One of the most significant recent trends in the healthcare industry has been the increased migration of physicians from independent private practitioners to employees of hospitals. This trend is being driven by several factors: the decrease in reimbursement paid to physicians by Medicare and managed care organizations; increased overhead costs for physician practices; an increasingly complex regulatory environment; increasing malpractice insurance costs; and the requirement to convert to electronic medical records which requires a large upfront expenditure. According to a recent survey of more than 1,000 physicians balanced by age, gender, practice type and specialty conducted by the PWC Health Research Institute, 46% of the respondents were interested in pursuing hospital employment over the next two years. According to this survey, the top reason why the responding physicians said they want to become hospital employees is increased and consistent compensation. Thus, the compensation package that is part of a physician-hospital employment agreement is key to a successful alignment of the physician with the hospital.

Lurking in the background of any discussion of physician compensation in hospital employment arrangements is the federal Stark Law which prohibits a physician from referring a Medicare patient to a hospital for inpatient, outpatient, or ancillary services such as clinical laboratory or imaging, if he or she has a compensation arrangement with the hospital unless a Stark Law exception applies. One of those exceptions is for an employee if certain requirements are met including a written employment agreement and total compensation that is “fair market value” (as defined in the Stark Law). To protect themselves from a possible Stark Law violation, many hospitals benchmark their employed physicians’ compensation by using one of the nationally recognized annual physician compensation surveys, and the physician’s employment agreement will often cap the annual compensation by a reference to one of these surveys. However, caution must be used when allowing one of these surveys to determine a physician’s maximum compensation. For example, the most recent Medical Group Management Association’s annual physician compensation survey, the most frequently used survey, shows that the median compensation for all urologists is $372,455; the 75th percentile is $492,555; and the 90th percentile is $640,977. Further, this same survey shows that the median compensation for urologists employed by a hospital is $423,020, and the median compensation for all urologists in the southern region (which includes Florida) is $349,184. This wide range of compensation shows that the particular benchmark within a survey used to determine “fair market value” compensation can have a significant impact on the physician’s total compensation.

There are four key components to the compensation package in a physician-hospital employment agreement:

1. Signing Bonus.

Usually the hospital will include a signing bonus in the employment agreement in the range of $20,000 – $40,000, and if it is not included, the physician should ask for one. From the physician’s perspective, it is better if this bonus is paid to him or her in one lump sum upon signing the employment agreement or beginning employment with the hospital. However, the hospital will prefer to treat the signing bonus as a loan to the physician to be forgiven periodically, for example annually, if the physician continues to be employed by the hospital or, if the employment agreement is terminated before the end of its term, to be repaid by the physician to the hospital. If the signing bonus is structured as a loan, then there are significant federal income tax consequences to the physician, but not to the hospital, if the loan is forgiven.

2. Base Salary.

The base salary is a fixed amount that will not vary with the physician’s productivity. The physician should insist that the amount of the base salary be guaranteed for a minimum of three to five years, or at least that the base salary will not decrease below an agreed upon amount.

3. Productivity Bonus.

In addition to the base salary, the employment agreement will include a productivity bonus to encourage the physician to increase his or her productivity above a pre-determined threshold. The productivity bonus can be based upon a percentage of the physician’s collections or on his or her work relative value units (WRVUs) multiplied by an agreed upon conversion factor. A productivity bonus based upon WRVUs shields the physician-employee from the collection risks and the hospital’s payor mix. An issue to be considered is whether clinical services billed “incident to” the physician will count toward his or her productivity bonus. The productivity bonus that should be avoided by the physician is one based upon his or her net revenue, since as an employee the physician will have little control over the expenses allocated to his or her practice by the hospital.

4. Incentive Bonus.

Recently, many hospitals have been including an incentive bonus as part of the physician’s compensation package. The incentive bonus can be based on such factors as patient satisfaction or quality survey results; on-call coverage beyond that required by the medical staff bylaws; and participation in medical staff committees.

A thorough understanding of the factors involved in determining physician compensation in any physician-hospital employment agreement is critical to assuring the physician that the expected compensation goal is obtained.

For more information on the firm’s Healthcare Practice Group, please visit: http://lowndes-law.com/industries/healthcare