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Productivity Still Drives Compensation in High Performing Group Practices



December 20th, 2010

In July, 2009, President Obama visited the Cleveland Clinic and praised its ability to provide hospital care less expensively than some other famous hospitals. This claim was bolstered by a recent study demonstrating that large multispecialty practices have lower cost and higher quality in treating Medicare recipients compared to other practitioners in their regions.

One of the hypotheses for this result is that physicians in such practices are paid by salary rather than on the basis of how much revenue they generate. This claim prompted us to discover which forms of compensation are typical for multispecialty group practices and how such compensation might be linked to medical cost expenditures.

The Multispecialty Group Practices We Studied

We contacted leaders at 12 multispecialty group practices—eleven of whom participated in the Medicare study cited previously. Ten of the twelve group practices pay physicians on the number and type of clinical services they provide with total compensation competitive with private practice. We conclude that cost savings demonstrated by group practices do not appear to be related to a fixed form of compensation.

The twelve practices we surveyed were the Billings Clinic; the Cleveland Clinic; the Geisinger Clinic; the Guthrie Clinic; the Henry Ford Medical Group; the Intermountain Medical Group; Kaiser Permanente of Northern California; the Lahey Clinic; the Marshfield Clinic; the Mayo Clinic; the Ochsner Clinic; and the Virginia Mason Clinic. (Short descriptions of each practice are included in an appendix at the end of this post.) The twelve practices were arbitrarily chosen because of their large size and scale, their longstanding experience and success in health care delivery, and their geographic diversity. While several of these clinics have research and education enterprises, none is a medical school faculty practice plan.

What We Found

Among the group practices studied for this report, most pay their doctors based on clinical activity, often measured with relative value units (RVUs)(1) which report physician’s clinical activity based on such factors as the number of patients seen, the intensity of the service provided, and the number and type of procedures performed. Many practices assign a guaranteed base salary—often calculated from data provided by organizations such as the American Medical Group Association (AMGA)(2,3) and RSM McGladrey — with additional incentives or bonuses based on clinical volume. The following practices pay partially or in some case, totally based on RVU methodology: Billings(3), Geisinger(4), Guthrie(5), Henry Ford, Intermountain(6), Lahey(2), Marshfield(7,8), Oschner(9,10) and Virginia Mason.(11) At the Cleveland Clinic, volume is one of the criteria used to determine future salary, but bonuses are not awarded.(12)

Two of the practices provide fixed salaries where the volume of clinical services performed is not a factor of importance in developing compensation. This model applies at Kaiser Permanente of Northern California(13) and the Mayo Clinic.(7,14)

Most of the groups give financial credit for time spent on research, teaching, and administration, and some consider patient satisfaction in determining part of the compensation.(1) None of the practices compensate on the basis of the number of consultations or tests the physicians order. Doctors in each of the multispecialty group practices studied do not realize income from facility fees since it is the practice or the hospital, not the physicians, who own the equipment and charge for their use.

Most of the respondents told us that they pay salaries that are equal to, nearly equal to, or greater than the amount the doctors could earn in private practice in their regions. Furthermore, many of the groups provide benefit programs and support structures that often exceed those available in many practices. Consequently, when one includes all the costs of employing physicians in large, multispecialty group practices, the total for most physicians is probably not significantly less than the amount they could earn practicing privately.

Lessons Learned

Volume is a significant factor in determining compensation in many multispecialty group practices. As more physicians seek the advantages of working at large multispecialty group practices over remaining in, or joining, individual or small group practices, the question arises whether physician compensation in such large groups is uniquely different from compensation in other forms of practice. As best we can tell, in the absence of much literature directly dealing with the subject, the answer is “no.” Only two of the 12 large multispecialty group practices that we studied—Kaiser Permanente of Northern California and Mayo Clinic—pay their physicians with fixed salaries in which income does not depend on clinical productivity.

Base salary supplemented by incentives dependent on productivity is a common model. In some groups, volume is even the principal determinant of compensation; in others it plays a lesser, though still significant, role. This productivity model is typical of most organized practices. The American Medical Group Association reports that, of its membership of 370 groups and about 110,000 physicians, the “vast majority” pay at least partly by volume measured in RVUs.(1) These data come from a collection of groups with widely different sizes and structures, some single specialty groups, and some in a for-profit structure.(1) 

From these observations, it appears that many, if not most, large multispecialty group practices take volume into consideration in compensating their physicians. Though these large groups may provide higher quality at lower cost—as some studies assert — their compensation programs do not appear to differentiate most of them from other group or private practices.

