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PHYSICIAN PAYMENT METHODS: FORMS AND LEVELS OF PHYSICIAN COMPENSATION Sunny G. Yoder The purpose of this paper is to examine how physicians in the United States are compensated. This is a matter of some interest since the method of compensation, that is, how the physician ultimately receives payment for his or her services, is an important element of the physician's economic environment. Another important element is the system of third-party payments: the policies and practices of government programs and private insurers defining the services for which they will pay, the conditions for payment, the form of payment, and its amount. Taken together, these two elements largely determine the relationship between the number and types of services a physician provides and the physician's gross income.* For most solo practitioners, the payment method and the compensation method are identical, so that the relationship between payments for services provided and the physician's income is direct. For practitioners who are part of a group practice or HMO, however, the payment method generally differs from the compensation method. For example, although the physicians in a group practice may bill patients and third parties on a fee-for-service basis, individual group members may receive a salary. In an HMO, where payments are on a capitation basis, physicians also may receive compensation in the form of salary. In such instances the relationship between payments for the physician's services and the physician's income is more complex. Students of the U.S. health care system express considerable concern about the economic incentives for physicians under different forms of compensation. While none of these observers believe that physicians conduct their medical practice solely for pecuniary gains, they do believe--and there is some, albeit limited, evidence to support this belief--that such motivations do influence physicians' *Other important pieces of the economic environment of the physician are the tax system and the system by which funds are raised for meeting the costs of medical services. They largely define the boundaries of physicians' aggregate claims on society's resources as well as the public-private mix of funding sources to meet those claims. 87
behavior. To understand the nature of a physician's economic incentives it is necessary to understand how the physician is compensated as well as how payments for services are generated. This paper describes the different physician compensation methods, presents published data on levels of compensation, and estimates the distribution of U.S. physicians among the different compensation methods. The latter estimate is constructed in three steps. First, published data from the American Medical Association Masterf lie are used to group physicians on the basis of their reported employment setting and professional activities. Second, for each of the groups, available evidence is used to estimate how the physicians in the group are distributed among compensation methods. Finally these estimates are combined to estimate the overall distribution. Summary oF Findings On the basis of published data, I estimate that in 1980 approximately half the active physicians, excluding residents, were compensated by fee-for-service. This figure includes all solo practitioners, 7 percent of physicians in group practice, and 60 percent of hospital-based physicians. Just under 20 percent were salaried. The remainder of U.S. physicians--roughly 30 percent--received a mixed form of compensation, with a f ixed component analogous to salary and an incentive component analogous to f Be-for-service. Compensation levels vary widely depending on employment setting, specialty, and other variables such as years in practice. The published data on physician compensation do not.permit conclusions about the relationship between compensation levels and methods. According to AMA data, the average net income of U.S. practitioners in 1982 was $99,500. The average for practicing physicians specializing in pediatrics was approximately $70,000, while for surgeons the average was approximately $130,000. Academic physicians had earnings ranging f ram $42, 000 to $122, 500 in 1983, depending on f acuity rank and method of compensation. The higher earni ngs are for faculty who receive a base salary plus supplemental practice earnings. Entry level earnings for physicians employed by the Federal Government range from $32,000 to $48,000 depending on their grade and on where they are employed. The military services, the Public Health Service Commissioned Corps, and the Veterans' Administration also provide physicians with an array of allowances and special pay over and above their base salaries. Distribution of U.S. Physicians Among Employment/Activity Groups According to the American Medical Association Masterfile (see Table 1), in 1980 there were approximately 415,000 active physicians who provided suf f icient data to be categorized by employment setting and main professional activity. Four-fifths of all physicians were -88-
