Hospital group revises plan to better match pay with revenue

Hospital group revises plan to better match pay with revenue

Covenant Medical Group (CMG), a health system-owned, 70-physician practice, already had a pay plan based on production down to the first dollar. But the group revised its production formula so that revenue from low-producing physicians would cover more of the overhead they generate.

While one motivation for the plan was to spur higher production, the main problem leading to the revision was that the group was paying too much of the overhead assigned to physicians producing below benchmark medians for their specialties, says President Patrick Board. The second key problem was that “some hard workers were getting paid near the medians” for their specialties and desired to earn more, Board explains. The nine-year-old multispecialty group, which provides primary care and ob/gyn services in 14 clinics around the Milwaukee area, is owned by four-hospital Covenant Healthcare System. The system in turn is part of Wheaton (Ill.) Franciscan Services.

On Nov. 30, 2002, the group completed its first year under the new system. While Board declines to indicate whether CMG’s revenues rose or fell from 2001 to 2002, he says the new system succeeded in better covering the group’s costs with revenues. In a difficult year for revenues, he adds, the new pay plan “absolutely helped protect the medical group” from financial harm. Moreover, the new plan funneled higher income to Covenant physicians who did increase their production in 2002, he notes.

Board says that based on discussions with his practice manager colleagues at other groups in the Milwaukee area, medical office revenues, particularly for primary care, fell perhaps 5% in 2002. One key reason, he explains, is that fewer people seemed to be going to see physicians, which may be attributable to sharply higher copays as employers struggled to hold down double-digit health insurance premium hikes. The second key reason was the 5.4% cut in 2002 Medicare reimbursements. A further 4.4% Medicare cut, now scheduled for March 1, would be “very significant” for CMG, he says, but given the nonprofit mission of the health system, stemming intake of Medicare patients is unlikely.

50% Hike for 2001st RVU

Under both the old and new plans, Board explains, physician production is measured by work RVUs, with some internal modifications of Medicare’s RVU procedure values. And both plans involve figuring out benchmark median RVU production and median pay per RVU for each specialty. CMG uses data from MGMA, AMGA, and Sullivan, Cotter & Associates for this purpose, he says. The results of this calculation are not modified for affordability, he notes. Like many hospital-owned groups, CMG runs an annual loss.

Under the old system, CMG simply paid physicians the benchmark rate for all of their RVUs. There also were a few physicians (in addition to newly recruited ones) on guaranteed salary contracts.

The revision is quite simple. Up to half the median production level, says Board, CMG pays 80% of the median pay rate. Over that level, it pays 120% of the median pay rate. That 120% rate continues over the median production level.

For someone producing at the median level, he notes, the pay revision makes no difference. Under median production, there’s a pay cut; over median production, there’s an increase.

Board gives a hypothetical example with median production at 4,000 RVUs and the median pay rate at $40 per RVU. Up to 2,000 RVUs, CMG would pay $32 each (80% of $40). Over 2,000 RVUs, CMG would pay $48 (120% of $40). Thus, there’s a 50% pay hike from the 2,000th to the 2,001st RVU.

Only three of CMG’s physicians are part-time. If a physician works anywhere from .8 to 1.0 full-time-equivalent, says Board, the threshold under the new pay system to earn the 120%-of-median rate for each new RVU is half the benchmark production level (2,000 RVUs in the example). For physicians working from .5 to .79 FTE, the threshold is 70% of the regular threshold (1,400 RVUs in the example).

CMG physicians were active in developing the revision, Board recalls. There was an advisory physician committee on compensation, and CMG’s board, which includes physicians, approved the revision unanimously. “Some physicians were for it, and some against,” he says. “There have not been a lot of complaints.”

Pay for Residency Grads Stuck at $120,000

Board says pay levels in Wisconsin for PCPs coming out of residency have not risen or fallen in five years. The going rate for internists and family practitioners (FPs) is $120,000, and for pediatricians it is $100,000, he says. At CMG, physicians in the first two years out of residency are on salary.

The PCP recruiting market is becoming “tighter,” Board says, meaning it’s getting harder to find people, and there are fewer candidates for each opening. Specifically, he explains, there are fewer new internists because a much higher percentage of internist residents now is choosing to go on to a specialty such as cardiology or gastroenterology than was the case a decade ago. FP residents don’t have those options, and recruiting FPs is less difficult, he says. The tightness in the internist market has not raised pay rates for new people because of the affordability problems that many groups are facing, he adds.

Pay levels don’t pose a retention problem for CMG. The main retention problem in the last few years is from two-physician marriages in which a spouse gets a new job out of state. One CMG site lost three physicians over three years time because of such situations, Board notes.

Contact Board at (414) 456-2323 or

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