Our study did not examine distinguishing features such as practice culture, governance, insurance contracting, and payment for performance. Any combination of these factors can motivate practices to improve quality and reduce cost.(15,16) It does not appear, however, from our data, that the method of compensating physicians, many of whom can increase their incomes by generating more business for the group, directly contributes significantly to these savings. More comprehensive data from further, more detailed studies are required to prove whether this thesis is correct.

Compensation based on volume presents challenges at group practices, as elsewhere. Compensating doctors wholly, or in part, on volume has its problems. Such systems may encourage use of those tests and procedures that pay well. Leaders at the Marshfield Clinic have found that the RVU system “encourages doctors who do procedures to do procedures.”(8) Accordingly, Marshfield has had difficulty providing enough specialists to provide consultations since the RVUs generated for consultations are much less than those for procedures. It also leads to “running patients through,” seeing as many as possible even if this short-changes patients with complicated problems and those who want to spend more time with their doctors.(8)

What doctors earn in multispecialty group practices can be similar to what they can earn in private practice. As a general rule, physicians in multispecialty group practices earn as much as, or slightly less than, they could in private practice. However, some groups recruit by emphasizing that they provide better and more comprehensive financial and administrative benefits than most doctors in private practice can afford when working independently. Groups may employ a larger professional support staff of nurses, nurse practitioners, and physicians’ assistants to make the physicians’ work more productive and give patients more effective long-term care for their chronic diseases in particular.(17) Consequently, the total cost to the group of employing the physicians may be greater than the cost to the doctors to operate their practices privately even though the salaries may be somewhat less.(17)

As for the income of physicians in multispecialty group practices appearing to be somewhat lower than in many private practices, one CEO writes: “That may have been the case in the past, but I do not believe that it is significant now. The private practice model in years past was able to manage expenses and payer mix better, so I think there was better pay. However, with complex billing processes, rising expenses through inflation and stagnant reimbursements, I think this has leveled off. That is furthered by the recruiting marketplace.”(18)

In joining a group, doctors give up charging for use of equipment that they or their groups may own. Of course, the doctors must spend or borrow capital funds to buy or lease the equipment if they want to collect facility fees for their use. Nevertheless, the return on these investments can be quite sizeable for some specialties. In private practice, physicians, either individually or in specialty groups, who own such equipment have a strong financial incentive to use it more.(17) This incentive does not apply to physician compensation in any of the groups that we studied where the groups or the hospitals own the equipment and collect the facility fees.

Our study has implications for health reform.

Most organized group practices, known for lower cost and higher quality, reward physician productivity. Some health reform proposals, like capitation and bundled payments, will change revenue flow and may disrupt the conventional RVU metrics. For example, physicians may be asked to perform “non-RVU” work, like coordination of care. Health policy makers should be aware that even among practices cited as exemplary, physician productivity is embedded deeply in the current system of rewards.

In conclusion, our study reports that, in the 12 groups we studied, salary without supplements or consideration for volume is the exception rather than the rule. We also learned that, driven by competition to recruit doctors, most of our multispecialty group practices compensate at levels that approximate or nearly approximate what the physicians could earn in private practice.

 As one of our participants told us: “Simply paying all physicians in the US on a salary basis will not be a panacea for our current [financial] ills.”(19) Two others added, “The real meat of the issue is the self-governance and ability to review and influence practice through physician leadership and organized systems of care,”(15) and “Physician engagement in the process and a commitment to the outcomes of our patients is the best solution.”(20)

APPENDIX — CLINIC PROFILES

Billings Clinic

The Billings Clinic began when Dr. Arthur J. Movius opened his general practice in Billings, Montana in 1911. Gradually other physicians and surgeons joined Movius and his partner Dr. J.H. Bridenbaugh. The group adopted the name The Billings Clinic in 1939 when enough doctors had joined to constitute a multispecialty group practice.

