health system must fall under some seal of approval from an outside group that does fair market value work to verify that the plan is within fair market value standards. And again, we have covered the subsidy component at length. So, compensation in the academic med centers, this one size does not fit all is, it's absolute. I mean, that's 99.99% definitive. In some instances which we discussed in employment modeling, you may forego compensation for training. So, that is to say, you may go into a very large academic med center, be paid less than your peer groups who are in private practice settings or working for health systems, but your clinic criteria or your clinic expectation is generally much, much lower. So, you might do, we talked about this, you might do a half day of clinic and then you might teach and do research the other four and a half days. And so, you will not be paid more generally speaking if that's the case. Again, what we talked about also or considered is that there are some academic med centers where the faculty practice, the expectation is now out there that they will generate revenue to help fund the university. So, it just really depends on where you're going and what that academic, excuse me, what that academic medical center looks like. So, the P&L comparisons, we talked about these in module two and I think in module one, the recognition of revenue where private practices have cash, outstanding or remaining cash goes to the shareholders and health systems have accrual where the dollars are recognized at different timing. Again, I am not, as I've said before, I'm not a CPA, I am just an MBA. CPAs manage this differently than people like me who are in the trenches. And in summary, when you consider the compensation, I would suggest to you that it is really, it is really a measure of supply and demand, physician compensation. And by that, I built this graph out just to kind of get a sense of things and it feels like broadly speaking, this holds true. For instance, if I'm going to an area, let's call me an electrophysiologist and there are five other EPs in the area, I might be able to demand a higher salary, especially if the demand for services is not met by the current supply of clinicians. Likewise, so I'm on the blue curve and as you follow that from left to right, let's say there are 30 EP physicians that might drive my salary down. Now I'm using absurd numbers certainly, but this is in my way of thinking very much a supply and demand, really a supply and demand curve relative to compensation. It's predicated on market, market supply and demand, specialization. We talked earlier about practice leverage. If you're a five physician practice versus a 50 physician practice, also larger practices generate more revenue and have the opportunity generally speaking to support more clinicians. So roughly speaking, if you're in a 30 physician private practice, you are probably generating somewhere between 25 and $40 million of revenue a year, depending on the specialization of the practice and any ancillary procedures or services that you offer. So really it's, if I looked at a physician who wanted to be in Atlanta, an internal medicine physician, they may not make as much as a physician working in a rural clinic only because there's such demand for rural practitioners and the supply just isn't there. When I look at some of my rural clients and I think, would this guy, this guy wanted to be here, not Atlanta, but a lot of folks they wanna be in Atlanta or they wanna be in Philly or they wanna be in New York City. You can make an argument that the revenue paid to, or excuse me, the compensation paid to physicians can almost be measured against the demographics of the area. And I'll leave that at that for now. But it is worth considering and contemplating and I'm happy to discuss that with anyone who wants to debate me relative to that. So that is a quick and easy review of compensation. Again, one size does not fit all. If you were to dig deeply into the metrics and measures, comp plans can get very, very prickly, very, very fast. But as with all of the other modules in this practice management 101 series, this is really built to give you a broad, facile understanding of the different avenues out there and what goes into crafting a comp plan. So I hope you found it to that end worthwhile to be on board for today's presentation. As we've said in the other modules, we will be having a, holding a live WebEx. Module eight will be May 10th, 2023. It will begin at 7 p.m. Eastern time, 4 p.m. Pacific. And for those folks who can't break away and be on board live on the West Coast, as with the other modules, this will be recorded for on-demand viewing and listening at your leisure. And I will, of course, be available for questions after and during the on-demand module. But I'd love to get your questions ahead of time or thoughts. If you have a question, I guarantee you there are probably multiple other folks out there who have the same question or they're asking it a different way. Love to be able to provide some insight into that. Your questions can be sent in to physicianservicesatosteopathic.org. And they will package up and aggregate all of the questions. They will pump those to me and I will build out the final slide deck that we can go through on May 10th. So with that, I will, again, thank you for your time. I know it's valuable. I really appreciate you spending some time with me today and listening to our discussion on physician compensation. I look forward to meeting up with you on May the 10th. Thank you so much for your time.

physician compensation

WorkRVUs

health system models

productivity-based incentives

compensation planning

revenue cycles

hybrid models