Published March 19, 2020

When It Rains, It Pours: The COVID-19 Procedure Deferral’s Impact on Physician Compensation

Seriously?? If you are like us, you are wondering what in the world is going on? Literally! The most comparable event that comes to mind for us is 9/11, but at that time the best course of action was a return to normalcy as quickly as possible. Now, in the face of this pandemic, the best course of action is to move away from normalcy for a while! In the meantime, our healthcare providers are standing in the gap. And they continue to face challenges on resources and coverage, not just related to the patients with COVID-19, because, as we all know, other healthcare events did not just cease.

In times as dire as these it might seem trivial to focus on matters of compensation. However, in order for health systems to have the resources to treat COVID-19 patients, as well as their other critically ill patients, they must secure and maintain a stable physician staff. Anything that introduces instability and uncertainty into a health system’s ability to marshal all of its resources is important to the team leading our health systems through this crisis.

With that in mind, a number of health system clients have reached out to us for guidance around disruptions or potential disruptions in the ability of their employed physicians to perform certain elective procedures following the request by the U.S. Surgeon General and the Centers for Medicare & Medicaid Services to discontinue such.[1] Meanwhile, these same physicians are likely still needed for emergency room coverage, either restricted or unrestricted. And, there are likely still acute healthcare matters being addressed by these same physicians. Yet, their ability to generate revenue to cover the overhead, nurse salaries, and their own compensation is substantially reduced. And the margins the hospitals and surgery centers need in order to subsidize low or negative margin service lines critical to a community are also substantially reduced.

Physicians particularly impacted are those whose compensation is based upon productivity, especially if such productivity is largely dependent upon elective procedures. The impact will also likely be felt by physicians supporting elective procedures, such as anesthesiologists. Typically, when we receive health system inquiries about physician compensation, the questions involve negotiating market-based compensation that is fair to the health system and to the physician, but also consistent with regulatory guidance regarding fair market value (FMV) and commercial reasonableness (CR). These days, the concerns are much more personal, and revolve around physician resource stability in the face of the dire financial impact every community is facing.

Because we are living through a healthcare phenomenon at a magnitude which none of us have seen in our lifetime, there is no real guidance regarding how health systems might best stabilize the physician resources, if they can even do so, during this unprecedented societal disruption. In the absence of guidance, we will share our thoughts as to a decision framework to consider surrounding the commercial reasonableness issues evident on this matter. We believe virtually every health system with employed physicians will face this quandary to some degree. Further, when considering the financial effects of this pandemic, it is important to consider that this disruption is likely limited in duration. While elective procedures may be deferred at present time, it is likely that once we begin a return to normalcy, there will be a backlog of procedures that need to be addressed.

To clarify, we are focusing on how health systems and other providers might need to address employed physician compensation, as opposed to any type of financial assistance to community physicians. And for many organizations, this issue will not be limited to just a few physicians. Rather, it will likely involve many different specialties and will include hospital-based physicians such as anesthesiology, radiology, etc. The issue of community physician assistance might ultimately be something that many hospitals and health systems are forced to confront as well, but the logic and business analysis related to such efforts would be different than when addressing physicians who are under employment agreements. Further, these thoughts are specific to the unusual circumstances we are currently facing in the form of a pandemic and would not apply to declines in productivity as a result of a lack of work effort on the physician’s part, or any other circumstance within the employed physician’s control.

As mentioned previously, of primary concern are physicians who are compensated on a productivity-based compensation formula and who are experiencing declines in cases due to the postponement of elective procedures. By contrast, an employed physician paid a straight salary, will not likely have an issue relevant to this question; however, there may be some relief required on certain statistical threshold measures such as personally performed work relative value units (wRVUs). Primarily, the question our clients have posed is whether the health system, as the employer, can supplement any of the physician’s compensation to help blunt the hopefully temporary financial impact on the employed physician due to postponed or foregone elective procedures. An exploration of a couple of reasonable approaches a health system employer can consider when addressing the unintended disruption to physician compensation follows.

First, consider that a common compensation structure for employed physicians is a base draw that is supported by a specified level of productivity, commonly defined by wRVU production. When physicians exceed the wRVU threshold indicated by the base draw, the physician may be eligible for additional productivity-based compensation, often calculated as the excess wRVUs multiplied by a conversion factor delineated in the employment agreement. Under this structure, one possible approach the employer could pursue includes temporarily waiving any reduction in base compensation when wRVUs are not generated at a level to be fully supportive of the base draw:

As an example, let’s simply consider the impact of just one physician who has a base draw of $400,000 based on expected wRVU production of 6,000, and a conversion rate of $67 for any wRVU generated in excess of 6,000. Historically, the physician produced wRVUs to earn compensation of $600,000. However, with the disruption in elective cases, the physician will not only be unable to generate historical compensation levels, but will likely  fall short of the 6,000 wRVUs needed to support base compensation.

