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AHLA's Speaking of Health Law
Best Practices for Implementing Physician Compensation Redesign
Shad Ritchie, Senior Consultant, Stroudwater Associates, and Stacy Gerber Ward, Shareholder, von Briesen & Roper, discuss the various aspects of a successful physician compensation redesign. They cover anchoring the compensation redesign in compliance, working with legal counsel, starting the compensation redesign process, determining fair market value, structuring and implementing an effective compensation plan, and longer-term governance issues. Sponsored by Stroudwater.
Watch this episode: https://www.youtube.com/watch?v=Ed4QfVsSApI
Learn more about Stroudwater: https://www.stroudwater.com/
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SPEAKER_02:All right. Well, I am excited to be here. My name is Shad Ritchie. I am with Stroudwater Associates. I'm a senior consultant with that organization. And we are really excited to be here today, and we're going to be talking about best practices when implementing physician compensation redesign. So with that, just a little brief introduction about myself. I've been with Stroudwater for almost two years now. But with that said, 28 years in practical healthcare administration, I was led multiple physician networks. And then I also have been working with physician compensation since the mid-1990s. So with that said, there's a lot of history that I can bring to the table. And I'm excited to talk about that today with Stacy. With that said, I'll let Stacy introduce herself.
SPEAKER_01:Hi, Shed. Thanks so much for inviting me to be with you today. I think we'll have lots of great information to share. As you mentioned, my name is Stacy Gerber Ward. I'm a shareholder with the law firm of Umbrezen and Roper. I co-chair our firm's health section. My practice involves representing hospitals and health systems and other types of providers. I've worked with Stroudwater on several occasions regarding physician compensation redesigns. So really excited to be here today and have this conversation with Chad. So Shad, I'll get things started. Maybe you can kick us off by just talking a little bit about how Stroudwater typically gets involved in a provider compensation redesign for a hospital. And kind of what are the hospitals looking for when they come to you?
SPEAKER_02:You know, Stacey, that's a great question. A lot of times, hospitals or organizations sometimes they don't even know that they need a compensation redesign. Sometimes they hear Stroudwater or other consultants or uh legal folks talking at conferences. And it gets them thinking about, okay, well, what is, you know, should we be looking at our compensation redesign plan or do we have a plan? And so a lot of times what we find is that the um these individual organizations will call us as a consultant and they'll say, okay, let's let's have a quick um call to talk about where we are with our compensation plan. And a lot of times what we find is that they have some hesitation or concern around regulatory risks based on maybe some outdated models that they're particularly using. Um sometimes the organizations also will say, you know, we have we've developed a compensation plan, but we've had multiple CEOs over the last five years, and those plans changed with every CEO. So there's no consistency. And then one of the other things that I think um we get asked quite a bit is you know, how do we align ourselves with the organization goals? And um, you know, from a compensation standpoint, because sometimes organizations will pay providers a certain way, but it doesn't align with the goals of the organization. So I say all that because um we get asked um numerous questions when we're talking about compensation, as you can probably imagine.
SPEAKER_01:I love that. Um so you so there's not just one um, there's not just one factor that that drives these discussions, but I take it often these conversations uh lead into regulatory compliance. Is that right?
SPEAKER_02:All the time, yes. And so, and I think we we may talk about this um in a bit, but you know, obviously when we start an analysis, you know, we look at numbers and that um gives people pause on, you know, where are we from a compliance standpoint and regulatory compliance.
SPEAKER_01:Right. And and so maybe I'll just jump in and just set the foundation here, right? I think we're talking about two different sort of regulatory structures that that at the very baseline you're trying to ensure that the hospital has compliance with. One is the exception for the stark exception uh for employment, or the stark, the second one is the stark exception for personal services, right? And just making sure that those sort of very fundamentally, the the key elements of those two different stark exceptions are being met. That is primarily you're looking at fair market value and making sure that the compensation is not determined in any manner that takes into account the volume or value of the referrals, right? So is again as a sort of very foundational element. Those are the key things you have to keep in mind. But then on top of it, you have all these other goals that need to be met.
SPEAKER_02:Oh, exactly. You're spot on with all everything you just said.
SPEAKER_01:So, Shad, do you um uh do you ever work with attorneys when you're uh work starting off these compensation reviews?
SPEAKER_02:That is a great question because we have multiple clients. So Stroudwater historically is um focused on rural hospitals, um, rural health clinics, um, those types. Um obviously, we also work with urban organizations as well. But um in a lot of some organizations, they have internal counsel and then they have external counsel. So normally, if they have internal counsel, they are usually part of the conversation, but um a lot of times external counsel is not at the table. So I don't know how you feel about if that is is a pro or a con. I don't know. I'd be interested to hear.
SPEAKER_01:Well, I I um, you know, usually I'm getting a call from a client about the same time you're getting a call from the client. And I and I do think there's some benefit to starting these engagements at the very least under an attorney client privilege. Um, so that would be having uh either internal counsel or external counsel involved in the engagement of Stroudwater. And I think the the benefit that a lawyer can provide, especially at the early stages of these reviews, is to prevent sort of some unhappy surprises from being um unprotected. Um and we'll probably talk about this a little bit more in a minute, right? But sometimes these the initial data gathering and compensation review can reveal some uncomfortable realities about a compensation structure. And it's certainly to the client's benefit if that initial review at the very least is done under the attorney client privilege to give some protection if there are some concerning results of that initial review. So I like to encourage clients to do it. You might not need it all the way through the system all the way through the process, but it certainly can be helpful early on. So with that, maybe you could talk a little bit about how you start the review process and how you are, you know, as I mentioned before, fair market value is really sort of a key consideration when you're looking at compensation um redesign. So, how do you get the process started? And then how are you working on figuring out what fair market value is for the compensation system?
SPEAKER_02:Yeah, that's a good question. Um, so usually the clients are, you know, we've talked about the reasons why they're calling us. And so um they they are usually not um well versed in the process. And so what we do is we we try to have a kickoff call and we like to educate um the leaders of the organization as well as maybe board members of why are we going through this engagement? Why are we talking about compensation redesign? Um, there's reasons behind that, which we've talked a little bit about. But um usually the the first thing that we do is obviously we we educate, then we do a kickoff call, we get data specifically from the organizations, and kind of like what you talked about with um attorney client privilege, we make sure that um everything is sent to us in a secure portal because we would not want to have any PHI out there, obviously. So um we when we when we ask for data, they send everything to a secure portal and we get um usually compensation information from the provider as well as productivity. And that's what we start with. And we benchmark basically that against um uh using industry standard benchmark data. Uh we use MGMA sometimes, we use uh a blended approach, sometimes with MGMA and AMGA. So it just depends on the situation, um, what approach we use.
SPEAKER_01:So, Shad, sometimes I have encountered clients who like to do this all themselves. Um, they think, okay, well, I have the MGMA surveys and I can just benchmark all of our compensation to the median for the specialty that I'm dealing with. What do you think? Is that a good idea?
SPEAKER_02:Oh gosh, you would not believe how many organizations will call us and say, uh, we set everybody's base salary at the median of MGMA. Well, that may be a good strategy for that market, and it may not be a good strategy for that market. And most likely it's not, because it probably is not aligned with the productivity of the providers. And when we say providers, we're talking about um physicians. We, you know, we we work with physicians, we work with nurse practitioners, PAs, CRNAs, all of all of the above. But when we take into account um fair market value, and when we look at that, we have to, from a valuation approach, we have to look at three approaches. We have to look at the income approach, we have to look at the market approach, which is that use what you just referred to as like using MGMA data. And then lastly, we look at the cost approach. Um, and that's a normal, so CMS says um they don't tell you how to value, but um that is bet industry best standard is to consider all those approaches. But most often the market approach is is what comes out as the leading um indicator for fair market value.
SPEAKER_01:So and Shad, if a if a client is trying to sort of do this on their own and just look at the median according to the MGMA, you know, are there other business factors that might impact even whether the median is fair market value?
SPEAKER_02:Gosh, I would say um a lot of times, and and I'm not sure if I'm answering your question, so make sure I'm I'm answering your question correctly. But what we a lot of times find is that um, you know, they they think they have a compensation problem. And a lot of times they do. But um a lot of times it's not because the provider is unproductive. It could be that the operations of the uh practice is um inadequate, it's inefficient for that particular provider. And so what we find is that a practice assessment needs to be done in addition to the compensation redesign to see what's causing there to be a discrepancy in compensation versus productivity.
SPEAKER_01:So I think what you're saying, right, is that there you sometimes find there's a misalignment or disalignment between productivity and compensation, right? And and that might be justified based on the type of provider, based on the market, but it often requires a deeper dive because if you're at the 20th percentile uh for productivity and the 80th percentile for compensation, you need to at least be taking a look at that. Oh is that is that fair?
SPEAKER_02:Yeah, that's what we call a red flag right there for sure. Anything that's a 20-point difference between your compensation percentile and your productivity percentile, if there's a 20-point difference, then that really gives us pause to really need to research further.
