Phillip A. Ciano, Esq. and Thomas J. Ferkovic, R. Ph., MS
The COVID-19 Compensation Dilemma.
If there is one thing we have all learned from the COVID-19 pandemic, it is this: No industry, sector or profession is immune from the disease. Although certain aspects of the healthcare industry have increased production since the outbreak, the vast majority of doctors, practice groups and hospital systems have, and will continue to suffer negative economic consequences as a result of COVID-19.
In April alone, the healthcare sector lost 1.4 million jobs, and ambulatory services accounted for over 80% of those losses. Physicians’ offices lost 243,000 jobs in March-April, and Ohio’s hospital health systems suffered a $1.2 billion monthly hit since the pandemic. When one considers that the pre-COVID profit margins of Ohio’s hospitals hovered meagerly between 1%-2%, the post-COVID outlook is dark indeed. Although Congress has appropriated almost $200 billion to accommodate for healthcare losses, much of this government assistance will not help private, independent physician practices.
Many physician-employees are compensated on a “production”, net revenue and/or work RVU compensation model. During normal economic times, these “eat what you kill” models are lucrative for high-volume, efficient and experienced providers. In addition to production comp models, many physicians are compensated on a “salary guarantee” structure. Although salary models are customarily immune from economic downturns, even this comp model is at risk in light of the current pandemic.
This article reviews three traditional “fair market value” physician compensation models, and analyzes the COVID-19 impact on these structures. Additionally, the article offers suggestions for the re-negotiation and re-evaluation of existing physician compensation agreements in order to more realistically take into account not only the current pandemic, but future uncontrollable events.
Traditional Physician Compensation.
Although many creative physician compensation models exist, they traditionally fall into three basic categories: “guaranteed salary” (with or without a bonus component); “variable salary” (based on work RVU production and other quality metrics) and “net production” (physician-produced revenue minus expenses). Each of these compensation models have been and will continue to be impacted by the COVID-19 pandemic, and absent adjustments and intervention, providers will face dire economic consequences.
A. Guaranteed Salary.
Under the salary model, a physician’s compensation is “guaranteed” at a certain level, irrespective of the physician’s production, charges or collections. Although it limits physician compensation, it provides security and predictability. However, even physicians employed under the “guaranteed salary” model are not immune from downward compensation adjustments due to COVID-19. For example, many physician employment agreements contain “change in law” and/or “force majeure” clauses that employers may now choose to invoke in order to modify and/or terminate guaranteed salaries in light of the pandemic.
A typical “change in law” clause might contain the following language:
The parties recognize that this Agreement is subject to federal, state and local law now or hereafter in effect and shall be subject to amendments, modification and/or termination in light of such laws and regulations and new legislation (collectively, “Law”). In the event any Law is enacted, amended, changed or modified to reasonably read that the compensation transaction(s) contemplated by this Agreement is: (a) in violation or contravention of the law; and/or (b) may subject a party to this Agreement to undue hardship, burden or regulatory risk, then the Law shall be deemed to supercede the terms of this Agreement, and the parties shall either amend and/or terminate the Agreement, as the case may be.
As it pertains to the current pandemic, there are a wide array of federal, state and local laws which have been enacted to mitigate the spread of COVID-19. These “stay-at-home” and similar mandates have prohibited “non-essential” surgeries and other (non-emergent) procedures. These laws have directly impacted the healthcare delivery system, revenue cycle, patient volume metrics, and other criteria which might easily justify an employer’s reliance on a “change in law” covenant to warrant modification or termination of a “guaranteed salary” physician employment agreement.
Likewise, a typical “force majeure” clause in a physician employment agreement might contain the following language:
Neither party shall be liable nor deemed in default under this Agreement, resulting from acts of God which include, without limitation: public enemy, war, accidents, fire, explosions, earthquakes, floods, failure or disruptions of transportation, machinery or supplies, strikes, or other work interruptions, or any other cause beyond the reasonable control of the parties to this Agreement. If such event shall cause a substantial interruption of the Employer’s business operations, the Employer shall have the right to reasonably modify any and all compensation provisions of this Agreement and/or terminate the same, as may be reasonably necessary to maintain Employer’s business operations.
Obviously, the COVID-19 pandemic has and will continue to be characterized as an Act of God, which is “beyond the reasonable control of the parties”, thus triggering force majeure covenants in physician employment agreements. Physicians employed under these models would be hard-pressed to deny that the pandemic was not an unforeseen and unanticipated impact on his/her agreement, which drastically interrupted the hospital/practice business operations.
In sum, both change in law, force majeure and other foresee-ability “catch-all” protections in physician employment agreements have, and will be triggered by employers who compensate physicians under a “guaranteed salary” model.
B. Work RVU’s.
Physicians employed under a “work RVU” model tie their compensation to wage, data and related information aggregated for seven (7) physician specialty occupation categories. The RVU’s provide a measure of the physician work involved with performing a specific service or procedure as represented by a CPT or HCPCS Level II Code. This year, the Medicare Physician Fee Schedule work RVU’s range from 0.1 for CPT Code 703000 (radiologic examination, teeth, single view) to 108.91 for CPT Code 39503 (repair, neonatal diaphragm hernia, with or without chest tube insertion and with or without creation of ventral hernia).
CMS has proposed significant changes to the evaluation and management codes and their respective wRVU values for 2021. If the changes are made for 2021 there will be winners and losers depending on specialty and the impact can be significant, to employees and employers, depending on the definitions in the contractual language of the employment agreement.