By 2010, the Billings group included more than 230 physicians working at the main site in Billings (population 103,994 according to the Census Bureau’s 2008 estimate) and several other sites in Montana and one in Wyoming, each connected electronically to the central unit. The clinic currently provides tertiary care for an estimated 500,000 people.(3) About one-third of the staff are primary care physicians.(21)

Compensation of the physician members of the clinic is developed from standard data and is strongly influenced by clinical volume. Few doctors are paid by salary alone.(3) Compensation for physicians in some departments is based on “quality measures specific to that specialty.”(22)

Cleveland Clinic

Founded just after World War I by four physicians—3 surgeons and an internist—the Cleveland Clinic Foundation, the organization’s corporate name, now includes (2010) about 2,200 physicians in the group practice, which is its fundamental organization. Since the founding, most of the doctors at the Cleveland Clinic have been specialists. Currently, about 15% practice primary care.(23)

Compensation of the professional staff is by salary alone.(12) No bonuses are given, nor does volume of work, as measured by relative value units (RVUs), revenue, or referrals, enter into the direct determination of income. The clinic’s point of view about this practice is that “the RVU system destroys other missions like teaching & research,” according to the president of clinic’s regional hospitals and former chairman of the medicine institute.(17) Salary is adjusted annually based on a comprehensive performance review. Factors considered in determining salary include quality, innovation, patient volume, teaching and research performance, national profile, and clinic citizenship, but there is no specific formula for salary calculation. Top performers will generally be rewarded with higher salaries.

On average, Cleveland Clinic pays at the 92nd-95th percentile of comparable specialty-specific salaries at other academic multispecialty groups, reflecting the lower cost of living in Cleveland and a more generous benefit package. The board of directors compensation committee approves all salaries and settles controversies.(12)

Geisinger Clinic

The Geisinger Clinic was founded in 1915 by Abigail A. Geisinger, a wealthy widow who, in her 80s, decided to build a hospital and clinic in Danville, PA where she lived. What Abigail Geisinger and her physician colleague Dr. Harold Foss started is now a large health system, still based in Danville, a borough in northeastern Pennsylvania with a population of 4,897 in the 2000 census. In addition to the founding hospital, Geisinger owns Geisinger Wyoming Valley—a hospital outside Wilkes-Barre, PA, where some of the staff physicians are not members of the Geisinger group—and 37 practice sites in 20 counties in the region, staffed entirely by Geisinger-employed physicians.(15) About 28% of the patients are members of the Geisinger-owned insurance entity. Members of the group practice care for about half of the Geisinger-insured patients.(15)

The group practice has more than 800 physician-members—230 in primary care—(2010) and is adding more health care providers each year. Compensation for most, though not all, physicians is derived from data supplied by RSM McGladrey and can be modified by volume, seniority, and specialty. Eighty percent of the compensation is considered base and 20 percent bonus, which is directly linked to strategic goals—“innovation, quality, market expansion and legacy,”(24) according to CEO Glenn Steele—but not to RVUs. Not meeting assigned volumes, as measured with RVUs, can decrease doctors’ salaries.(25) Compensation is set yearly and does not fluctuate significantly throughout the year.(15)

Physician members of the group practice “make as much as they would in private practice [in the region],” says Steele. “We pay primary care doctors better [than the average in the market.]“(4)

Guthrie Clinic

In 1912, Dr. Donald Guthrie started his eponymous clinic in Sayre, then the center of the Lehigh Valley Railroad’s rail repair facility in eastern Pennsylvania just south of the Pennsylvania-New York border. He had come to Sayre (population 5,813 in 2000) from the Mayo Clinic as surgeon-in-chief and administrator of the Robert Packer Hospital, which had been founded in 1885 in memory of a former director of the railroad. The clinic and the hospital are now part of the Guthrie Health Care System, which includes several other hospitals and health care facilities in the region.

Most of the clinic’s approximately 280 physicians are paid with a base salary plus a volume-dependent bonus. A few receive salary alone.

Henry Ford Medical Group

From the opening in 1915 of the Henry Ford Hospital in Detroit, each doctor practicing there has been employed by the hospital and more recently by its health system. The structure at the Mayo Clinic provided the model for Henry Ford, who funded the construction of the hospital, originally to care for employees in the nearby plants of the Ford Motor Company. Ford insisted that only members of the medical group could work at his hospital. The closed panel system angered many physicians in the community and medical organizations both at its formation and for several years afterwards, but it has continued to this day, almost a century after the founding of the hospital.

The Henry Ford Medical Group now includes more than 1,200 physicians who work at the flagship hospital in Detroit and at six other hospitals and ambulatory centers owned by the Henry Ford Health Care System. Members of the group receive a base salary of about 80 percent of total compensation and can increase the remainder  through RVU productivity.

