Coker Connection Newsletter
The Growing Issue of Compensation Governance
- August 8, 2019
According to a recent study by the American Medical Association (AMA), employed physicians outnumber those that are self-employed for the first time in United States history. The AMA states, “Employed physicians were 47.4% of all patient care physicians in 2018, up 6% since 2012. In contrast, self-employed physicians were 45.9% of all patient care physicians in 2018, down 7% since 2012.”1 Physician networks are growing, and with this growth comes compensation governance issues.
The size of the provider network determines the level of detail in defining governance structure and policy, and various methods exist to create a compensation governance structure and corresponding compensation plan. We find that managing compensation proactively within a well-planned compensation governance structure is the most effective way to minimize risk and maximize agreement among physicians. Following, we address the two key elements of compensation governance: compensation committee and compensation policy and plan.
As employed physician networks and medical groups have grown and the marketplace has consolidated, the question of who will govern compensation policy is a crucial one to answer. Each network situation is unique; however, the size of the network and organization generally dictates the shape and size of the compensation committee. In a small organization, the C-suite or legal counsel preside over physician compensation, along with the board. At larger organizations, generally, a select group of physicians oversees compensation. From a best practice standpoint, organizations must ensure that a robust governance structure exists and the fiduciary responsibilities surrounding physician compensation are proactively managed.
From a functionality standpoint, it does not make sense for small medical groups (10 employed physicians or fewer) to have a multilayered governance structure, including a formal compensation committee. A compensation committee is a necessity in a medical group of 50 or more employed physicians. Figure 1 illustrates a governance structure in which a health system has delegated physician compensation oversight to its affiliated medical group, while ultimate supervision is retained by the health system’s board of directors.
The compensation committee should be created based on a charter that explicitly defines the roles and responsibilities of the committee. These responsibilities include the committee’s duty to provide not only recommendations but also oversight and reporting. A physician compensation committee must oversee the development and maintenance of the compensation model as well as updates to compensation policies and procedures. It should also advocate for updates to approved compensation models and resolve any compensation-related issues.
Compensation Policy and Plan
The compensation policy helps to establish guidelines and document the organization’s overall compensation philosophy. It focuses the stakeholders’ attention on key tenets of the compensation structure and provides a lens through which to ensure compensation structures adhere to the mission, vision, and values of the organization. In the absence of well-defined compensation policies, variation in physician pay practice often result in the perception that one group of physicians is receiving better treatment than others. Policies must ensure that compensation is adaptable, equitable, compliant, reasonable, and effective.
In terms of complying with Stark and Anti-kickback regulations, compensation policies should outline the organization’s approach to fair market value (FMV) and commercial reasonableness (CR) testing. They need to address issues such as the difference between internal and external reviews, how potential FMV/CR issues should be adjudicated to the extent they exist, and how often FMV reviews should be performed for all employed physicians.
The goal of the compensation plan is to provide consistency for incentives across all physicians and specialties. Because such a plan encompasses compensation model documents, it requires a standardized model structure. Further, as compensation models become more complicated with the addition of value-based components, standardization of the compensation model becomes critical, regardless of medical group size. Achieving alignment between operations and compensation is paramount. Compensation plans can be customized to address the specific needs and practice patterns of individual specialties, primary care, medical and surgical specialties, and inpatient medicine specialties.
Physician engagement and buy-in to the compensation design and governance are essential parts of a successful compensation governance plan. Empowering physicians to help influence the outcome of their compensation generates an environment of transparency and trust within the organization. Without physician buy-in, a compensation plan can become a constant burden for administration.
A formal compensation plan allows for documentation of the key tenets of the compensation structure, outside of the employment agreement. Standardizing this plan enables efficient subsequent updates, as updating a single document requires fewer resources and less time than updating multiple physician employment agreements.
The use of contract language is vital within the compensation plan: It should accurately reflect the development of the compensation structure and must include appropriate exhibits that illustrate the critical compensation components. It is essential to acquire legal and consulting expertise to ensure a well-developed, compliant compensation plan.
Through an affiliation, Coker Group offers an automated compensation plan modeling platform, ProCare Portal. This technology helps to address the scalability dynamics of physician compensation.
Advanced Practice Provider Involvement
As the demand for physicians continues to outweigh the supply, advanced practice providers (APPs), which include physician assistants, nurse practitioners, certified nurse midwives, and certified registered nurse anesthetists, are the clinicians helping to fill the shortage. As this dynamic grows, APPs will have a more significant impact and influence on the clinical operations of an organization. Organizations should consider including APPs in both the compensation committee and the design of the compensation plan, as their impact is vital to the care continuum. Their compensation structure may not be identical to the physician compensation structure, but the same risks of not having a quality physician compensation governance plan also apply to the employed APPs.
The highly regulated nature of physician-hospital compensation arrangements and the level of consolidation within the healthcare industry require organizations of all sizes to establish a well-functioning governance structure for physician compensation. As the supply of physicians decreases, the utilization and impact of APPs will increase. The more an organization uses the services of APPs, the more consideration should be given to including APPs in the compensation governance process. An effective governance structure involves establishing distinct roles and responsibilities regarding who governs compensation, creating compensation policies, and documenting the approved compensation plan(s) through which compensation will be adjudicated.
Contact Coker Group today to see how we can assist your organization in arranging an effective governance structure. And for an additional resource on physician compensation governance that addresses the topic from a legal/counsel viewpoint, please consider an article by Rosalind Cordini and Randy Gott titled, Physician Compensation Governance, which can also be found on the Compliance Cosmos website.
- American Medical Association, 2019.