Tufts Practice Tries Broad P&L Concept to Set Bonuses, Raises

Physician Compensation Report, March, 2002

The multispecialty practice associated with Tufts University Medical School is trying a pay plan under which the profit and loss figure (P&L) calculated for each physician -- based not only on clinical work but also on research, teaching and administrative effort -- will be a key determinant of bonuses and annual raises.

At 420 physician New England Health Care Foundation (NEHCF) in Cambridge, Mass., physician pay systems, like those at many other academic practices, have in recent years placed greater emphasis on clinical production. The difference at Tufts is that in some specialties NEHCF is applying P&L or individual profit center concepts not only to clinical work but also to research and teaching, in order to set an overall dollar contribution value to each individual's efforts.

Chief Financial Officer Theodore Bukowski says the P&L system tells physicians, "Don't even ask for a bonus if you're not making money, and if you are making money, you can't have all of that." As an independent practice foundation, Bukowski explains, NEHCF is barred under federal tax rules for non profit organizations from paying physicians based on the profit each earns for the overall group, but an individual's P&L can affect or be a parameter such as a cap in the calculation.

"I can pay market rate" under the tax laws, he says. Many aspects of an individual physician's background and performance affect his or her market rate salary level. For instance, if a physician is producing at the 90th percentile for his or her specialty, IRS generally will let NEHCF pay at the 90th percentile income level. Within these legal limits, non profit medical groups have wide discretion in choosing physician compensation formulas and procedures, says Bukowski.

The 15 different specialty departments at NEHCF have widely different pay plans, he notes. A few special ties use "traditional" academic plans in which bonuses and annual raises are set subjectively by department chairs or in negotiation between the physician and the chain

Others use point systems in which points for bonuses or raises are given for seniority (academic rank), longevity and high production. Most departments are in some stage of implementing the P&L procedure as part of the overall compensation process.

The pay systems in all departments foster internal cooperation, Bukowski indicates. That's because one point true of all specialty plans, whether traditional or updated, is that a department gets extra money to pay bonuses only if it generates positive cash flow for NEHCF. If a department does not do so, then the chair must take salary money away from lower producer's to give very high producer's incentives to stay, he says.

Noting the widely different circumstances of academic and non academic medical groups and special ties, and the strong emotions generated by pay formulas, Bukowski says that the "right compensation model [for any practice] is one that everyone agrees to, is legal, and works for a practice" financially.

Cost, Revenue Methods Vary by Department

On the cost side of the new P&L plan, Bukowski says, some specialties divide expenses equally while others allocate costs to individual physicians. Here is the general allocation method used in psychiatry, although details there are still being worked out (see article, p. 6):

(1) Direct costs -- such as psychotherapists selected by a psychiatrist to work with his or her patients, expenditures for the individual's research incurred by NEHCF, and the individual's pay are allocated directly to the physician.

(2) Common expenses -- mainly fixed department overhead such as the department chair's administrative pay -- are distributed equally among the physicians.

(3) Variable costs -- that rise and fall with clinical revenues -- are allocated by production.

The revenue side of the P&L plan is more complicated. While clinical and research revenues can be as signed to individual physicians quite clearly, "administrative, supervision and teaching" or "AST" pursuits pose problems. There are "TEFRA" studies required under the tax laws, usually done each quarter on each individual's AST time, effort and productivity. NEHCF must put market dollar values on this work.

Even after dollar values are assigned, the problem remains that teaching is underpaid, Bukowski says. In general, there is only "graduate medical education" or GME money in Medicare and Medicaid reimbursements, not commercial. If an entire department is unprofitable, he says, it's usually because of underfunded teaching work. NEHCF is wrestling with how to adjust revenue values for this effort.

P&L System 'Engages Physicians'

How to use the individual P&L numbers depends on whether the physician's department is making money, Bukowski says.

If the practice is profitable, the process is relatively "cut and dried," he says. The individual P&L is a guide, along with other factors such as the size of the practice profit and the individual's accomplishments, both to bonuses in the given year and to changes in salary for the next year: