The compensation plans of many providers (physicians, PAs, NPs) are governed by labor relative value units (wRVU) in one way or another. As most healthcare professionals know/understand, provider compensation in a salaried model requires provider compensation to be at “fair market value” (FMV). Not to go into the details of FMV, but FMV essentially sets parameters around compensation to ensure that providers are not unduly incentivized to refer patients to the health systems in which they are employed. FMV was established to ensure that providers refer patients to the appropriate clinician to provide the appropriate services, whether it is an internal referral (eg, hospital employer) or not. The obvious incentive for internal orientation is the financial benefit to the health system which thus indirectly benefits the provider. Although you may be dubious, there are many well-documented cases where vendors have been compensated based on internal referrals.
Even paying providers at a GMF rate can be problematic for a health system if the revenue collected does not cover provider cost (let alone contribute to any other overhead costs).
If you’ve read my columns in the past, I’m a big fan of simple numbers and data to paint a picture. So with that in mind, onward. Figure 1 below is a simple JVM example.
In Figure 1, Dr. Schmoe is a cardiologist in Southwest Somewhere, USA, and is employed by Hospital X. Hospital X pays him $950,000 a year for his work. The “market value” for a cardiologist in the Southwest, USA is $400,000. That being the case, an outsider (eg, the government) might wonder why Hospital X would want to pay Dr. Schmoe $450,000. above what the market “looks like”. A stranger might assume that somehow Hospital X makes money from Dr. Schmoe’s referrals to the cath lab for angiograms, stents, maybe pacemaker implants. , etc., and perhaps reward Dr. Schmoe financially for these referrals (hence the more than generous, off-market compensation). Notwithstanding all this, there may be JVM outliers in the total comp package.
Having established the (basic) parameters of the JVM, let’s go back and look at Dr. Schmoe, which in our example is indeed paid at FMV ($400,000 per year).
In Figure 2, Dr. Schmoe has seen enough patients to generate 6,154 wRVUs in the year and at his $65 compensation per wRVU generated, his compensation will be $400,000. (Remember, there can being some upward leeway on one’s compensation…that’s a discussion for another article.)
The health system is satisfied because it pays Dr. Schmoe (GMF) fairly and produces the “work” he expects (6,154 wRVU). In Figure 3 below, we consider Hospital X’s vendor output (physicians, PAs, and NPs) noting their collected revenue of $34.5 million and an average collection per wRVU of $292.
Hospital X is profiting from its collected revenue, the C-suite and the board are satisfied, and since times are good, they do not reconcile provider compensation with the revenue generated. Although Figure 3 may look good in a macro sense, the underlying numbers may tell a different story. What we don’t see is that in this case the revenue cycle (RC) of hospital X, for example, billing/collection of services, is a bit messy. As such, suppose Hospital X pays Dr. Schmoe $400,000 per year, corn he receives $375,000 per year for his services (Figure 4).
In Figure 4, Dr. Schmoe raised (the system raised on his behalf) $375,000. Although the hospital is happy with Dr. Schmoe’s production and compensation plan, the revenue received for his services does not cover his compensation. As shown in Figure 4, Hospital X loses $4.06/wRVU on Dr. Schmoe.
Breaking down revenue collected by vendor helps delineate revenue by line item, profitability of a service line (in this case Cardiology), and RC functionality (because you can break down collections and gaps in your RC process ). In addition, this type of analysis can help the system understand RC gaps, supplier production and/or service line pain and profitability.
Vendor compensation plans that meet FMV criteria are a great first step, but understanding the RC side of the business and how vendor revenue relates to overall financial stability versus vendor compensation is everything. also important. As the saying goes, you can’t build a chair for $10, sell it for $8, and make up the difference in volume.