SPEAKER_01:And to be fair, right, it that might be justified. Again, you do work with a lot of rural providers, right? So you might be in a hospital that needs a number of providers, uh, certain types of providers, and the volume isn't there. But but again, this is all things that really should be factored in by a consultant who can render an opinion on fair market value, right?
SPEAKER_02:Right, right.
SPEAKER_01:So so once you have all of that data gathered, um, what are the factors that are you're considering when structuring a compensation model for a hospital?
SPEAKER_02:Yeah, so I'm glad you asked that question because a lot of times um what what we really like to do in the first part of the process, and I failed to mention this earlier, is we like to do interviews specifically with uh the providers because um we sometimes we we get an answer from the leadership and then we get a whole different answer from the providers as to what drives them from a uh personal standpoint is that are they financially motivated? Are they um just they love to work in rural communities, for instance, um, because we work with rural. Um so a lot of factors will drive that, but I will say knowing and understanding the thought process of the providers really guides us into what is a good uh compensation design model for the organization. But we also need to know uh one thing we do ask organizations is what is your five-year strategic plan? We need to know that because that really will also drive should should an organization have just straight salary or should they incorporate incentives as well?
SPEAKER_01:So are you um is the outcome of of this process uh I mean, do you typically recommend that clients have and end up with provider compensation plans, um, something in writing uh to move this process forward?
SPEAKER_02:Yeah, that's our recommendation, yes. So those organizations that choose to um accept our recommendations, obviously we we propose that a document be created that basically outlines what is the compensation plan of the organization. That obviously not only documentation is key, and I I know you'll you may talk about this um as well from an attorney perspective, but just having that a document where a provider can go and say, This is how I get paid, and understanding it, because a lot you would not believe how many providers we have interviewed that have no idea how they get paid or why they get paid the way they do. And so having a document that outlines it from start to finish really is beneficial for the organization.
SPEAKER_01:So I love that, right? I mean, because I think that actually has sort of dual benefits. One, you're emphasizing, right, the importance of the provider, him or herself understanding how they're compensated. And I think that provider buy-in to that process is really important. I also think there's a really key regulatory consideration when you're trying, when you're documenting the compensation plan that, and that is if there's ever a concern that's raised, right, the the organization is able to provide the compensation plan and the data to show, you know, that that the compensation plan has been blessed by a consultant. And here, we're complying with that compensation plan. So that does, it can provide a lot of regulatory um protection for a client if it's um ever needed. Um so Shad, what are the what are some of the factors that you use that go into a compensation plan, right? I mean, everybody traditionally thinks about work RVUs, right? The the physician's productivity. Are there other and you talked a little about mission-driven. Maybe you could give some examples of those factors that you can include in a compensation plan that are mission-driven. And are there other considerations or other factors that you use in structuring a compensation plan?
SPEAKER_02:Yeah, I think um in today's market, and hopefully everybody that's on this call or listening to the podcast is going to relate to this, but we know that um providers are gonna be there's gonna be a large shortage in the future. Um, there's already shortages in a lot of um areas in the United States. So obviously, uh recruitment and retention is really key when you're building a compensation design. Um, one, you of course you want to make sure it's um fair market value, but you have to figure out what's going to incentivize somebody to come to your organization. It's not always about money, but money does help drive people to your organization. So I say all that to say that, you know, organizations will get um uh what's the word I'm looking for? They will get um innovative sometimes and they will want to incorporate not only a base salary and a productivity model, but they may also want to incorporate, you know, what are some maybe sign-on bonuses could that are within fair market value? Maybe there's um housing allowances because the cost of living is going up. Um, there are people that are adding citizenship components, um, and that's a whole nother conversation we can have. But um there's a lot of different types of compensation models. There's not there's not one that fits any type of organization. Um, I think there's um best practices, but whatever works when when I you mentioned mission, um, obviously it needs to tie to the mission of the organization and what is what is that?
SPEAKER_01:Awesome. Okay, so so now you you you take all of those factors, right? And Stroudwater comes up and says to the organization, here's the proposed compensation plan, right? And the the leadership in that organization is you know buys into that. You've got your structure. How do you actually implement this, right? This is you got a lot of people that are involved. Hospitals are complicated organizations. So how do you how can you effectively implement a change in compensation uh as we've discussed?