Of all the physician labor taken into consideration in developing a work RVU (technical skill, physical effort, mental efforts, judgment and patient outcome), the most crucial component is the time required to perform a medical service. And that is where the most dramatic impact on physician compensation will lie in light of the current pandemic.
Physicians employed under a work RVU model typically have clauses in their agreements which identify a “minimum annual productivity target”. If the physician meets and/or exceeds his/her productivity target, then compensation is paid and enhanced on a graduated scale. Likewise, if physician productivity falls below minimum targets, physicians are required to repay their employer a pre-designated monetary amount, multiplied by the deficient number of work RVU’s. Failure by the physician to repay these amounts can result in a further amendment of the agreement and/or termination of employment. More importantly, absent a modification of work RVU thresholds, physicians sidelined during the current pandemic will not only be left with a reduction in compensation, but in many cases will owe their employer money at the end of the applicable term.
C. Net Revenue/Production.
Many hospitals and independent practice groups employ physicians – – especially experienced physician with mature practices – – under a “production” “net income” and/or “revenue minus expense” model. A typical production employment model provides the physician with a practice financial statement which identifies his/her practice “net income” (collections, less direct and indirect physician expenses), then determines whether a deficit (negative) or surplus (positive) has accumulated in the physician’s account. If the physician account contains a surplus, the net amount (or a large percentage thereof) is paid to the physician, but if the account contains a deficit, the physician must either pay the deficit to the employer or carry it forward against future billings and collections.
Physicians operating under a “revenue minus expense” compensation model have been dramatically impacted by the pandemic. Elective surgeries have been canceled; patient visits have dramatically decreased; and revenue across every specialty has plummeted. Even with the federal and state mandates now loosening stay-at-home and other COVID restrictions, the production lag and downward ripple effect for physicians operating under a production model will continue for years to come.
This compensation model may lead to disputes due the allocation of ‘Cares’ subsidies, CMS advances, Quality Bonus’ and PPP Loan forgiveness and how these cash inflows effect the production and expense calculations in the definition of ‘net income’.
Adjusting Physician Compensation Agreements in Light of COVID-19.
So, what does all this doom and gloom mean for healthcare providers trying to survive in the current economic climate?
First, although it’s easier said than done, don’t panic. Whether your employer is a global healthcare system with tens of thousands of employees, or a boutique physician practice group, these are akin to any other business which is now experiencing the same economic crisis you find yourself in. A calm, collective business approach to your particular contractual problem will be better received than a frantic cry for help. Like other businesses impacted by this crisis, healthcare employers are re-negotiating their own contractual arrangements – managed care contracts, vendor contracts, leases, supplier agreements – – which have become impossible to perform in light of unforeseen circumstances. Although the devil is always in the details, a clear presentation of the issues, back-up data, and sensible recommendations will have the best chance of success for re-negotiations of your agreement. Reality is our friend in these situations, therefore gathering objective information is a priority.
Second, expressing a willingness to return to your original compensation model after the pandemic has subsided will be much better received than a request for a permanent change in your compensation structure. Most healthcare enterprises have sought and received governmental and other financial aid to help them weather the COVID-19 storm. They have shored-up resources and increased liquidity to combat the downward economic effects of the pandemic. Approaching your particular contractual situation as temporary modification, rather than a long-term adjustment will provide your employer with the ability to budget and plan for this temporary set-back. Adjusting your compensation model and “sharing in the pain” will be well-received by your employer, who is also struggling. Remain flexible, sacrificial and optimistic. An example of helping now while gaining an ‘earn back’ may be to ask for a makeup bonus if productivity returns to or exceeds normal run rates in the third and fourth quarter of this year; this provides you and your employer incentives to make up short term losses quickly. This may be especially important if your employer uses a compensation committee that has set caps on maximum earnings and fair market value. You should ask to waive the cap if you work extra to make up for losses incurred during the Covid-19 shutdown.
Third, developing a realistic schedule and staffing support is vital to recouping lost revenue and compensation. Take a fresh look at your schedule, project hours that you will be able to add to your schedule to make up for lost patient visits/procedures. Ensure that your employer will provide you with staff and resources to support additional clinic or operating room time. Unlike an airline seat that is empty when the plane leaves the gate you may be able to recoup some of your lost revenue, to do so requires good planning and the benefits can be to you and your employer if done correctly.
Fourth, in your re-negotiations with your employer, plan for the next (God forbid) unforeseen pandemic. As much as we all want to characterize COVID-19 as a “once in a lifetime” anomaly, reality dictates that we have not seen the last of viral pandemics. Thus, if you are fortunate to engage your employer in a re-negotiation, make sure to negotiate contractual safeguards which will be triggered in the event future, unpredictable pandemics or events shut down your practice or specialty. Using the economic and non-economic data your practice has accumulated in the current pandemic, you can plan for and draft provisions into your re-negotiated agreement which will take into account both your and your employer’s risk of future unforeseen events, like COVID-19.
Finally, identify and retain experienced, professional advisors who are not only proficient in the negotiation and drafting of physician employment agreements, but are also willing to be flexible with you on fees and costs. Experienced professionals should be willing to align their incentives with yours and modify traditional “hourly” and other costly billing structures to address your contract in this particular crisis.
This, like other historical economic crises, shall pass. Learning the physician compensation lessons of this pandemic will prepare you, your employer and your colleagues for the next unforeseen economic crisis.