Physician Employment Agreements

I was working as CMO when the VP for the medical group left the organization. The CEO asked if I would temporarily take over administrative responsibility for the division. I knew all of the providers, and I enjoy working with contracts, so it made sense for me to step in. I would soon become well-versed in physician employment agreements.

I quickly found that there was a significant backlog of employment agreements that needed to be addressed. We had several physicians whose old contracts were due to expire. We were actively recruiting for several specialties as we tried to double the size of our medical group. Several candidates had contracts in hand and were contacting me with questions.

I quickly needed to understand contracting basics, especially compensation, productivity and how to calculate bonus payments. 

Needed Expertise

Physicians executives are often asked to help address questions of newly recruited physicians during the interview process. Their most common concerns center around the following five contract issues:

1. Understanding the salary structure (and salary surveys)
2. Potential bonus and how is it calculated
3. Signing Incentives
4. Liability Insurance Tail Coverage
5. Time Off (Vacation and Conferences)

The first two issues require an understanding of worked relative value units (wRVUs).

Salary Surveys

As physicians prepare to seek new employment opportunities, they quickly begin to access national physician salary surveys such as the MGMA (Medical Group Management Association) survey. But the information presented in the surveys is easily subject to misinterpretation.

A salary survey is just that: a survey. It is an inquiry sent by the surveying entity to obtain salary information from a sampling of physicians, either directly or from their employers. The salary data are collected, analyzed and published for employers and others to use in comparing compensation levels in their organization to the external data.

The surveys generally present both salary means and salary medians. Employers and recruits tend to focus on the medians because they are less impacted by outliers. The surveys also generally provide salary data at the 25th, 75th, 90th and 95th percentiles. Other information that may be included in such surveys is gross revenues, collections, office expenses, and worked RVUs. The data can be subject to certain biases.

For example, it is probably not appropriate to expect a new residency graduate to be paid at the median level when he/she cannot produce or bill for a similar volume of services during the first few years of practice.

This topic is made more complicated because compensation may change during the term of a contract. It is not uncommon for compensation to start out as a fixed salary (generally paid on a bi-weekly basis), and transition into one partially or wholly based on productivity and other performance measures.

For example, hospital systems tend to offer higher salaries to physicians than physician groups. And some of the salary surveys, such as the MGMA survey, have a higher representation of responses from such hospital-based groups, while others (such as the American Medical Group Association) are more representative of physician owned groups. It’s unlikely, therefore, that a physician-owned medical group will make an offer equal to the salary suggested by the MGMA survey.

Also, the survey might have a small number of responses in certain specialties and geographic areas, so linking salary levels to such numbers might not be justified.

Understanding Worked RVUs

Physician productivity is often measured and reported in terms of wRVUs. They are often used to determine the size of a bonus payment or even 100% of a physician’s salary.

Before RVUs were developed and applied, Medicare paid for services based on usual and customary fees, which were highly variable and arbitrary.

In order to standardize payments, the Health Care Financing Administration (now known as the Centers for Medicare and Medicaid Services, or CMS) adopted the resource based relative value scale (RBRVS) after it was development in the late 1980s. A team led by William Hsiao, Ph.D., at Harvard University, published its RBRVS in the Journal of the American Medical Association (JAMA) in 1988. Its use was formally signed into law in 1989 and began to be used in 1992.

The RBRVS, as adopted by CMS, is used to pay for medical services, including medical care provided in hospitals, clinics, emergency rooms, nursing homes and elsewhere. The RBRVS is composed of three parts: physician work, practice expense and professional liability costs.

The latter two of these factors also take into account geographical variability. Medicare payments are determined by applying a dollar multiplier to the relative value of a procedure (generally between 0.0 and 30.0).

The physician work part of the formula (wRVU) is what is used to compare the productivity of physicians and to create compensation models (NOT the total, or tRVU).  The wRVU results from consideration of its components: the time needed to deliver a service, the relative mental effort and judgment required, and the intensity as it relates to the risk to the patient.

The complete list of tRVUs and their components (including the wRVUs) are updated and published annually by CMS (Physician Fee Schedule – January 2015 Release). Each year, CMS adjusts the multiplier in order to create the payment schedule for physician payments. To get an idea of the relative weight of various types of services, I am including a very small sample of wRVUs and their weights below:

Notice that a typical new patient office visit of moderate complexity (99204) runs about 2.43 wRVUs. An established patient office visit at the same level runs only 1.5 wRVUs. Operative procedures run much higher values. The total of a physician's wRVUs is calculated by simply adding up the RVU assigned to each of the visits.

RVU Averages

Using these weighted values, it is possible to compare the productivity of physicians in the same specialty, and even in different specialties. Typically, an internist or family physician will generate 4,000 to 5,000 wRVUs per year, or roughly 100 wRVUs per week (assuming 48 weeks of work). If the average visit has a weighting of 0.97 wRVUs, 100 visits will generate 97 wRVUs. If the average weighting is closer to 2.0 (such as for new patients or procedures), then fewer of these more complex visits (about 50 per week) will still generate about the same 100 wRVUs per week.

A general surgeon may generate 7,000 to 8,000 wRVUs per year; an invasive cardiologist or neurosurgeon perhaps 10,000 or more, primarily because of the heavy weighting of procedural visits/codes.

While initial salaries may not be linked directly to wRVUs, there will usually be an expectation by the employer that the wRVUs being generated (through patient visits and procedures) will meet the wRVUs of similarly compensated physicians.

Consider a hypothetical Dr. Smith who was hired at a salary equal to the median salary for his specialty of $160,000 per year. Two years later he seeing about 50 patients per week and generating 3,500 wRVUs annually. Unfortunately for the physician and the employer, this wRVU level correlates with the 25th percentile level for his specialty in the survey. He will probably be generating revenue and net collections for his employer at the 25th percentile as well, which probably does not cover the costs of his salary, benefits and overhead expenses, since he is being paid at the median. He seems to be overpaid and this will need to be reconciled in some manner.

There are many other similar nuances to the use of RVUs that can render their use in employment contracts somewhat challenging.

Sometimes, wRVUs are used to define bonus thresholds. But what if the work that is being done does not generate visit codes for the physician (e.g., time spent in research, teaching, or as adviser or medical director), and therefore would not be reflected in a bonus calculation.

Consider, for example,  an internist who is to be paid a bonus for wRVUs personally generated and billed above a threshold of 4,500 per year. In addition to seeing patients in the office and the hospital, she is collaborating with an NP that sees overflow patients and she is working part-time as a medical director for a nursing home. Since these additional duties do not generate billable visits and RVUs for the physician, she will not be compensated for those duties under an RVU bonus model, even though those duties take her time and effort to accomplish.

A good working knowledge of wRVUs will be useful to the new physician executive. The link below goes into some more detail about RVUs in employment contracts.

The Basics – RVUs

What questions do you have about worked RVUs and negotiating physician employment agreements? What issues have you encountered when working with physician employment contracts?

Disclaimer: I am not an attorney and I do not provide legal advice. My role is to provide education and coaching to physicians. I strongly recommend that every physician entering into an employment agreement, or any contract, engage an experienced local attorney to assist them in their negotiations.