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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.
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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
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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.
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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.
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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%
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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
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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.
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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.
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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.
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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~.
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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.
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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.
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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%.
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Representative terms from entire chapter:
net incomes
