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Summer 2018

What is the Right Compensation for Your Providers?

Jody Locke, MA
Vice President of Anesthesia and Pain Practice Management Services
Anesthesia Business Consultants, LLC, Jackson, MI

Many anesthesia practices complain that their biggest challenge is to generate enough funds to cover the cost of a sufficient number of providers to meet the expectations and service requirements of the facilities they serve. There are many variables to the equation. What is the staffing model? How many physicians and CRNAs are employed? What are the collections for the practice and are they growing or eroding? And, ultimately, how much is each provider paid?

Knowing what is reasonable and appropriate to pay a physician or CRNA in the current environment has become one of the most difficult management issues. Often, little of the national benchmark data is relevant for individual situations. The data that we most need to make informed management decisions is the most difficult to come by.

So you are preparing for a presentation to the hospital administration. You know the current subsidy is not enough to meet your providers’ expectations. You also know that any numbers in your calculation of a new subsidy request will be subjected to a fair market value (FMV) test—a process that your hospital will most likely have to use in order to satisfy their fiduciary obligations to avoid violations of the Stark Law and the Anti-Kickback Statute. You want to obtain enough to make the potential agreement fair in the short and long term. This is the greatest challenge in hospital contracting. Almost anyone can get a subsidy number right today, but chances are it will be wrong tomorrow. What are reasonable benchmarks? How do you justify your request?

Of course, the members of your practice all think they are being underpaid. Everyone has anecdotal evidence of other practices with similar workloads and a comparable payer mix that are making more. Unfortunately, these perceptions are of little value unless you can justify them empirically. And so you or your consultant look for benchmark data to bolster your case.

Benchmarking Challenges

Taking a page out of a real estate appraiser’s guide, you would like to know how your compensation compares to other practices in the local area.

First, most practices are not willing to share the details of their compensation with potential competitors and even if they were, it would probably not be all that useful.

Second, even if they were willing to do so, it is not clear they would provide sufficient detail for a reliable comparison for purposes of evaluating compensation; what might be deemed fair and reasonable to one provider might not be acceptable to another. A serious comparison of practices would involve multiple variables including the staffing mix, types of cases performed and operating room efficiency.

Third, any sharing of compensation data could have significant anti-trust implications in a competitive market. All of which explains why most consultants turn to thirdparty data where the data is blinded. The problem, of course, is that blinding the data reduces its potential relevance to your particular practice.

National compensation surveys are designed to provide reasonable benchmark data but they have many limitations, including sample size, timeliness and relevance to a specific geography. There are four main sources of such survey data:

Most independent anesthesia consultants have come to accept MGMA’s compensation data in its annual Physician Compensation and Production Survey as the gold standard. As the nation’s largest independent practice management organization, MGMA represents a significant crosssection of the American medical community and takes its mission of providing useful and relevant management metrics very seriously. While MGMA data is monitored closely for national and regional compensation trends, its breakdown is fairly general: Northeast, Southeast, Midwest and West. A typical survey may only represent a few hundred practices employing a few thousand providers. By our estimate, there are currently more than 55,000 anesthesia providers working in the U.S. If you are trying to evaluate compensation for a specific location, the data may not justify your request.

An Interplay of Factors

Geographic factors can be significant in determining a competitive level of compensation. Consider, for example, New York state. You might think the highest paid anesthesiologists work in New York City, but this is not necessarily the case. It takes more to recruit a physician to Glens Falls or the Finger Lakes than it does to Queens or Long Island. A large organization, such as North American Partners in Anesthesia (NAPA), one of the nation’s largest anesthesia entities, located in Roslyn, New York, may have better contracts and can, thus, pay more than those who are not with NAPA and who cannot get the same contract rates.

National survey data only looks at who is paid what, but not why. Specifically, they do not look at issues like payer mix and practice revenue potential or the challenge of recruiting a provider to a particular location. Even with these limitations, the FMV process relies of these national benchmarks to provide a final report to the hospital. To understand the first criterion, it is useful to keep in mind that there are two types of anesthesia practices: those that require a subsidy and those that do not.

Consider the following. Every practice has a cost of providing services. Suppose the practice consists only of physician anesthesiologists. If they earn the MGMA median and receive eight weeks of vacation, then the cost per anesthetizing location day is approximately $2,100. If the practice consists of a care team with physicians and CRNAs, the cost per anesthetizing location will be less, and might be as low as $1,700 or $1,800. Subsidy payments should reflect the gap between the revenue potential of the practice and the cost of providing the service. If the practice has a favorable payer mix and is busy, then the providers do well because there is plenty of money in the equation to pay them without any support from the facility. While 75 percent of all anesthesia practices require some form of financial support from the facilities they serve, according to MGMA data, 25 percent do not and the variances can be significant. For all other practices, where the cost of providing the service exceeds what is collected in fee-for-service income, the gap must be covered by the facility hospital.

Conventional wisdom holds that hospitals will contribute an amount necessary to put the anesthesia practice on par with other practices in the area, but this is not always the case. There is a lot of pressure on hospital administrators to minimize the amount of money they pay for anesthesia and other subsidies and they will always look for alternatives to increasing an existing subsidy.

Hospital Negotiations

It is easier to get money from insurance plans than hospital administrations. A poor payer mix impacts both the anesthesia practice and the hospital. This explains why hospital contract negotiations have become such a challenging exercise. There also tends to be a certain prejudice on the part of hospital administrators who are always suspicious of requests for more money from their anesthesia practices. It is interesting how many administrations have run out of patience with their anesthesia providers. This may explain why so many groups with longstanding contracts at facilities with high Medicare and Medicaid patient populations are being taken over by national staffing companies. The perception is that these national staffing companies speak the same language as the administrators, which may or may not be true.