Intermountain Medical Group

The Intermountain Medical Group, a multispecialty group practice in Utah, is part of Intermountain Healthcare, an independent, not-for-profit corporation founded in 1975 that owns 20 of Utah’s 60 hospitals plus one hospital in southeastern Idaho. The medical group employs about 735 physicians, most of whom are based in outpatient practices.

Approximately 90 percent of the physicians are paid solely on clinical activity, measured by RVUs. Of those salaried doctors, many are highly paid surgical specialists who are starting programs in areas where the volume needed to generate competitive compensation is not yet available.(26)

Kaiser Permanente of Northern California

Kaiser Permanente is an integrated managed care organization with three principal components: the Kaiser Foundation Health Plan, an insurance vehicle; Kaiser Foundation Hospitals, and the Permanente Medical Groups of physicians and other health care professionals. Kaiser Permanente of Northern California is the direct descendent of the health plan organized initially to provide medical care for the employees of the Kaiser ship-building enterprise during World War II. The first of the Permanente groups to form was in northern California that currently has about 6500 physician-members.

Physicians who work for the medical group are paid competitive salaries with incentives based on quality and patient satisfaction, but not on volume.(27) When asked whether pay for performance enters into compensation, Dr. Jay Crosson replies, “In a manner of speaking, yes, but not in the way it is commonly used. Over the career of a physician his/her salary will rise (and our small bonuses will vary) depending on an assessment of the quality of care and service rendered by the physician. Data is used, of course, but so are peer evaluation and the assessment of the department chief. So it is not formulaic in design. Utilization issues are not part of the consideration of income for individual physicians.”(28)

Lahey Clinic

Surgeon Frank Lahey (1880-1953) founded his clinic in 1923 in Boston Until 1980 when the clinic moved to Burlington, MA and built its own hospital, Lahey members admitted their patients to hospitals in Boston.

Compensation for the clinic’s approximately 430 physicians is based partially on volume in addition to salaries derived from standard, published data.

Marshfield Clinic

In 1916 six physicians in Marshfield, Wisconsin pooled their medical practices to form the Marshfield Clinic. The city, like Rochester, Minnesota, home of the Mayo Clinic that the founders of Marshfield used as their organizational model, was small then and still is. Settled in 1868, Marshfield is located near the geographical center of the state. In 2000, according to the census of that year, the population was 18,800.

Currently, Marshfield Clinic employs about 775 physicians in its historical center in Marshfield and in 54 health care centers in northern, central and western Wisconsin. 90 percent of its patients live in Wisconsin.

The Marshfield Clinic provides an instructive example of how methods of physician compensation have evolved. Salaries are set each year by a committee of four elected physicians and members of the board of directors. For most of the doctors, compensation is based largely on how many patients they see, measured by the number of RVUs the physician accumulates. Annually, each doctor fills out an activity report which contains non-RVU activity such as, the time spend on teaching, research, and administration.

Each year the salary committee assigns a salary for the next year based, in part, on market data and on the size of the doctor’s clinical activity during the previous year. An independent compensation committee reviews the salaries, with special attention to the high ones.(21) An average of 8 doctors/year appeal the amount of their salary to the board of the clinic.

It wasn’t this way for most of the clinic’s history.(7) One of the senior members recalls how, when he joined the clinic in 1979, he and his 160 colleagues were paid a salary of about $64,500(8) regardless of specialty. “Back then, we were very successful because of the advantages of a close-knit group.”(8)

When some of the specialists started to insist on being paid more, the salary system began to fail.(29) The clinic found that it couldn’t recruit physicians doing advanced procedures, such as radiologists, cardiologists, and gastroenterologists. The clinic tried paying a base salary and a bonus based on production. This incentive, however, proved inadequate to recruit and retain some of the higher paid specialists, and the clinic switched to a total RVU system. Each member is expected to generate a specific amount of activity.(8,29)

The growth of the Marshfield Clinic and the increasing variation of compensation among the members produced a significant change in its culture.(29) “The egalitarian nature of the Clinic changed,” a former CEO said. “A widening salary gap between specialists and primary care developed. The utopian plan just did not work.”(29)

Mayo Clinic

The Mayo Clinic, the first integrated, not-for-profit group practice, was founded in 1889 in Rochester in southeastern Minnesota and was based initially on the practices there of William Worrell Mayo and his sons William and Charles. The clinic has spawned several of the groups discussed here, which, among others, have modeled themselves, at least in part, on the Mayo system. The clinic has branches in Jacksonville, FL and Phoenix and Scottsdale AZ.

