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A look at how much you should be earning “and how you should be paid

December 2006

Published in the December 2006 issue of Today’s Hospitalist

At a recent presentation on hospitalist compensation, John Nelson, MD, shared this good news: Hospitalists’ incomes continue to rise.

But while hospitalists “are still a hot item,” Dr. Nelson was quick to add that growing salaries fail to answer some basic questions about compensation. Chief among those is how much should hospitalists be earning, and what’s the best way to pay them.

According to Dr. Nelson, who is one of the founders of the Society of Hospital Medicine (SHM), the director of the hospitalist program at Overlake Hospital in Bellevue, Wash., and a consultant to hospitalist practices nationwide, physicians and programs typically turn to one of several income surveys to answer those questions. But the problem with that approach, particularly with a new and still-evolving specialty like hospital medicine, is that surveys show only medians and not specifics.

Physicians mistakenly accept survey data as the gold standard when they should instead use them as a starting point, Dr. Nelson said. In a practice management pre-session held at the University of California, San Francisco meeting on managing hospitalized patients in October, he offered pointers on how hospitalists can tailor survey data to determine what they should be earning. He also listed the pros and cons of prevailing compensation models to help physicians assess different plans.

The absolutes of compensation
While Dr. Nelson stressed that there is “no true best method” for getting paid, he did point to some basic principles.

First, a compensation plan needs to be simple. “I often visit hospitalist practices, and the first thing I ask them is to explain how their compensation plan works,” he said. “Half the time, the doctors can’t.”

If a compensation plan is too complicated to understand, Dr. Nelson said, it’s probably too complex to use to your advantage. A plan needs to be easy to explain, easy to understand “and easy to defend in public.

“It will become public information,” he warned attendees, “and you don’t want to be embarrassed.” Hospitalists who earn a straight salary, for instance, stand to be accused of not wanting to take on more work simply because their pay won’t increase commensurately.

A compensation plan also needs to be flexible enough to change as the practice grows, to accommodate a new six-hour swing shift in the evening, for instance, or a shorter night shift.

And you should look closely at any incentives that are a part of the compensation structure. One common mistake groups make is to create a list of incentives that is too long and complex.

Or they peg too little money to each incentive, he explained, so have trouble getting physicians’ attention. Or they set the incentive bar too high and physicians won’t respond. “If you have to be perfect or you won’t get a penny,” Dr. Nelson explained, “you’ll ignore it.”

He noted, however, that the converse is usually the case: Practices tend to incentivize baby steps and aren’t bold enough with incentive plans. “If you make the tiniest improvement,” Dr. Nelson said, “you’ll get a bonus for what you should be doing anyway.”

Working with survey data
Dr. Nelson pointed to the many surveys on hospitalist incomes and mentioned several variables borne out in each survey. (See “Where to start with compensation: survey data,” right.)

For one, hospitalist incomes in the U.S. vary by region, with physicians in the South making the most and those in the West earning the least. In addition, hospitalists employed by hospitals tend to earn less (and work less) than those who work for local, privately-owned, hospitalist-only groups.

Surveys also report various median numbers for the number of patient encounters and average relative value units (RVUs) worked every year. So how does survey data apply to you and your hospital?

“Probably not at all,” Dr. Nelson said. Instead, hospitalists should use those data as a rough estimate that can be adjusted, taking the following factors into account:

“¢ Local variables. You’ll need to adjust survey medians up or down, depending on the region of the country and your practice model. Also factor in how hard it is to recruit to your area.

But perhaps the most telling gauge is what local physicians are taking home. Refer to either hospitalists at competing hospitals (if there are any) or general internists in office-based practices.

“A program should consider what internists could make if they decided not to be a hospitalist after all and took a position in a traditional practice,” Dr. Nelson advised. Whatever general internists earn locally, he said, hospitalists typically make between 5 percent and 15 percent more.

  •  Workload. Your income should also be linked to how hard you work, which can be measured by different yardsticks such as the number of patient encounters or RVUs.

Also take into account whether you have a lot of call or work many nights and weekends. According to Dr. Nelson, the most common mistake programs make is not paying physicians enough for how much they work.

  • Premiums for start-ups. Programs that are just being launched pay more because they have no workload track record. Physicians typically balance that unknown with more income.

Structuring a plan
Compensation plans have undergone a sea change in recent years, Dr. Nelson explained.

Most hospitalists used to be paid on a straight salary basis. According to 2005-06 data from SHM, however, the percentage of hospitalists receiving a straight salary has plummeted to 28 percent, with fully 67 percent of those surveyed being paid on a base salary plus incentive plan. That leaves only 5 percent of hospitalists paid purely on productivity.