either residents enrolled in graduate medical education programs (15%) or were engaged in of f ice-based practice (65%~. Most of the remainder were f ederal employees, hospital-based practitioners, or were engaged primarily in teaching, administration, and research. A description of the methods and levels of compensation for each group in Table 1, based on available information, follows. Table 1 Number and Percentage Distribution of U.S. Physicians by Employment/Activity Category, 1980 Employment/Activity Number Percent Category Of Physicians Of Total All 414, 9161 100. 0 Residents (including federal) 62,042 15.0 Federal physicians (all activities) 15,360 3.7 Office-based practice 271,268 65.4 Hospital-based practice 31, 032 7.5 Medical teaching 7, 379 1. 8 Administration 10, 846 2.6 Research 14, 298 3.4 Other 2,691 0.6 Source: Adapted from Catherine M. Bidese and Donald G. Danais, Physician Characteristics and Distribution in the U.S., 1981 ea., American Medical Association, Tables 2 and 6, pages 38 and 64, respectively. 1 In 1980 there were 461,289 physicians In the U. S. and possessions of which 25,744 were inactive and 20,629 could not be classified. This leaves a total of 414,916 that can be distributed among employment/ activity categories. 89
Residents. In 1980, 62,000 physicians were enrolled in graduate medical education programs. Their compensation is in the form of salary, sometimes referred to as a stipend (Association of American Medical Colleges, 1980, page 169 ~ . Compensation levels for these physicians have grown significantly from the era when they literally resided in the hospital. Today residents' salaries ref lect their apprenticeship role in providing medical services to hospital) zed patients, ranging from a median of $18, 900 for the f irst post-M.D. year to $23,200 for the 5th post-M.D. year in 1982-83 (Department of Teaching Hospitals, 1982~.* Federal physicians. In 1980, 15,360 physicians (excluding residents) were employees of the Federal Government. Roughly 7000 of these were in the military service, and another 6000 employed by the Veterans Administration. The remaining 2400 federal physicians were employed by the Public Health Service (including the Commissioned Corps) or other parts of the Federal Government (Kahn and Orris, 1982; Eiler, 1983~. The basic form of compensation for these physicians is salary, although the details of compensation arrangements vary depending on where the physician is employed. In the military and the Commissioned Corps, the base salary is augmented with non-taxable housing and subsistence allowances' dependents allowances, and bonus pay for board certification and years of service. In addition, these physicians receive a lump-sum retention bonus for each year they remain in the service. Taking all these components of compensation into account, a physician entering the mi litary or the Public Health Service Commissioned Corps earns approximately $40, 000. Elsewhere in the Federal Government physicians are paid according to special GS pay levels, which at entry are $31, 900 for GS-11, $32, 000 for GS-12, and $45, 400 for GS-13. An exception is the Veterans Administration which has its own pay schedule. Physicians may enter the VA at a senior grade, equivalent to a GS-14, at $41,277 per year, or at a chief grade at $48,553. In addition, the VA also has a system of special pay for board certification, tenure, responsibility level (e.g. service chief), and geographic location. This special pay can add as much as $22,500 annually to VA physicians' earnings. Office-based practitioners. The nation's 271,000 office-based practitioners are compensated in several different ways, depending upon whether they are in solo or group practice and, if in a group, how the group's practice income Is distributed. According to estimates from the AMA Periodic Survey of Physicians (a detailed survey of a 5% sample of office-based, non-federal physicians), 54 percent were in solo practice and 46 percent in group practice in 1980 (Kahn and Orris, 1982, page *Graduate medical education programs range in length from three to seven years, although most programs are in the three- to five-year range. 90
286~. The physicians in groups reported the following income distribution methods: Equal distribution Straight salary Salary plus profit share Fee-for-service Other or unknown 11% 8% 16% 7% 4% 46% (Kahn and Orris, 1981, page 286.) These percentages should be viewed as very rough estimates, subject to considerable error due to a relatively low (50%) response rate for the survey. Too, these categories are highly simplified characterizations of income distribution plans that often are quite complicated (see, for example, Medical Group Management Association, 1978~. Information on the net incomes of office-based practitioners in 1980, by specialty, are available from the Periodic Survey of Physicians. As published, these figures do not differentiate between physicians under different compensation methods, but are reported by