Physician Compensation: Key Design Principles for the Independent, Health-System Sponsored, and Faculty Plan Platforms

Physicians across the United States have long struggled with the best method to compensate themselves, whether as independent physicians, as members of a faculty plan, or as health system-employed physicians. In the last 7 years, the number of health system-employed physicians has risen from 24% to 49% of all physicians. It is expected to reach 75% within the next 3-5 years. While there will always be independent physicians in most markets, three of every four physicians will be employed by health systems before the end of this decade.

While there have long been varying views on the extent to which physician compensation drives desired behaviors, most agree the design of any compensation plan is an important ingredient in delivering and sustaining strong performance within any of the platforms that may employ physicians. This article will first explore the overarching design principles and characteristics that should be connected to any compensation plan. Then it will provide some specific design principles and components related to the three primary employment platforms for physicians—independent medical practices, hospital or health system-sponsored arrangements, and faculty plans. 

Connecting the Compensation Plan to the Strategic Business Plan

At its roots, any physician compensation plan (or all compensation plans for that matter) must be connected to the sponsoring organization’s strategic business plan. Interestingly, however, many sponsoring organizations, particularly smaller to medium-sized medical groups, lack such a “roadmap.” Any organization should have well-understood strategic goals and business objectives laid out for the short term (one year or less), intermediate term (three years or less), and long term (five years). The provider (and non-provider) compensation plan goals should always be geared toward encouraging the necessary behaviors to help achieve the organization’s strategic objectives. Accordingly, the plan’s goals may relate to practice growth (new physicians, service lines, sites, etc.), improved provider productivity and revenue capture initiatives (coding, documentation, etc.), quality measures (PQRI, NCQA, etc.), and/or service excellence (patient access, patient and/or referring physician surveys, etc.).

Too often compensation plans focus on individual provider productivity and not enough on building and maintaining a well-performing organization. The best plan is organically built, well understood by all physicians in the practice/group/organization, and reviewed and updated regularly to be sure it is appropriately linked to the business plan. 

In essence, this “roadmap” is a promise, a promise to all stakeholders—physicians, staff, patients, families, community, local hospitals—and every effort must be made to keep it, each and every day.  

Overarching Goals of Any Compensation Plan

Here are some critical goals any physician compensation plan must deliver:

•    Attraction and Retention – The compensation plan must attract and retain physicians by offering the opportunity to earn market rate levels of compensation for market rate effort. In addition, the plan must allow for other important contributions to the organization’s growth and market position by compensating for non-clinical activities, including, for example, citizenship (community activities, hospital directorships, group leadership, etc.). Doing so will provide physicians with alternative means to contribute to the organization’s success that are both stimulating and rewarding. The physicians must have faith they are compensated fairly when they “do the right thing.” They also must feel comfortable they have a say in what that “right thing” is.

•    Motivation – As described above, a good compensation plan is well woven into the organization’s strategic business plan. Accordingly, the plan must contain the necessary incentives to better ensure the goals and objectives of that business plan are met. This provides motivation for physicians to become more productive, efficient, and clinically effective practitioners and helps support physician retention.

•    Fiscal Responsibility – The compensation plan must be affordable. That said, the term “affordable” may have different meanings depending on the practice platform. In a private medical group, affordable means the bottom line. In a health system or hospital, it may mean a limit on its “investment” in its physician strategy and further constraints by fair market value limitations. Similarly, in a faculty plan, a balance must be struck between paying market rates for faculty, based on rank, and paying what’s affordable after tuition or state funding has been received. This often puts additional pressure on the clinical practices within the faculty plan to help fund academic efforts.

•    Internal Equity – As with “affordable,” the term “equitable” may have different meanings depending on the employment platform. In an independent practice, any restructuring of the compensation plan usually results in some physicians making less while others earn more because the compensation pool has little elasticity. As a result, “equitable” ultimately equates to the “least unfair to all.” In a faculty setting, it often reflects the interest in compensating teaching as well as clinical efforts.             

•    Reward Quality and Efficient Care – This has been more or less cavalierly handled in the past. But despite the recent reform law’s relatively light emphasis on cost containment, it is becoming increasingly clear that quality and cost are becoming very important. Although patients tend to take for granted a positive outcome to their health issues, studies are clearly showing that delivering an exceptional patient experience is equally important to clinical quality. So while tracking and rewarding consistent adherence to PQRI, NCQA, and other standards is important, equal emphasis must be placed on delivering exceptional customer service. With patients absorbing more of their health care costs, they are demanding this.

In summary, any reasonable compensation plan should possess the following characteristics:

•    Be aligned with the mission, vision, and business plan of the sponsoring organization.

•    Be sustainable over time.

•    Be aligned with marketplace demands.

•    Be affordable and sustainable beyond the immediate economics.

•    Be easy to understand and administer.

