When I was in private practice as an anesthesiologist, I had the chance to work at two different groups with different compensation structures. I want to talk about my experience with them and give you a better understanding of how a private practice group compensates its shareholders.

My first job was at a large private practice group (let’s call it Group A) that had a contract with a busy metropolitan private hospital with a good payer mix. When I was a part of that group, they used an “equal-sharing” compensation plan. Everyone made the same amount of money and members shared daily cases and call duty as equitably as possible. In essence, they pooled all the money that was collected by billing patients and their insurance companies and divided the money equally among shareholders after overheads and other expenses (including employee salaries) were paid. Although the incentive to work was weak, the physicians were able to provide the necessary care that the hospital needed. You might call this the group-oriented approach.

My second job was also at a large private practice group (call it Group B) that had contracts with a few large private hospitals. That practice used a more “productivity-based” compensation plan in which everyone’s earnings were “pooled” together, and you made a percentage of the pooled money based on how much you worked. Every month, there was a pooled or blended unit value which was basically the group’s total monthly revenue divided by total work units for all physicians (anywhere between $45-50 per unit value for Group B, but can vary quite a bit depending on geography and payer mix), and you just multiplied the pooled unit value by the Relative Value Unit (RVU) you accumulated that month in order to figure out how much money you made that month (For more discussion about what an RVU is, see * below).  This was a version of the “eat-what-you-kill” type of compensation, but because everyone pooled together their earnings before dividing it up based on the amount worked, the system reduced payer mix distortions.  The group was also quite collegial because there was hardly any friction over room assignments.

The above examples are not the only compensation models out there, but they fall on a spectrum that goes from individualistic to group-oriented (or Ayn Rand to Karl Marx, if you will).  What does that mean?  In the table below, I’ve listed some attributes of compensation models that range from individualistic to group-oriented.  So from my examples above, Group A falls on the right end of the spectrum and Group B falls somewhere in the middle.

As you go from left to right in the spectrum, you will see something called partial revenue sharing.  Some private practice groups pool percentage of all individual units and redistribute them to all physicians (usually to shareholders) on a regular basis.  By partial revenue sharing, an individual’s income is less vulnerable to the vagaries of the O.R. – cancelled cases or light rooms.  In addition, because revenue sharing reduces the coupling between room assignment and compensation, it enables case assignments on the basis of physician skill sets – e.g., a pediatric anesthesiologist is more likely to work in a pediatric room.  Partial revenue sharing also might encourage members to participate in administrative endeavors such as Medical Staff and hospital committees.

I personally think that somewhere in the middle of the spectrum, with a blended payer mix and partial revenue sharing, is a good compensation structure.  Basically, a group divides the total group revenue by total work units for all physicians.  The result is the practice’s average reimbursement per unit, aka pooled (or blended) unit value.  Physician compensation then equals individual’s accumulated RVU times the pooled unit value.  This system gives incentive to work (in that the more you work, the more you make), while shifting payer risk from the individual to the group. This system also encourages group-oriented behavior and collegiality among colleagues while meeting individual needs.  There is no incentive to vie for an O.R. with a better payer mix.  In comparison, a more individualistic compensation scheme, i.e. a strict productivity compensation plan, can lead to unfair pay inequalities and conflict over room assignments.  Why?  In such a structure, you basically receive payment from the patients whom you anesthetize without any pooling. So if you take care of a group of patients with no insurance, you make very little. Vice versa, if you have a group of patients with good insurance, you stand to make a lot.  Therefore, everyone competes for the O.R. with a better payer mix under such a scheme.  To me, that’s not a fun way to spend a work day.

I know that this topic is bone dry, but if you’re thinking about private practice anesthesia, you should understand the different compensation structures and their ramifications.  It can range from individualistic to group-oriented.  Choosing the right group with the right compensation structure is important not only for your income, but also for your work environment.

*What the heck is an RVU, you’re asking. Ok.

In 1992, the Center for Medicare and Medicaid Services (CMS) implemented the use of the resource-based relative value scale (RBRVS) and the relative value unit (RVU) and since then, most government programs (like Medicare) and many insurance companies use this system as the basis for physician payment.  Before this, CMS and insurance companies based their reimbursement based on the historical charges physicians billed for their services, also referred to as usual, customary, and reasonable (UCR).  The problem was that each payer interpreted UCR differently.

Why did CMS do this?  Before RVUs, there was no quantitative way of measuring the relative amount of physician’s work, resources, and expertise needed to take care of patients.  They felt that they needed something more objective.  So in all fields except for anesthesia, CMS created an RVU value for each procedure with a CPT code.  And every year, CMS updates it by adjusting units for existing CPT codes.

A bit of a kicker for anesthesia: in anesthesia, unlike other specialties like surgery, your RVU is based on base units and time units.  In other words, your RVU for a lap whole can be very high if the case takes a long time whereas the surgeon makes the same RVU regardless of the time it takes to take the gallbladder out.  Each procedure has a base unit (e.g. hand surgery is 3 units and a spine case with instrumentation is 13 units with the assumption that the latter is more difficult than the former) and each 15 minutes in the OR is an additional unit. So if you do a hand case that lasts an hour, RVU you generate for that case is 7 (3 base units +4 time units).

So how does this translate to reimbursement?

Your private practice group has contracts with different insurance companies as to what the dollar value per anesthesia unit is.  For example, Blue Cross/Blue Shield might have a contract with a group that says an anesthesia RVU is worth $50 of reimbursement.  This kind of a contract differs based on location and the leverage that a private practice group has with the insurance companies.  So a larger, national anesthesia group might have better contracts with insurance companies and have better reimbursement rates.  This is one of the reasons why there are a lot of mergers of private practice groups – to gain negotiation leverage.  But this is a topic for another article.

So getting back to the hand case with an RVU of 7 – your reimbursement will be 7 times whatever the dollar value per anesthesia unit is from the insurance company of the patient who has the surgery.  Of note, if that patient has Medicare or Medicaid, the dollar value per anesthesia unit is very low because the U.S. government puts a cap on how much you can bill the system.  So you can see how the reimbursements will be different for the same procedure that took the same amount of time if the patients have different insurance companies.  Are you asleep yet?

Now, in a pooled unit system, all such payments – with different dollar value per anesthesia unit – are pooled together before being distributed to the shareholders based on amount worked.  Again, not to beat a dead horse, this system takes away the payer risk from the individual to the group.  This, I believe, is one of the big advantages of being in a group.

I know this topic is boring, but it’s important.  It’s a way for me to show you the money.

Please post a comment here or on Twitter and let us know what you think.