Each model, Dr. Nelson said, has benefits and pitfalls:

  • Straight salary. Dr. Nelson admitted that he doesn’t like straight salary models because they don’t tie income to physicians’ decision-making.

“It’s not a good idea long-term,” he said. “It effectively creates highly-paid interns whose best day at work is the one where they get no referrals.”

That said, straight salary models have simplicity in their favor: They’re easy to understand and to budget.

They are also inordinately important in recruiting, particularly for physicians right out of training. Young doctors tend to be nervous about how much they’ll earn with incentives and downright scared of pure production models.

Dr. Nelson mentioned one former colleague who now runs a hospitalist program where physicians are paid on production.

The director tells all new recruits that they’ll earn about $190,000 a year if they start from day one on production. He offers them a choice between that option and earning a guaranteed first-year salary of $150,000.

“He has yet to have anyone take the higher production because they don’t want the risk,” Dr. Nelson said. “It’s remarkable how fixed physicians are on salary.”

  • Base salary plus incentives. Like the majority of groups now, Dr. Nelson’s own uses a plan that combines base salary plus incentives.

Incentives can be based on measures like workload, RVUs, collected fees, proper CPT coding, quality targets, patient and referring-MD satisfaction, administrative or admitting work, nurse or resident teaching, and good citizenship. Among those items, his “blue-ribbon choices” are productivity and proper CPT coding.

Dr. Nelson also said he prefers to offer physicians a low base salary, ideally less than 50 percent of their total annual income. However, he usually offers new recruits a one-year income guarantee to “reassure them that they’re not going to make less.”

  • Productivity. Out of all three models, pure productivity is Dr. Nelson’s hands-down favorite.

“It’s liberating,” he said, pointing out that he worked for more than 12 years for a practice in Florida that paid strictly on production. Even though members of the group worked different amounts and got different-sized paychecks, “they saw the connection and fairness between the two, and they never argued.”

Production models allow physicians to work at their own pace. They also encourage doctors to see themselves as owners of the practice, even when they’re hospital employees. Once they’re responsible for their own incomes, said Dr. Nelson, “they take responsibility for practice economics.”

However, physicians and hospital executives have reservations about production plans. Executives worry that such models will influence physicians to keep patients in the hospital just to pump up their RVUs.

In Dr. Nelson’s experience, that simply has not been an issue. “As a hospitalist,” he said, “your first thought every morning is, ‘Who do I get to go home?’ regardless of how you’re being paid.”

And physicians are afraid they won’t be able to predict how much they’ll earn. While you don’t have much control over your daily workload, Dr. Nelson noted, you can certainly project workload (and income) estimates over a year.

“Physicians also say, ‘If you’re paid on productivity, you’re paid to do bulk, not to do better,’ ” said Dr. Nelson. They worry that their colleagues will work too hard, never take time off, fight for patients in the ER and do a poor job.

“In my experience, that’s not a common problem,” he said. If it does arise, you have some recourse: If doctors who are sacrificing quality for volume won’t change, then they should be fired.

Finally, while acknowledging how important compensation can be, Dr. Nelson pointed out that compensation is only one practice variable.

“Get compensation wrong and it may sink your practice,” he said. “But getting it right with the best possible compensation system won’t be enough to guarantee success.”

One plan you may want to consider: case-rate compensation

In an effort to pay physicians a fair wage and align their incentives with a hospital’s, John Nelson, MD, a hospitalist and medical director of the hospitalist program at Overlake Hospital in Bellevue, Wash., outlined what he considers to be a good approach to compensation: case-rate payment.

During a presentation before the University of California, San Francisco meeting on managing hospitalized patients, Dr. Nelson gave the following example: To combine a base salary with a case rate for each new patient the hospitalist sees, start with a base salary of $105,000.

Each physician could then receive $100 for every admission or consult (regardless of the number of subsequent visits). If a physician racks up 600 admissions and consults in a year, that $60,000 case-rate incentive brings his or her total annual income to $165,000.

In structuring such a plan, programs are free to increase or decrease the base salary and case rate as they see fit. Dr. Nelson said he’d prefer to “set the base lower, to between $60,000 and $90,000, and put the case rate between $125 and $175 per patient.” Just make sure a low base salary doesn’t scare away possible recruits.

What are the advantages of such a plan? First, it reassures administrators that physicians are not financially benefiting from keeping patients in the hospital or denying them care.

“It rewards the hardest thing for doctors to do,” said Dr. Nelson, “which is accept the next referral.”

Among the drawbacks: You run a theoretical risk of physicians admitting patients unnecessarily, which Dr. Nelson said he hasn’t run across.

And while such plans require some effort to carefully track each physician’s admissions and consults, “they can be easier to administer,” he said, “than many other compensation formulas.”