•    Have attainable goals and targets for participants.

And remember – “If you can’t measure it, don’t pay for it.”

The following explores the specific employment platforms and the unique characteristics and principles that are generally attached to each compensation plan:

Independent Practice

As stated above, developing a compensation plan within an independent medical practice has some challenges. First, the compensation pool is the net income of the practice and earnings are rarely retained. Therefore, any new compensation plan will result in some physicians making more than before and others less. This sometimes makes approval of the new plan difficult, which relates to the second challenge within this platform—governance. Decision-making in a smaller to medium sized practice tends to be consensus-driven. Even a larger medical practice, when it comes to approving a new compensation plan, typically requires a vote of the physician shareholders. Consequently, while the “least unfair” approach to compensation design may be desirable, garnering the necessary support to actually get a new plan approved can take some time and even lead to some attrition among the physician ranks. In many independent practices, where one vote is awarded per shareholder, it becomes difficult to change the compensation plan when certain physicians are asked to vote for a pay decrease to keep the group together.  

Another challenge for a medical practice relates to lifestyle issues. More often physicians are seeking a balanced lifestyle. Studies show that on average physicians are working four hours less per week than their peers 30 years ago. This is the equivalent of 36,000 fewer physicians, which only compounds the shortage crisis, particularly in primary care. Such lifestyle issues can cause problems with the call schedule, which inevitably is intertwined with the compensation plan. In addition, with the economic downturn, retirement plans for many physicians have been put on hold. This often widens the demographics of a practice and makes succession planning tough, which causes further strains on both the compensation plan as well as group harmony overall. 

It is advantageous for a practice to have clear retirement and call policies in place before it delves into a redesign of the physician compensation plan. This is an important ingredient of strategic planning that cannot be emphasized enough. 

Finally, physicians within a practice may have very different payer mixes. Pediatrics versus internal medicine is a classic primary care example. This can create income distribution challenges as well, which is why we typically support the use of work RVUs (wRVUs) in any compensation plan, given that they are payer neutral and most fairly measure clinical effort.

With these challenges, what are some fundamental characteristics and components that should be considered when an independent medical practice pursues a new compensation plan?

•    Use of wRVUs – As stated earlier, we generally subscribe to the use of wRVUs as a productivity measure because it is payer neutral and does not penalize a physician that may have a less favorable payer mix. It is also easier to administer when compared to using the practice’s net revenue as the starting point. Generally, the wRVU measurement serves to create the base compensation for each physician, whether that is considered a salary or draw. We often suggest the use of tiers where mean productivity and conversion factors are established based on the practice’s most recent fiscal year performance. Tiers above and below that mean can then be established that would carry higher or lower conversion factors, respectively, to further encourage improved productivity. The bottom line is this: if a physician practices at the “mean” productivity, the starting point of compensation should be the “mean” of the national/geographic surveys. Depending on the practice’s operations and geography, other factors can be measured and rewarded based on performance.  

•    Allocation of Costs – In an independent medical practice where there can be widely disparate levels of productivity due to lifestyle and/or imminent retirement plans, it is typically best to allocate certain costs to each provider. These would likely include each physician’s nurse, mid-level, or any other personnel who work directly for that physician. Other costs may also be directly allocable, including drugs (e.g., chemo), office space, equipment leases, etc., as appropriate.

•    Incentive Bonus Pool – The creation and use of an incentive bonus pool as part of the total budgeted compensation pool is also encouraged. Typically, this should be no less than 10% of the total pool and no more than 30%, depending on the importance and urgency of the strategic business objectives and performance improvement initiatives of the practice. Most Human Resource managers suggest that unless 20% of a person’s paycheck is in the form of incentives, behaviors will not change. The following are typical areas that could be incorporated into an incentive:

o    Quality measures 

o    Patient experience/satisfaction 

o    EMR implementation 

o    Chart documentation and service coding

o    Cost containment

o    Citizenship/leadership activities 

It should be noted that the bonus pool can also serve as a budgetary cushion. Therefore, a bonus pool will exist only to the extent there is one after each quarter, year, etc. 

The components described above fulfill many of the fundamental characteristics of an effective compensation plan—the structure is simple and easily administered; the incentives tied to the bonus pool can change each year depending on the practice’s strategic and/or business objectives for that year; it’s affordable and sustainable; and it delivers reasonable internal equity.

Health System- or Hospital-Sponsored Group or Network

Compensation plans within a hospital-sponsored group or network typically have many of the same characteristics and components as the independent practice platform. But there can be important differences:

•    The size of the compensation pool tends to be more driven by the group’s/ network’s performance and the amount the hospital wishes to “invest” in their physician strategy each year. Therefore, the compensation plan is able to more consistently deliver market rate compensation levels, which an independent practice may struggle to do, particularly if it is in a poor payer environment.