specialty. As summarized in Table 2, physician net incomes in 1980 ranged from about $63,000 for pediatricians and general practitioners to about $99,000 for surgeons. Overall, average net incomes rose at a compound rate of 6.8 percent between 1970 and 1980. Average net income for all specialties, according to this survey, was $80,900 in 1980 (more recent AMA figures on net incomes of all practicing physicians are presented in a later section). Hospital-based practitioners. Roughly 31,000 non-federal medical practitioners are hospital-based. These physicians are concentrated in certain specialties, primarily radiology, anesthesiology, and pathology. Information on methods of compensation for these physicians was collected in a special 1979 hospital survey by the American Hospital Association. Steinwald (1983) summarized the compensation methods for these physicians as salary, percentage arrangements, and fee-for-service. Table 3 shows the distribution of hospital departments of anesthesiology, pathology, and radiology among these methods. If one assumes that these distributions apply to the physicians in these specialties ( an assumption that is partially supported by comparing Steinwald' s results to those of a 1979 survey by the American College of Radiology) and weight these distributions by the number of physicians in each specialty, a rough estimate of how hospital-based physicians are compensated would be as follows: Sala ry Pe rcentage Fee-for-service 20% 18% 62% -91-
Table 2 Average Net Income f rom Medical Practice by Specialty, 1970, 1980, and Compound Percentage Growth 1970-1980 Compound Percentage Growth Specialty 1970 19801 1970 - 1980 - ALL~ $41 J800 $80,900 6.8% General Practice 33,900 63,300 6.4 Internal Medicine 40,300 79,100 7.0 Surgery 50,700 98, 600 6.9 Pediatrics 34,800 63,300 6.2 Obstetrics/gynecology 47,100 92,500 7.0 Psychiatry 39,900 65,100 5.0 Source: David L. Goldfarb, editor, Profile of Medical Practice 1981. AMA, Center for Health Services Research and Development, 1981. 1 1980 net income figures were projected by survey respondents. 2 This category includes all other specialties. Table 3 Percentage Distribution of Hospital Departments By Compensation Method Salary Percentage Fee-f or-ser vice Anesthesiology 19% 4% 77% Pathology 32 27 41 Radiology 9 27 64 Source: Steinwald, 1983, Table 1, page 20 92 .
This estimate applies only to hospital-based physicians, that is, physicians who spend the majority of their time in hospital-related activities. Among physicians who have any financial arrangements with a hospital, almost 60 percent have a salary arrangement (AMA, 1982~. Hospital-based physicians are among the highest earning specialties in medicine. Net practice income for radiologists for 1982, as estimated by the AMA, were almost $137, 000; anesthesiologists were estimated at $131,400. Pathologists' earnings were not separately reported (AMA, 1983~. Steinwald analyzed the relationship between compensation methods and earnings levels for these physicians. Radiologists and anesthesiologists who received fee-for-service compensation had the highest gross, and net, incomes; salaried physicians in these specialties had the lowest incomes. The highest earning pathologists received a percentage of department revenues, while the lowest-earning pathologists were salaried (Steinwald, 1980, Table 4, page 72~. Recent restrictions on reimbursement levels for hospital-based physicians by the Health Care Financing Administration may lessen the differences in incomes between salaried hospital-based physicians and the others. Incomes of all practicing physicians. In 1981 the AMA instituted a new series of surveys that include all practicing physicians, both office-based and hospital-based. Data on physician net incomes from this new Socioeconomic Monitoring System therefore are not strictly comparable with those from the former Periodic Survey of Physicians, and thus conclusions about trends in incomes must be made cautiously. In particular, since hospital-based physicians tend to be in the higher ranges, the new figures may overstate gains in income between 1980 and 1981. Table 4, based on the new survey, shows physicians' earnings for 1981 and 1982, and the percentage increase f rom 1981 to 1982. Table 4 Average Net Incomes of Practicing Physicians by Specialty, 1981, 1982, and Percent Increase 1981-1982 Average Net Income % Increase Specialty 1981 198 2 1981-1982 , All specialties $93,000 $99,500 7.0 General practice 72,200 71,900 - 0 e 4 Internal medicine 85,100 86,800 2.0 Surgery 118,600 130,500 10.0 Pediatrics 65,100 70,300 8.0 Ob/gyn 110,800 115,800 4.5 Psychiatry 70,600 76,500 8.4 Source: AMA, SMS Report, Vol. 2, No. 4, July 1983. 93
