Normalizing Physician Collections with the Earnings-Based Compensation Method

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The ratio of Work-to-Total RVUs is an excellent proxy for normalized compensation-to-collections ratios. But what do you do when physician collections are not normal?

The BVR/AHLA Guide to Valuing Physician Compensation and Healthcare Service Arrangements introduced the Earnings-Based Compensation method for calculating the physician compensation component of physician reimbursement.  The authors’ premise is that market pricing for physician services is already built into physician reimbursement paid by commercial and government payors in every market.  It is merely an arithmetic calculation to adjudicate the physician compensation component (“Work”) of total physician reimbursement (“Total”) based on the actual ratio of Work-to-Total RVUs for the actual services performed.

The Problem

The problem is that compensation for a large proportion of hospital-based physician specialists is subsidized, because the professional collections collected by the physicians are inadequate. These subsidies can occur for two major reasons. The normalization adjustments vary depending on which or both of these factors are in play:

  1. Poor Payor ReimbursementMedicaid, uninsured patients, and bad debt write-offs for out-of-pocket payments all negatively affect physician reimbursement. Two hospitalists with the exact same level of productivity may have vastly different professional collections as the result of payor mix alone.
  2. Hospital Coverage Requirements: Hospitalists, neonatologists, emergency medicine physicians, and other specialists are often required to be onsite or available, regardless of the patient census. For example, California Children’s Services (CCS) requires board-certified pediatric intensivists to be physically present at the pediatric intensive care unit at all times (CCS, “Chapter 3 – Provider Standards,” Manual of Procedures, Standards for Pediatric Intensive Care Units).

Poor Payor Reimbursement Adjustment

The Medicare reimbursement conversion factor is about $36 per Total RVU. If a physician’s collections-per-Total-RVUs fall below this level, it would be difficult for anyone to argue that a collections adjustment to Medicare reimbursement levels is excessive.

Commercial payors like UnitedHealthcare, Cigna, and Aetna typically pay between 100% and 160% of Medicare rates, depending on the physician specialty and market factors.

A good source for identifying overall blended Total Collections-per-Total-RVUs for specific physician specialties is the MGMA Provider Compensation Data. Just divide the Total Collections-per-Total-RVUs reported by MGMA by the then current Medicare rate (usually about $36). This will give you a sense of the typical blended conversion rate for specific specialties.

Hospital Coverage Requirements

When hospital coverage requirements make physician coverage uneconomical, a hospital subsidy or collection guarantee may be necessary to procure access medically necessary physician services. This may occur as the result of low patient census.

It would be logical to perform the poor payor collections normalization first, and then determine whether a true subsidy is necessary to procure medical and surgical coverage. This typically involves some negotiation, but generally when physicians are routinely rounding on low patient censuses, it is customary to limit total-compensation-per-physician to a level reasonably supported by market comparables (surveys, data). Depending on the facts and circumstances of the subject arrangement, this may represent the 25th or 50th percentile in terms of total compensation-per-physician. Under these circumstances, hospital-based physicians would be wise to negotiate supplemental administrative duties and administrative compensation for periods of low census.