•    Incentives within the bonus pool can also have very different features. For example, there may be incentives tied to the hospital’s overall financial performance. Quality measures may also be more hospital driven.

•    The most critical aspect of these compensation plans, however, is their ability to encourage a greater sense of “groupness” among the physicians in order for the hospital to achieve the benefits of its physician strategy. Most physicians who become employed by a hospital don’t do so to necessarily join a larger, fully integrated medical group. They do it for financial and market security. As a result, many networks are mostly a collection of smaller or individual practices, and it is very difficult to deliver accountable care in the absence of true physician collaboration.     

•    The use of professional services agreements (PSAs) as an alternative to physician employment by a hospital bears mentioning. In these instances, the medical group retains its professional corporation, which continues to employ the physicians. The hospital acquires and/or leases the medical practice’s assets and enters into a PSA with the medical group. While it is ultimately up to the physicians how they divide up the payments received through the PSA, many of the same mechanisms (e.g., use of wRVUs and conversion factors) and incentives can and should be built into the agreement. Therefore, the PSA is in many ways a compensation plan; it’s simply at a group level rather than an individual provider level.

Faculty Plan

What obviously distinguishes a faculty plan from the other two platforms are the teaching, research, and other scholarly activities required of its physician faculty members. The biggest challenges typically encountered in these situations include the following:

•    The departments or divisions within larger departments (i.e., surgery, medicine, etc.) tend to operate as autonomous silos. As a result, not unlike the hospital-sponsored group, there is very little cohesiveness or “groupness” among the departments. Operating policies and procedures can vary widely. Patient satisfaction and access can also run astray because there is no incentive for departments to ensure they maintain open doors.  

•    Department chairs are vested with a lot of authority, including how departmental dollars for physician faculty compensation get distributed. Therefore, there can be many different compensation plans operating within the faculty plan.

•    With cutbacks in state funding and/or the decreasing degree to which tuition dollars adequately support the teaching mission of the medical school, there is increased pressure on the physicians to make up the difference through clinical productivity. Such a tendency risks financially penalizing faculty for their teaching efforts. It’s important to reward teaching equally with clinical effort. As is often said in these circles – “No margin, no mission.”

Given these challenges, the following guiding principles will assist when pursuing a compensation plan design effort:

•    Quantify the school’s teaching, research, and scholarly requirements of its physician faculty (this excludes the basic sciences component). With all of the self-reporting of activity, there are inevitable abuses in how faculty time is actually spent. So for each department, division, and even faculty member, establish their expected teaching effort each year as measured in hours. For example, establish standards for prep and delivery time for a new lecture. This is a relatively straightforward effort, although understandably more difficult for the GME years, particularly when it comes to inpatient and outpatient rounding. Given that these activities actually generate patient revenue, the question really is the extent to which rounding with residents impacts or “drags” the productivity of the attending physician. It may help to use a common “drag” to accommodate this. 5%-8% is usually a reasonable estimate, meaning a physician rounding with residents should equal 92%-95% of a physician rounding without residents in terms of clinical productivity. Once the teaching requirements are “walled in” and distributed among the faculty, it is possible to determine the extent to which tuition and/or state funding covers that cost and, therefore, the extent to which clinical productivity must make up the difference. Once teaching, research, and scholarly activities are properly quantified and distributed among the faculty, clinical productivity capacity can be determined and baseline productivity targets can be set for each physician and rolled up to the division and department levels. 

•    Here are some ideas to further encourage “groupness”: 1) set departmental productivity bonus targets. Physicians can’t earn productivity bonuses until the department hits its target. Given that there is often a wide variation in productivity levels, particularly between newer and older physicians, this can be a useful mechanism to encourage better distribution of patients; 2) create incentives to implement standardized policies and procedures in areas such as patient scheduling, coding and documentation, and implementation of an EMR/EHR; and 3) focus on quality measures such as the use of PQRI, NCQA, and other measures. And don’t forget patient, referral physician, employee, and student satisfaction surveys and initiatives.      


While there are fundamental characteristics and principles that accompany any physician compensation plan, depending on the employment platform, there are some nuances that need to be considered. All plans generally should encourage productivity, strategic growth, cost containment, quality, and patient satisfaction. However, in the independent practice, it’s about developing a plan that’s the least unfair to all. In the hospital-sponsored setting, the key is generally to encourage “groupness,” and with the faculty plans, it’s usually about “groupness” and managing teaching time. 

All of these goals, while they may seem complicated, can be accomplished with relative simplicity, ease of administration, and sustainability. In our experience, an annual review of the goals is essential (with minor or even major changes needed). No compensation plan should be the same every year for 3-5 years. The 2010 health reform law and a medical group’s ability to recruit and retain the best physicians each year are two examples of why constant review is essential.


Davis Fansler