There is considerable vari action around these averages, depending upon length of time in practice, practice mode and form of compensation, geographic location, and the extent to which a physician's services and patients are covered by health insurance. In his or her prime earning years, e.g., between the ages of 35 and 55, the average physician would be earning about $110,000, rather than the overall average of $99,500. These data indicate that 20 percent of physicians had net incomes of under $50,000 in 1982, while 25 percent earned over $125,000. Net incomes exceeded $200,000 for approximately 7 percent of physicians. Academic physicians. Most of the non-federal physicians whose main professional activities are teaching, research, and administration are employed as faculty in the nation's medical schools. These physicians typical ly are compensated in one of two ways: ~ 1 ) a f ixed salary or ~ 2 ~ a base salary with the opportunity for supplemental earnings f ram medical practice. The degree of medical school control over practice earnings varies a great deal. Some medical faculty simply bill and collect their own fees independent of the school. However, in the majority of medical schools, practice earnings are channeled through an organized faculty group practice, or practice plan. These plans, not unlike private practice groups, have rules governing the collection and distr ibution of practice earnings among the group members and the medical school (Institute of Medicine, 1976; Hilles and Pagan, 1977~. Legally, they may be independent corporations, partnerships, or administrative units of medical schools (Jolly and Smi th, 1981 ) . Data on medical faculty salaries are collected by the Association of American Medical Colleges and reported, by faculty rank, for the two forms of compensation. In 1983, 53 percent of faculty received a fixed salary, while 47 percent received a base salary plus supplemental compensation f ram practice. Their annual salaries, according to these data, were as follow: Salary Base ~ Supplement Instructor $42,000 $51,300 Assist. professor 62,700 66,000 Assoc. professor 64,100 79,900 Professor 71,600 94,100 Chairman 78,100 122,SOO ~ Smi th, 198 3, Tables 5 and 6 ~ . For f acuity who receive supplemental earnings f ram practice, these data include only those whose supplemental income is actually reported. Since many medical faculty have uncontrol- led--and therefore unknown--outside earnings, the figures above probably understate average earnings for this group. Other physicians. According to the AMA, ~Other. physicians are those who work in insurance companies, corporations, pharmaceutical companies, voluntary organizations, medical societies, and other organizations. 94
Presumably they work as salaried employees in these settings; no data are available on their earnings. Overall payment methods. The data presented above, with some assumptions, can be used to construct a rough estimate of the numbers of physicians compensated by each of three basic methods: (1) salary, (2) incentive, and (3) fee-for-service. The salary and fee-for-service methods are self-explanatory. ~Incentive. refers to physicians whose incomes are positively influenced by revenues they generate, including medical school faculty receiving salary supplements, hospital-based physicians under percentage arrangements, and group practice members receiving incentive compensation. Assuming that all solo office-based practitioners are fee-for-service, that all federal physicians are salaried (since their bonus arrangements are independent of the volume of services rendered), and distributing the rest of physicians among compensation categories according to the percentages presented above, I estimate that in 1980, excluding residents, 63,000 (18%) of physicians were salaried, 105,000 (30%) received incentive compensation, and 185,000 (52%) were fee-for-service.* If federal physicians also are excluded, then these percentages would be salary 14%, incentive 31%, and fee-for-service 55%. Comparison with Other Estimates. Kahn and Orris (1982) employed a similar approach to estimating the distribution of U.S. physicians among compensation methods, but their results differ considerably from those reported here. They estimated that, including residents, approximately 53 percent of active physicians were salaried (my estimate, including residents, is 30% ~ and 47 percent were compensated by other methods ~ I estimate 7096~. The estimates differ for several reasons. Kahn and Orris used two compensation categories, Salary and ~other., rather than three, and included under salary a number of physicians such as medical school faculty who received salary plus incentive payments. Too, they assumed that 100 percent of hospital-based physicians, in comparison to my estimate of 20 percent, were salaried. Finally, their estimates are based on 1979 rather than 1980 Masterfile data. Gabel and Redisch (1979) have estimated that, including residents, 71 percent of U.S. physicians are paid under fee-for-service, and 28 percent are on salary. They do not report their method of arriving at these figures, but the distribution is very close to mine if they counted physicians receiving incentive compensation with those on straight fee-for-service. A substantial number of physicians receive a mixed form of compensation; how they are counted makes a great deal of dif ference in estimates such as these. The data presented here do not support any f irm conclusions about the relationship between physicians' compensation methods and incomes. *See Appendix for details. -95-
