More on Understanding Relative Value Units (RVUs) in Employment Agreements

Some of you emerging executives may become involved in recruiting new physicians and negotiating contracts. For those, I am providing the following discussion about the use of worked relative value units (wRVUs) in that process. I previously posted an introduction to the topic here: Physician Employment Agreements.

Suppose that your organization is offering the following salary proposal: two years at a fixed salary, followed by a third year in which it converts to a fixed component PLUS an RVU based bonus. Let's review the rationale and then look at actual MGMA (Medical Group Management Association) numbers upon which the offer might be based.

Your Perspective (as Employer)

You know that you must offer a competitive salary, along with other forms of compensation and benefits, in order to entice a new physician to sign. For most specialties, there is still moderately fierce competition for solid, well-trained physicians. The number of established physicians available is relatively small in comparison, so most recruiting is aimed at physicians coming out of residency and fellowship training programs.

In order to establish a reasonable offer, most systems or groups are going to use one or more salary surveys to inform them as to what other organizations are paying. In the past, my colleagues and I tended to consult the MGMA (Medical Group Management Association) survey, but there are surveys collected and published by the American Group Management Association (AGMA), by consulting firms like Jackson and Coker, by publications like Medscape, and by many of the larger recruiting firms.

Each one has its strengths and weakness, and the results of each are never exactly the same. But they are fairly consistent, taking into account expected differences between the expected respondents to each of the surveys.

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, in addition to listing means and median salary levels, generally provide salary data at the 25th, 75th, 90th and 95th percentiles.

Example 1

Let's walk through a simple example in which a salary survey might be used to determine an offer.

Below is a table with hypothetical data about internal medicine physicians. Note that the actual survey has much more information, including collections, total RVUs, worked RVUs, encounters and ratios of the various components. There is additional data about salary variation by years in practice and other factors. But, we need to start somewhere.

If you look at this small part of the survey report, you will notice several things. There is a pretty big difference between the highest and lowest paid physicians in every geographic area. And the median salaries for hospitalists are higher than those of traditional internists which are higher than those of outpatient internists.

Further Analysis of RVUs

If I were recruiting a hospitalist, and my facility was located in the Midwest, I would consider offering a salary close to the 25th percentile for a new graduate. I choose this salary because I know that the new physician will not be able to actively manage as many patients as a more experienced physician, and will generate less billable services and collection.

I would consider other survey data if they are available. And I would review the compensation for my existing hospitalists.

Here is another set of data to review as we consider how a salary might be considered.

Here I am trying to provide some insight into the reasons for the varying salaries noted above. The median salaries differ significantly between the three types of internists. Since the hospitalists take care of  a more complex and ill patient population, the average wRVU per visit (1.93) is higher than that of the other two subcategories of internal medicine practices (1.5 and 1.43 wRVU per encounter). That accounts for part of the difference in compensation. But it is also true that the hospitalists are paid more per wRVU. 

The variations in compensation per wRVU among various specialties and locations is a bit more difficult to explain, without looking at specific examples. But I can offer some possible reasons. If there are billable activities occurring that are not captured in the individual physician's work, some of the revenues and collections may be attributable to the physician and subsequently justify paying a higher payment per RVU.

Example 2

The hospitalist might supervise an advanced practice nurse (APN). The APN would assist in patient care, allowing the physician to see more patients. But the RVUs might be attributed to the APN rather than the physician. Additional collections will be generated for the employer, making it appear that there are more funds generated per physician RVU, even after covering the costs of the APN. If so, then it is reasonable to assign a higher payment per RVU to the physician.

Similarly, in a primary care practice, if the physician is able to see more patients and generate more volume and income by using his staff more efficiently, he/she may be able to generate more billings and collections, which can then be reflected in a higher compensation per wRVU.

Other Considerations

I would be very reluctant to agree to a higher salary for a new physician than my current staff, unless the new recruit brings special new skills that the other physicians don't have. If possible, I will try to construct an offer that pays the same amount per wRVU as other physicians, with differences in base salary related to expected productivity.

I might agree to pay a fixed salary of about $235,000 per year for the first two years, and an amount during the third year of $60.00 to $70.00 per wRVU above a threshold of 3,000 wRVUs (which correlates with the 25th percentile level of wRVUs for hospitalists in the Midwest). This productivity bonus will generally be paid at the end of the third year, although we might consider paying some of it on a quarterly basis if it looks like the wRVUs are going to exceed the threshold.

As a good employer, I will help the new physician establish herself and build volume over the first two years of employment. I will also be sharing reports that show visit volume, visit distribution by CPT codes, and worked RVUs. And I will be teaching the physician to understand how documentation affects coding, which in turn determines the billable amount and the RVU value attached to each patient encounter.

In this way, I hope to offer a fair salary that encourages us to  work together, while providing some income security during the first two years.

What questions or comments do you have about designing employment agreements?

Disclaimer: I am not an attorney and I do not provide legal advice. My role is to provide education and coaching to physicians to help them find a great job and avoid costly mistakes as employed 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.