Hospitals do not have unlimited resources, and in recent years have begun to request from groups alternative coverage models stating that there is only so much money to pay for anesthesia. This also often results in changes in the staffing model. Physician-only practices become care team practices and slightly leveraged care team practices become heavily leveraged care team practices. Practices that need more than 30 percent of their gross from the facility should accept that they are at risk for losing their contract.

Collections less the expenses for a practice determine how much money can be paid out to the providers, but the compensation model can have a significant impact on a physician’s or CRNA’s income. How your practice distributes its net income makes all the difference. Is it a “lump and divide” practice, as is more common in the East, or a productivity-based practice, as is more common in the West? If the revenue pie is divided equally, then all the physicians should essentially get the same pay. In a productivity model, however, there can be huge variability in actual physician compensation, depending upon how each member works. This is important because often the potential to earn an above average income will entice young physicians to join a practice.

Compensation Structure

Some practices are structured such that compensation is based on one’s position or tier in the practice. A buy-in for new physicians is not uncommon, resulting in limited or capped compensation for a period of years. By making partner or becoming a shareholder, they are entitled to a larger piece of the pie. Obviously, such structures are intended to enhance the compensation of the senior members at the expense of the junior members. What new members hope is that by the time they reach senior status that their compensation will increase commensurately. In such models, the physicians are buying futures in the practice.

The impact of the numerous large national staffing companies cannot be underestimated. They have redefined provider expectations. There was a time when a resident program graduate looked for a practice that would allow them to settle down and raise a family. It was a long-term commitment. New graduates now have many options. They now have the option to “shop” practices. The large staffing companies give them the option to move from one practice to another, which can be perceived as a nice benefit. Compensation levels may be somewhat lower than those offered by major established practices, but what the national firms offer is predictability of earnings and security. Lifestyle-oriented millennials like this feature.

Michael Hicks, MD, former president of EmCare, was asked if the ultimate objective of organizations such as his was to drive down the cost of anesthesia. His answer was “most certainly, yes.” By controlling an ever-larger percentage of the entire anesthesia community, such entities have enormous potential to manage/control anesthesia compensation.

Ultimately, practice culture is a significant recruitment factor. Practices in the northwest may not pay as well as others in other parts of the country, but providers are drawn to the potential for a nice lifestyle with many recreational opportunities.

There is no better example than the San Diego market. Graduating residents love the idea of being able to work near the beach even if it means a lower compensation package. It is also interesting how many graduating residents prefer to stay and work where they trained. Family or religious ties may also factor into recruitment efforts. Most graduating residents are still looking for practices in locations where they can settle and raise a family.

The practice’s work/lifestyle balance may be a positive, but it can also be a huge challenge. Many practices are in places where providers are not interested in living. This means that every practice must clearly and cleverly define and promote its culture and lifestyle opportunities.

Making Your Case

Provider compensation is at the core of any hospital subsidy request, but how do you make the case that the current income potential is not enough given the current requirement that hospitals have an external FMV? It is probably less about the benchmarks than about market dynamics.

Three factors determine the need for a subsidy: the practice’s revenue potential, the administration’s coverage and call requirements and the providers’ income and lifestyle expectations. It is a dynamic equation. The best arguments are those that look at each component separately and assess their impact on the whole. Monitor the payer mix and its impact of the average net yield per unit. Plot the slope of the line. If it is declining, then this is an important predictor of future deficits and must be addressed. It is not unusual to have a subsidy request based entirely on the change in Medicaid volume, especially for Obstetrics, where Medicaid is prevalent.

Look carefully at case volumes, operating room utilization and the expansion of non-OR anesthesia coverage requirements (NORA). As utilization declines, so does revenue potential. More 7:30 starts means more providers and a higher cost for the service. Calculate and plot the average net collections per anesthetizing location over time. If it is declining, a subsidy increase is inevitable and can be empirically demonstrated. Alternatively, a group may be able to convince the hospital to reduce its coverage requirements based on productivity. It is only after these baseline issues have been addressed that you look closely at provider compensation, but national benchmarks may not be the most useful indicator.

Typically, anesthesia providers have a certain degree of loyalty to their practice. They can tolerate minor fluctuations or drops from year to year, but only to a point. That is when they start to look at alternatives. No metric is more powerful in discussions with administration than the number of providers who have left a practice. This is your real leverage because it is generally recognized that the best providers with the best options leave first.

Collaboration is Key

Recent experience with hospital contract renegotiations has highlighted two important themes. If you are concerned about the future of your practice, do not be afraid to share all the details of your concerns with administration. Revising the terms of a contract should be part of an ongoing dialogue and not a face-off every time it comes up for renewal. A collaborative approach is always better than a confrontational approach.

Second, anesthesia providers and hospital administrators speak a different language and work through problems in different ways. Anesthesia providers pride themselves on being able to make critical clinical decisions in a matter of seconds but quick decision-making is not the objective of hospital administrations whose objective is maintaining the status quo. This is why physicians are having to learn how to think like business people. It is fundamentally about mastering the art of negotiation. Make your case, argue its merits, but be willing to accept and appreciate administration’s goals and objectives. It can be tedious and frustrating. Unfortunately, there is no alternative.

Jody Locke, MA, serves as Vice President of Anesthesia and Pain Practice Management Services for Anesthesia Business Consultants. Mr. Locke is responsible for the scope and focus of services provided to ABC’s largest clients. He is also responsible for oversight and management of the company’s pain management billing team. He is a key executive contact for groups that enter into contracts with ABC. Mr. Locke can be reached at