SPEAKER_02:Yeah. Um, I love your feedback on this this initial component. Um, whenever we engage are engaged with a redesign project, um, we really want some providers at the table because you really want to develop that trust with the organizations and maybe physician or provider leaders. Um, so what we do is we recommend a compensation committee, and it's different from the board, and you can probably explain a little bit about that, but um, we Stroudwater, we would not want to engage with any client that would not have some sort of compensation committee that we could educate and help them help us make um what what is the design going to look like.
SPEAKER_01:So, and I would say sort of the collateral benefit, right? I I didn't mention this at the beginning, but I'm a former assistant U.S. attorney and I did a lot of whistleblower litigation. You know, I think the real benefit to, well, one of the benefits to what what you're referring to, and that's getting some uh provider buy-in early on, is to sort of mitigate the risk that there's a whistleblower, right? I mean, these are these can be difficult conversations, right? The compensation plan may have compensation going down, it may have operational changes. Providers like, you know, they they like consistency and and so change can be concerning. And whenever you're in a climate or an ecosystem where there's change going on, I think you risk whistleblowers. So what you're talking about in terms of engaging providers in the process is, you know, really critical. They can also be frontline advocates if there are other providers who are unhappy about the proposed changes being made. Um, again, this isn't you can't have everybody on your compensation committee, but hopefully part of the process that you're talking about is to build some sort of internal champions for for why um why this process uh is necessary and what the practical implications are going to be uh for the organization and for the providers. So really an important step of the process. Chad, does Stroudwater ever do um sort of education for the providers in an organization as a whole? What does that look like about the compensation redesign process?
SPEAKER_02:Yeah, so um we we really like to um at the onset of the process really educate um the organization as a whole. So we we do not mind, and this would be best practice for my opinion, is that you know, the whether it's the physician leaders and the hospital or organ organization executives, they at least, and maybe some of the board members need to be educated on why is a redesign necessary. But I don't disagree that it's really beneficial if you have a physician network, let's educate everybody at one time because they're gonna be they're gonna be asking questions. And it's never a it's it's never an easy conversation when you're talking to a provider about compensation and their money. And so, yeah, so you really want to educate them, and it's easier sometimes coming from a third party versus a CEO or maybe their legal counsel and saying, well, this is why we have to do it, but sometimes it's easier for you know a third party to educate them.
SPEAKER_01:And Shev, do you ever provide board education, board of director education on the compensation redesign? And when when when might that be important?
SPEAKER_02:Yeah, we really like to do that also at the onset because a lot of board members really don't understand us. It's you would not believe the number of organizations we go in where the board members are, you know, members of the community and they don't really know what they don't know. And so the CEO drives day-to-day operations and that that may work fine. But from my understanding, a board member needs to understand and be aware of everything that's going on in their organization, especially compensation designs.
SPEAKER_01:And I would say from a practical perspective, you know, sometimes in smaller communities, especially, it's not unheard of for a provider to actually call a board member and say, hey, what are you guys doing? Right. And and much, and again, to my point earlier, trying to build organizational champions of the process. If you can educate the board on the need for the compensation redesign, uh, the and what the compensation redesign is going to look like and what the benefits of the redesign are, again, you're you're building champions that that may they'll they'll interact for sure with the community, but they also potentially could interact with providers that have questions or concerns about the compensation redesign. So I I really advocate for really strong board education in this process. Um I think it can only pay long-term dividends. Um so once you've sort of rolled out your your plan um and started the implementation process, can you talk about some of the longer-term governance issues uh that a hospital will need to consider to maintain uh the compensation redesign long-term?
SPEAKER_02:Yeah, so hopefully when when organizations are going through this redesign, they're they're really being aware of making decisions that's gonna have a long-term impact on what this design is gonna be. And what I what I mean by that is that it's not gonna change within a year. It's gonna be something that you can build on. So, this new compensation redesign that you've just built, you've spent a lot of time working on it. And redesign doesn't happen overnight. It usually takes between six months to a year to really get to a good point. Um, so with that said, you've got to um make sure that whatever you develop is gonna be sustainable and you can build off of it. So, what we recommend is that you know you you carve out whether you start with base salary production and then you can add maybe quality metrics if your um EMR is able to produce those kind of reports. And I won't go into all of those details, but obviously you wanted something that's gonna be sustainable. And when I say sustainable too, you need to make sure that that um compensation committee um also stays active because I feel like um if that after the redesign, if that compensation committee disbands, then um people are not gonna know what's going on and what the next steps could be. So that's our recommendation is that there continues to be communication. If you don't communicate with your providers and the folks in your organization, then a lot of these redesigns are not going to be successful long term.
