Tips from the Trenches—A Physician Compensation Tale

Imagine this hypothetical scenario—a hospital has individual employment agreements with physicians.  The Board has kept a hands-off approach, focusing mainly on the impact to the bottom line, and leaves it to the CEO, to negotiate these contracts.  The CEO has negotiated each contract as one-off contracts, doing what is needed to get the physician on board, with contracts including a variety of base salary, hourly, wRVU and collections-based compensation.  The CEO also aims for multi-year contracts with auto-renewal provisions to minimize time spent on renegotiations and to ensure agreements continue seamlessly into future terms. A physician, Dr. Wantsmore, whose contract includes a fixed base salary, is approaching renewal and has presented the CEO with a proposal for a 25% salary increase for the upcoming year. After several weeks, they are at an impasse.  Dr. Wantsmore calls the Board Chair—a personal friend—and makes the case for an increase, threatening to leave.  The two meet at a local bar and agree to a 20% increase in base salary.  The Board Chair tells Dr. Wantsmore not to worry; the Board Chair will get the CEO to sign off on this.  So what went wrong?

At first glance, you might say the problem was the Board Chair overstepping his Board role and negotiating as if he was an executive of the hospital.  Boards do have a critical role in reviewing and approving overall compensation philosophy consistent with their fiduciary duties to the hospital.  Those fiduciary duties include financial viability, legal compliance, and carrying out the mission of the hospital.  Boards also have a key role in reviewing compensation that is outside the fair market value parameters that an independent valuation expert sets, as the Board is in the best position to determine special circumstances that support compensation in excess of such parameters.  But Board members are not executives of the hospital.  While the Board Chair’s negotiation with Dr. Wantsmore is an issue, the underlying problem is the lack of an overall Board-approved physician compensation philosophy that is consistently applied to physician contracts.  This lack of strategy left the CEO with no guidance and framework with which the CEO could confidently respond to Dr. Wantsmore’s proposal—other than a desire to make a deal.  It also left the Board Chair with no framework with which to respond to Dr. Wantsmore.  And it left the hospital exposed to significant compliance concerns due to the one-off approach to negotiation of physician compensation without a compliant regulatory framework.

So what’s the answer?  Good physician compensation processes start with a board reviewed and approved physician compensation policy that sets the framework and parameters for all physician negotiations and contracts while also detailing responsibilities, including the actions to be approved by the board (or a physician compensation committee).  The policy should guide the hospital in meeting its goals while remaining compliant with regulatory standards.  For example, such a policy should describe the responsibilities of the board and management, the types of compensation arrangements to be used, when and how they will be subject to external evaluation for fair market value, the factors to be used (or not used) in setting compensation, regulatory compliance standards, and key contract terms (such as length and renewals). 

The board’s role in physician compensation strategy is critical to carrying out the hospital’s mission, ensuring regulatory compliance, managing financials risks, and fostering a collaborative relationship with physicians.  When the board focuses only on the bottom line, it fails to carry out this role.  Maintaining a board-approved compensation policy prevents physicians from seeing the board as a way around the CEO and keeps board members from being put in positions they should not and would rather not be in.