The 800-physician Henry Ford Medical Group, part of the multi-hospital, $2+ billion-annual-revenue Henry Ford Health System (HFHS) in the Detroit area, is about two-thirds through a long-term transition from a salary to a production pay system.

Tom Nantais, CFO of the medical group, says that the goal of the transition is to place about 15% of physician pay at risk, mainly for production but also for patient satisfaction, administration, teaching and other tasks. He predicts the pay transition will be complete in about 18 to 24 months. So far, about 10% of pay is at risk, Nantais notes. Several years ago, the pay system was straight annual salary with differences based on specialty and seniority.

Echoing the many consultants who say that putting any substantial portion of compensation at risk usually will motivate physicians, Nantais says that, even with just 10% of pay at risk, the medical group’s physicians have gotten the idea that production affects compensation. “Every physician is on production,” he notes. “The RVU information [given to each physician about personal production levels] is almost as important [to them] as their paycheck.”

As example No. 1 of their greater production focus, Nantais says that in mid-2001, a consultant, brought in to suggest ways of stemming the medical group’s losses and pushing pay up to more competitive levels, set a production goal (measured in RVUs) of 63% of the MGMA national median for each specialty. On average, that goal required a 22% production increase. A little over a year later, half the departments have met the goal, he notes, and all departments have achieved significantly higher marks. This accomplishment probably would not have happened under a salary system, he suggests. “We can’t afford a straight salary system any longer.”

When the transition is complete, the group wants 85% of physician pay to be a base salary that is equal to about 85% of the specialty median in the RSM McGladrey survey of very large teaching institutions (PCR 5/02, p. 3), he says. The 15% of pay that the group wants to put at risk should equal, on average, about 15% of the McGladrey median. Base pay already equals about 85% of these medians.

It’s the incentive pay that has not yet reached the intended levels, mainly because of the revenue problems noted below. As a result, overall pay averages about 93% of McGladrey, Nantais says. (These figures are general ones that vary according to specialty, and also vary from year to year in relation to the goals because of sampling variability in the benchmark data.)

Expressed another way, the group also is shooting to pay physicians 50% or more of MGMA national, nonacademic specialty medians, he says. On average, the group now is paying physicians at about the 45th MGMA percentile level.

Revenue Problems Hold Back Transition

Several major limitations on the medical group’s revenue hold down the amounts it can afford to pay physicians for added production and other desired behavior, Nantais says. Among them are:

* About 55% of primary care revenue and 45% of overall revenue is capitated. In particular, the group has global risk (including hospital and drug charges) for about 250,000 members of Health Alliance Plan, an HMO owned by HFHS. The group loses money on this contract, and no longer wants to bear the risk, he says.

* Some Medicaid HMOs have paid the group late or not at all.

* Medicare, of course, had the 5.4% RVU dollar value cut this year.

* The Detroit reimbursement market generally “is not the best,” he notes, perhaps because of the presence of a few dominant employers and payors.

Despite these problems, the group has cut its losses by about $26 million this year, about $20 million through cost cuts and about $6 million through net revenue hikes. A key strategy on the revenue side has been to improve documentation to support claims for higher evaluation and management codes.

Incentive Pay Depends on RVUs

Henry Ford Medical Group’s pay systems use work RVUs to measure output for both specialists and primary care physicians.

There are about 560 specialists in the group including most medical and surgical subspecialties along with hospital-based anesthesiologists, pathologists, radiologists and emergency physicians.

Their incentive pay is calculated every six months by the following four main steps, Nantais explains.

* To calculate the basic dollar rate per RVU, the most recent McGladrey survey rate for each specialty is modified downward by affordability factors because of the revenue problems cited above. Most of the rates are between $35 and $45.

* The RVU dollar value is multiplied by the total RVUs for each specialty or “product line” to get the total cash compensation value for the specialty.

* The amount of base salaries paid to each set of specialists is subtracted from the total cash compensation value to yield the incentive pool. The result is sometimes further reduced for affordability.

* Each department has its own formula to distribute its incentive pool to individual physicians. In general, Nantais says, the departments credit the bonuses 70% for individual RVUs, 15% for patient satisfaction, and 15% for a combination of group citizenship, teaching and other functions.