While it might not be either practical or defensible to supplement the physician to the full historical compensation of $600,000, in these circumstances a reasonable argument could be made to not engage in reducing base compensation due to the wRVU shortfall. The rationale for both holding the base compensation in place and not supplementing to the full historical compensation level are the same: the disruption is likely temporary and completely out of the physician’s control. Therefore, any wRVU shortfall needed to fully support the base compensation will likely be made up in subsequent months when elective procedures resume. By the same token, if the employer supplements the full historical compensation, when the elective procedures resume, it could result in payments for cases which were postponed during the pandemic, with subsequent compensation for the performance of these cases again at a later time.

Another reasonable approach a health system could consider is supplementing the physician’s compensation to a level approximating the median as published by benchmark surveys such as the one published by the Medical Group Management Association (MGMA). The rationale for this level of assistance is that: (1) the disruption is temporary, (2) the disruption is entirely out of the control of the physician, and (3) in subsequent months the physician is likely to be able to generate productivity to support a median level of compensation once elective cases can be performed again. This approach would only be appropriate if the physician’s base or total compensation historically was in excess of the median as published in survey data. However, if this approach is used, it will be important to consider whether the physician will have any compensation “double counted” as the elective surgery backlog dissipates.

The overall goal is to pay the physician employees fairly and keep them in place in the community. If the elective cases are postponed, they are likely postponed anywhere else in the community. So the “value” of the services provided might be temporarily impacted, not unlike the value of all professional services at present. Any commercially reasonable business approach in this present circumstance should not be designed to “make whole the physician’s historical compensation.” Rather, as an employee, with a commitment to being available and continuing to serve the patients of the health system as needed and as capable, the goal should be to protect downside risk of the physician because he/she is not in private practice where such protections are not afforded.

Further, a complicating factor for the health system relates to the likelihood the system will be suffering financially from both the added burden of preparing for and possibly treating the COVID-19 patient population, which will likely be coupled with the temporary loss of the elective procedures (which tend to provide more contribution margin than medicine-based cases). It is still too early to know the full impact these changes will have on health systems’ financial position, but as stated in Modern Healthcare, you could see many hospitals with their backs up against the wall.[2] However, since these physicians are employees of the health system, just like nurses and other technicians, is it fair to allow their reasonable earning capacity to be significantly impacted when other hospital employees are not impacted? These are the types of questions many health system executives will be dealing with in the coming weeks and months.

Regardless of how the health system chooses to address the issue of disrupted physician compensation, it will be important to lay out the commercially reasonable business case for any temporary economic support of compensation. Key FMV and CR considerations to consider include:

  1. Is any supplement to compensation affording the physician a reasonable compensation for his/her training, accessibility, call coverage, etc., rather than attempting to “make them whole?”
  2. Elective procedures are likely to return later, so is the intended economic support creating a double payment for the same work?
  3. What are the long-term implications to the community should the physician leave (given his/her specialty) because the current financial impact is just too much to bear?
  4. Is it even feasible that the physician(s) would be able to leave and replace their desired income since this pandemic is a global phenomenon?
  5. Does the physician perform a key leadership role for the organization?
  6. What is the supply and demand like for this specialty in your market?
  7. What level of financial investment has the health system made in the service line?
  8. What would be the alternative if the physician left, and how does that cost compare to the temporary economic support?
  9. How many physician specialties does this impact, and what are the practical realities of providing economic support, if any?

Simply put, we have no definitive answers at present. Each situation must be assessed based on its own facts and circumstances. A rural provider will have a completely different fact pattern when contemplating this same issue. Guidance specific to this subject and other repercussions of the current pandemic will likely continue to evolve over the coming weeks and months. We are going to continue evaluating this for our clients and, in doing so, we are focused not only on fair market value, but commercial reasonableness. If you have ideas or other considerations we have not mentioned herein, join us in the conversation. The goal here is not about addressing individual physician compensation; rather, it is about ensuring physician resource stability, especially during such unstable times.

PYA stands ready to help you think through these complex issues. We are confident solutions exist to help health systems navigate these issues in ways that are compliant with regulations governing FMV and CR. We just need to work creatively together to find the solutions that work for each specific situation.

For additional guidance related to physician compensation, regulatory compliance, or valuation, contact one of our PYA executives below at (800) 270-9629.

[1] https://www.cms.gov/newsroom/press-releases/cms-releases-recommendations-adult-elective-surgeries-non-essential-medical-surgical-and-dental
[2] Modern Healthcare, “Canceled Surgeries, COVID-19 Patients Could Be ‘Double Whammy’ for Hospitals,” March 16, 2020

Disclaimer: To the best of our knowledge, this information was correct at the time of publication. Given the fluid situation, and with rapidly changing new guidance issued daily, be aware that some or all of this information may no longer apply. Please visit our COVID-19 hub frequently for the latest updates, as we are working diligently to put forth the most relevant helpful guidance as it becomes available.

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