SPEAKER_01:I guess I would add a comment, building on the discussion we had about the board's involvement, you know, one of the things for I think long-term governance that I encourage my clients to think about is, you know, how how what role does the board um what do what role, ongoing role, does the board play? Or in some cases, right, boards have compensation subcommittees that could provide some oversight. You know, I think um it's hard to in any compensation model take into account every situation that's going to happen, right? So you may have some compensation arrangements that kind of fall outside of, you know, the sort of norms, you know, it might fall significantly above the median. And so, you know, I like to build in uh to these to the written compensation plans, you know, some benchmarks to engage the board for review of compensation um arrangements that go over and above certain benchmarks. So, for example, and again, there's nothing magic about this, but if you're proposing total compensation that exceeds the 75th percentile, that might be a good time for uh the leadership to go back to the board or the board subcommittee that's dealing with compensation, right, to get the board's approval on those arrangements. I think that helps ensure you know um uh the compliance with the IRS intermediate sanctions rules and frankly it's just a good governance practice. So something Another strategy that I think can be considered for sort of long-term governance consistency for these compensation plans.
SPEAKER_02:And I'm assuming those would be documented with meeting minutes. And so obviously you would have the documentation should anything occur.
SPEAKER_01:A hundred percent, yes. The board minutes are often harder to draft than you would think. But yes, good board minutes are really critical here. So that the board, right? Because again, if you're considering a sort of above average compensation arrangement, there certainly could be business factors that support that type of compensation arrangement. And again, this gives the organization another opportunity to document what those considerations are. Again, one great example is a rural provider that has difficulty recruiting in a particular specialty, right? If you're trying to recruit in a specialist and there just aren't a lot in your in your region or in your state, um, and you may have to pay a little bit more in order to recruit somebody like that into your organization. And so those are all things that can be taken account of and documented as part of this board committee documentation. So another strategy to be considered in all this. Um well Shad, that that I think that we've covered a lot of grounds here. Are there any sort of sort of uh uh uh comments you want to make and to to wrap all this up?
SPEAKER_02:I think the one thing that I probably failed to talk about too is, you know, as you're designing these compensation plans, um, obviously you want to make sure it's fair and equitable across your providers. Um, I feel like that um sometimes, you know, like you just said, there might be a certain specialty that the CEO or a board member may think, oh my goodness, we need a urologist here, or we need an ENT specialist here. And sometimes they'll go above and beyond from a compensation perspective to get those individuals. But it really um the compensation plan design should be something that is fair and equitable, equitable across the board for all your providers. So that is something to think about too. Um obviously, sometimes you do have to pay more for a particular provider, but um you want to make sure that it's um within reason.
SPEAKER_01:Right. And that it's you can articulate those reasons to the other providers, right? So um, and again, having good documentation of those.
SPEAKER_02:Um and as we know, they always providers always talk.
SPEAKER_01:So providers always talk, yes, indeed.
SPEAKER_02:So that is that does happen, and they will find out that the orthopedic surgeon makes X amount, and um, then they'll wonder why they don't make that much.
SPEAKER_01:I I will just my my I'll say my wrap-up comment about this is that indeed that is this often the scenario that can lead to a whistleblower. In fact, we had a uh a Wisconsin um Stark case that was settled a few years back for$10 million, with with frankly just that scenario. Um, so again, I think really important are building your internal champions, transparency, consistency, and really strong documentation uh, from my perspective, are all really important factors as you're as you're going through this process.
SPEAKER_02:Yeah. So and the last thing I'll say too is that you know, I mentioned earlier that a compensation redesign does not happen overnight. It it really takes six months to 12 months. Sometimes provide organizations are going through an EMR transition as well. We definitely don't suggest ever going to do a compensation redesign during an EMR change.
SPEAKER_01:But um there's a lot of how to make providers really unhappy.
SPEAKER_02:Oh, yes, exactly. The first time you give them wrong data, they're not gonna um they're they're not gonna believe anything. So definitely make sure that you know when you start this process, make sure you know what the barriers could be. Um and just make sure that the you set a good timeline, you have consistent uh communication, and um always make sure that uh you you utilize the right um individuals to make sure you're at fair market value.
SPEAKER_01:Right. Well, that's the I think that's great advice. Um and uh Shad, thanks so much for inviting me to participate with you today. This has been a lot of fun, and um we'll we'll be talking to you.
SPEAKER_02:Exactly. Well, good luck to everybody if they're doing compensation redesigns. And thank you so much.
SPEAKER_01:All right, take care.
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