The physician staff—1700 in Rochester—is paid by salary without incentives based on volume. The salary program is based on a combination of factors, including the compensation in other large multi-specialty practices and in academic medicine and includes consideration of the total in salary, fringe benefits and other factors, like time for professional activities.(30)

Ochsner Clinic

In 1942 surgeon Alton Ochsner and four colleagues established the Ochsner Clinic, the first multi-specialty group practice in the South, which now includes about 750 physician-members, about 40 percent in primary care. The Ochsner Clinic Foundation, its corporate name, claims to be the largest private healthcare system in the region, with 7 hospitals and more than 35 neighborhood health centers throughout southeast Louisiana. The organization included a health plan but sold it recently.

Physician salaries are based to some degree on national standards and are compensated “very well,” according to the CEO.(9) From 50 to 100% of salary—the number varying by department—may be determined from volume as measured from RVUs. Doctors do not receive financial credit from ordering tests or requesting consultations.

Virginia Mason Clinic

 A small group of doctors in Seattle founded this multispecialty clinic in 1920. They named it for two of the founders’ young daughters, each of whom had the name Virginia (in one case Virginia Mason Blackford) .

Now a part of Virginia Mason Health System, the clinic employs about 460 physicians. Compensation is based both on the market and on volume.(11)

NOTES

1. Fisher, Donald W., Ph.D. Alexandria, VA, by telephone 2/15/10
2. Barrett, David M., M.D. Burlington, MA, by telephone 12/29/09
3. Wolter, Nicholas, M.D. Billings, MT, by telephone 1/4/10
4. Steele Jr., Glenn, M.D., Ph.D., Danville, PA, by telephone 2/4/10
5. Scopelliti, Joseph A., M.D. Sayre, PA, by telephone 2/9/10
6. Leckman, Linda, M.D. Salt Lake City, UT, by telephone 5/14/10
7. Fye, W. Bruce, M.D. Rochester, MN, by telephone 12/22/09
8. Liss, Paul L., M.D. Marshfield, WI, by telephone 4/1/10
9. Quinlan, Patrick, M.D. New Orleans, LA, by telephone 7/19/10
10. Guthrie, Richard D., M.D. New Orleans, LA, by telephone 7/16/10
11. Kaplan, Gary S., M.D. Seattle, WA, by telephone 3/25/10
12. Bronson, David L., M.D. Cleveland, OH, by e-mail 9/16/10
13. Crosson, Francis J., M.D. Oakland, CA, by telephone 4/16/10
14. Wood, Douglas L., M.D. Rochester, MN, by telephone 1/27/09
15. Hamory, Bruce H., M.D. Danville, PA, by e-mail 8/30/10
16. Wood, Douglas L., M.D. Rochester, MN, by e-mail 7/12/10
17. Bronson, David L., M.D. Cleveland, OH, by telephone 8/10/10
18. Scopelliti, Joseph A., M.D. Sayre, PA, by e-mail 8/3/10
19. Wood, Douglas L., M.D. Rochester, MN, by e-mail 8/3/10
20. Scopelliti, Joseph A., M.D. Sayre, PA, by e-mail 9/6/10
21. Ulrich, Karl J., M.D. Marshfield, WI, by telephone 12/28/09
22. Wolter, Nicholas, M.D. Billings, MT, by e-mail 8/23/10
23. Bronson, David L., M.D. Cleveland, OH, by telephone 4/5/10
24. Steele Jr., Glenn, M.D., Ph.D., Danville, PA, by e-mail 9/7/10
25. Hamory, Bruce H., M.D. Danville, PA, by telephone 4/12/10
26. Leckman, Linda, M.D. Salt Lake City, UT, by telephone 7/16/10
27. Crosson, Francis J., M.D. Oakland, CA, by e-mail 7/12/10
28. Crosson, Francis J., M.D. Oakland, CA, by e-mail 8/3/10
29. Hall, Reed E., Marshfield, WI, by telephone 5/14/10
30. Wood, Douglas L., M.D. Rochester, MN, by e-mail 7/12/10

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