Physician earnings are affected by many variables' and a careful analysis is needed, taking into account specialty, years in practice, geographic location, hours worked, and other variables, in order to establish any systemat ic relationship between how physicians receive their income and their income levels. In any event we can be sure that the relationship is a subtle one, since a physician's earnings are not independent of his/her choices among specialties, locations, or practice modes, nor of decisions about medical practice. Even salaried physicians' incomes often bear some relation to the quantity of services they provide, even though the relationship is less direct than for fee-£or-service practitioners. As one observer notes, to assess the economic incentives in salaried practice it is necessary to consider the incentives and reward structure of the institution paying the physician's salary (Reinhardt, 1983~. 96
References Settich, John F., Radiology Practice Survey 1979~. Chicago, American College of Radiology, 1979. 2. American Medical Association, SMS Report, Vol. 1, No. 2, February 1982. . American Medical Association, SMS Report, Vol. 2, No. 4, July 1983. 4. Association of American Medical Colleges, Graduate Medical Education: Proposals for the Eighties. Washington, D.C., 1980. 6. '. Bidese, Catherine M. and Donald G. Danais, Physician Characteristics and Distribution in the U.S., 1981 edition. Chicago: American Medical Association, 1982. Blumberg, Mark S., Changing the Behavior of the Physician: a Management Perspective,. Proceedings of the Twenty-First Annual Symposium on Hospital Affairs, June 1979, University of Chicago. 7. gurney, Ira, et.al., Medicare and Medicaid Physician Payment Incentives., Health Care Financing Review, Summer 1979, pp. 62-73. 8. Department of Teaching Hospitals, Association of American Medical Colleges, COTH Survey of House Staff Stipends, Benefits, and Funding 1982. 9. Eiler, Marianne, Physici an Characteristics and Distribution in the U.S., 1982 edition. Chicago: American Medical Association, 1983. 10. Gabel, Jon R. and Redisch, Michael A., Alternative Physician Payment Methods: Incentives, Efficiency and National Health Insurances, Milbank Memoria1 Fund Quarterly, 57~1) :38-59, 1979. 11. Gertman, Paul M., et.al., Second Opinions for Elective Surgery,. New England Journal of Medicine, 302~21~:1169-1174, May 22, 1980. 12. Goodman, Louis J. and Lynn E. Jensen, The American Medical Association's Periodic Survey of Physicians,. in David L. Goldfarb, Ed., Profile of Medical Practice 1981. Chicago: American Medical Association, 1981. 13. Institute of Medicine, Medicare-Medicaid Reimbursement Policies. Washington, D.C.: National Academy of Sciences, March 1976. 14. Hilles, William C. and Sharon K. Fagan, Medical Practice Plans at U.S. Medical Schools. Washington: Association of American Medical Colleges, 1977. -97-
15. Jolly, Paul, and William C. Smith, Jr., Medical Practice Plans in 1980. Washington, D.C.: Association of American Medical Colleges, February 1981. 16. Kahn, Henry S. and Peter Orris, The Emerging Role of Salaried Physicians: an Organizational Proposals, Journal of Public Health Policy, 3 (3~: 284-292, 1982. 17. Medical Group Management Association, Digest of Medical Group Employment Contracts and Income Distribution Plans. Denver: MGMA, 1978. 18. Reinhardt, U.E., Perspectives on the Compensation of Physicians., mimeo, May 1983. 19. Roemer, Milton I., Con Paying the Doctor and the Implications of Different Methods, Journal of Health and Human Behavior 3:4-14, Spring, 1962. 20. Showstack, Jonathan A., et. at., Fee-for-Service Physician Payment: Analysis of Current Methods and Their Development,. Inquiry 16: 230-246, Fall 1979. 21. Smith, William C., Jr., Report on Medical School Faculty Salaries, 1982-1982. Washington, D.C.: Association of American Medical Colleges, 1983. 22. Steinwald, Bruce, Compensation of Hospital-Based Physicians,. Health Services Research 18~1~: 17-43, Spring 1983. 23. Steinwald, Bruce, Hospital-Based Physicians: Current Issues and Descriptive Evidence, ~ Health Care Financing Review, Summer 1980, pages 63-75. 98
Appendix Estimated Distribution of Physicians by Work Setting and Type of Compensation, 1980 Type of Compensation Salary Incentive Fee-For-Service All 352, 874 ~ 100%) 1 63,195 ~ 1896) 104, 965 ~ 30%) 184, 714 ~ 52%) Federal 15, 360 ( 100%) 15, 360 ~ 100%) Solo practice 146, 485 ~ 100%) 146, 485 ~ 100%) Group practice 124,783 (100%) 21,701 ~ 17%) 84,093 (6796) 18,989 ( 15%) Hospital-based 31,032 ( 100%) 6,206 ~ 2096) 5, 586 ( 1896) 19,240 ~ 62%) pract ice Teaching, administ rat ion ~ research 32, 523 ( 100%) 17, 237 ~ 53%) 15, 286 ~ 47%) Other 2, 691 ~ 100% ~ 2, 691 ~ 100% Source: See text 1 This total excludes residents. If they are included, the distribution of physicians by type of compensation is salary 30%, incentive 25%, and fee-for- service 45%. _99_
