February 2004 Bulletin

Physician compensation in the academic setting

By Claude E. Nichols III, MD

Much has been written about appropriate compensation systems for physicians in private practice. Although developing a compensation formula in an academic setting may appear to be a much simpler task, in reality, it is a virtual minefield for many reasons.

For example, the mission of most academic institutions is to provide services to patients regardless of their income level or insurance status. Controlling payer mix is neither possible nor considered appropriate in many institutions. Additionally, overhead in academic settings is frequently substantially higher than is the case in private practice.

Because academic groups are often expected to provide primary, secondary, and tertiary subspecialty care to patients, a greater percentage of academicians’ time is spent in the office rather than the operating room (OR). On a per minute basis, office time tends to be reimbursed at a lower rate than OR time.

Additionally, academic physicians are generally involved in teaching medical students and residents, activities for which they often do not receive any direct reimbursement. Many spend considerable time in non-clinical activities such as research and administration. Although grant dollars may be awarded for the research, the oversight of grants is very time-consuming.

Moreover, research subjects may not always be charged the same amount as they would if their treatment modalities were not experimental. The result typically is that less money is available for distribution to physicians affiliated with academic institutions than to private practitioners, compounding the issues and emotions that exist relating to income distribution.

Income/funding sources
Four major sources of funds are available for academic compensation (after expenses are paid):

Occasionally, the funding sources for an individual, such as research salary support or directorships, are not reflected in the compensation to that individual. For example, a full-time researcher may be paid at the same level as peers who are more clincally oriented, even though the research grant has a lower compensation level. To maintain parity between full-time researchers and clinically-oriented faculty, the organization will have to subsidize the researcher’s funding sources. When this occurs, it must be explicitly acknowledged and the sources of the compensation must be clear.

Clinical productivity as a key determinant
Because clinical productivity is a key factor in compensation decisions, the method for measuring productivity must be defined and understood by everyone.

“Gross Charges” (also called “Gross Production”) is one way of measuring productivity. However, in many cases, using gross charges is inappropriate, because charges do not correlate to net income (income after all expenses are paid except for physician salaries). Additionally they may not represent doctors’ true contributions to either the bottom line or the total work effort.

In contrast to gross charges, “Net Collections” do relate to the bottom line. In an academic setting where subspecialty care is the norm, however, a salary system based on collections may prove disadvantageous to those orthopaedists who practice in subspecialties that reimburse poorly or who provide uncompensated services to the medical school and the teaching hospital.

“Relative Value Units” (RVUs) is a third methodology to measure productivity. Each physician activity has an explicitly stated value determined by the Centers for Medicare and Medicaid Services. This methodology is not sensitive to fee schedule changes and actual reimbursements. Some physicians argue, however, that RVUs assigned to activities relating to certain body parts (e.g., extremities) are undervalued relative to others, resulting in inequities.

A carefully crafted combination of the above methodologies can rectify, to a certain extent at least, the weakness of each one individually. That said, there is no single methodology for determining productivity that is perfect for all academic practices across the board.

Other considerations
A well-crafted academic compensation plan should consider factors other than productivity alone. For example, doctors might receive “credit” for activities that further the group’s and/or the institution’s mission, such as:

A compensation plan that considers these factors will result in at least some transfer of income from academic physicians with higher clinical receipts to those with lower clinical receipts. Such an arrangement may be something that is difficult for the high producers to accept. However, the long-term success of the academic practice depends on their doing so.

Conceptual structure of the compensation formula
In the ultimate analysis, developing a successful compensation formula greatly depends on the department chair’s ability to obtain a consensus among physician stakeholders in two arenas: first, the formula for calculating productivity, and second, a way of quantifying the value of non-clinical work.

The University Health Consortium has recently started to collect data from several academic institutions that outline different approaches to this second problem. (See sidebar.)

Increasingly, academic practices are implementing compensation formulas that include a base salary, a productivity bonus and an incentive component. Base salary is the guaranteed portion of the compensation package and may be tied to tenure and/or academic rank. The productivity bonus relates to the generation of receipts above and beyond established standards. The incentive component relates to how well the doctor meets performance expectations in areas critical to the success of the practice but not directly related to revenue generation, including teaching, administration, directorships and research.

The two variable elements should challenge practice doctors to push themselves both in the quality and the quantity of their work. Clearly defined and understood criteria should be developed to evaluate physicians in connection with all salary elements.

The precise formula for compensating physicians in an academic environment will always depend on the specific organizational structure of the system. With diminishing extramural funds and reduced levels of reimbursement from managed care and government programs, academic practices must rely more heavily on clinical income to ensure their ongoing financial viability. The major challenge confronting academic institutions today is to develop a compensation plan that rewards physicians’ clinical productivity as it advances the institutions’ mission of research, teaching and clinical service.

Claude E. Nichols, III, MD, is chair and professor, Department of Orthopaedics and Rehabilitation at the University of Vermont, Burlington, Vt. He is a member of the Academic Business/Practice Management Committee. He can be reached at (802) 656-2250 or at claude.nichols@uvm.edu.

Information on academic productivity and compensation

  • The Medical Group Management Association (www.mgma.org) publishes the Academic Practice Compensation and Production Survey for Faculty and Management as well as the Cost Survey for Orthopaedic Practices.
  • The American Association of Medical Colleges (www.aamc.org) publishes a Faculty Salary Survey.
  • The Faculty Practice Solutions Center (www.facultypractice.com), a joint project of AAMC and the University HealthSystem Consortium, collects and maintains data on faculty practices across the country.

The information provided by these organizations is not prescriptive. They do not make recommendations on how much academic doctors “should” be paid based on their productivity levels (however productivity is defined) or their other non-clinical activities. For a more detailed look at compensation policies for medical school clinical faculty:

  • Jones, RF and Gold, JS. “The Present and Future of Appointment, Tenure, and Compensation Policies for Medical School Clinical Faculty,” Academic Medicine (2001) 76:993-1004
  • Carter, LR and Lankford, SS. Physician’s Compensation, Measurement, Benchmarking, and Implementation, John Wiley & Sons, Inc. New York, 2000.

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