Your employment contract should specify compensation, including base salary and bonus, as well as any distinctions between clinical and other earnings. The base salary is effectively your “guaranteed” annual compensation, while other sources of income may vary annually depending on your performance or the performance of your unit or private practice. There is also the possibility that you won’t receive any income beyond your base salary. Note that the guarantee alluded to above assumes you continue to be employed. If you resign or are fired, you’ll likely be eligible for only two weeks of severance pay.
The contract may also address annual increases to your base salary, which may or may not be automatic. It’s reasonable to expect some annual cost of living adjustment to your base salary, to keep up with inflation. If there’s no mention of such increases I recommend asking the employer what is on offer.
Bonuses are often directly linked to productivity. For example, how many procedures you complete in a month or year. Ask the employer to quantify the bonus amount you can realistically expect to receive. The key here is realism. It may be implied that your bonus can be very lucrative, but that may require you to work 16 hours a day, six days a week. If you have a friend or contact who works at the same place reach out to verify what you’ve been told.
Be on the lookout for distinctions between regular salary and supplemental wages, where the latter may include bonuses or overtime pay. The distinction is important because your base salary is likely to be the one used to calculate the employer contributions into your qualified retirement plan.
For example, assume your employer will contribute 8% of your eligible annual income to a retirement plan and suppose your total income is $200,000. If the entire $200,000 is your base salary, the employer will contribute $16,000 into your plan annually. If your total income consists of $150,000 in base salary plus a $50,000 bonus, the employer will contribute 8% of your base salary, which is to say, only $12,000, to your retirement plan. That’s a significant difference for any one year, and it is magnified further if it happens over many years.
Strive to get as much of your total compensation as possible classified as base salary as opposed to supplemental.
Below are some other compensation-related considerations.
Stark Law and Bonus Restrictions
According to the Stark Law, bonuses generally cannot be paid for certain Designated Health Services (DHS). Barry Rosen, a senior health care attorney at Baltimore’s Gordon Feinblatt LLC, explains that the “designated health services” covered by the Stark Law include:
Your base salary can cover these activities, but you cannot receive a performance-based bonus for them.
Your compensation and benefits may also depend on your employment status. As a private practice co-owner you may receive: a salary, benefits, a bonus, and a share in the profits of the practice. As an employee you can expect: a salary, benefits, and perhaps a bonus. As an independent contractor you can expect: a salary, and possibly a bonus, but benefits are unlikely to be included.
It’s more favorable for a private practice to classify you as an independent contractor. Contractor status likely makes you ineligible for benefits, reducing the private practice’s overhead costs. To some extent, contractor designation makes you a second-class citizen compared to those with formal full-time employment who have all the associated benefits. Think carefully before accepting a contractor role.
Your employer will elect to keep its books using one of two accounting methods. These are known as accrual and cash accounting.
The cash method of accounting … records revenue when cash is received, and expenses when they are paid in cash, in contrast to the alternative accrual method which records income items when they are earned and records deductions when expenses are incurred regardless of the flow of cash. – Wikipedia
In plain English, the cash method records actual movements of cash, while the accrual method assumes that money has moved (into or out of the firm) when a contract for services has been signed or an invoice for payment has been received. The bottom line for you is that these two approaches can lead to different net income or profit results for your employer, which in turn may affect your bonus payout. Most likely you won’t be able to force the employer to switch from one method to the other, but you should understand which one is being used and how it affects your annual compensation.
Relative Value Units
Many hospitals base at least some compensation on Relative Value Units (RVUs). This is a Medicare concept used to determine a physician’s reimbursement for each service and procedure listed in Medicare’s fee schedule. In your workplace the system may be used to determine your productivity. Private practices rarely use RVUs.
Every procedure has an RVU value associated with it. The RVU values are adjusted every few years, along with other periodic changes. You can find information on various government healthcare programs including Medicare, Medicaid, and CHIP at cms.gov.
How do RVUs work? At the end of a given year, hospital administrators will multiply the frequency of each procedure you performed by its RVU; they will then sum those products up to yield a total RVU (for each physician) for the year.
The RVU amount you receive per procedure may vary by institution and or location. For example, a neurology procedure may net you $28 in Boston while the same procedure yields $65 in South Dakota.
It’s usually necessary to subtract from the total RVU some baseline amount meant to cover overhead expenses, then multiply that net RVU count by a net multiplier (a dollar rate per RVU) to yield the actual dollar bonus. The net multiplier is based on a Medicare compensation rate per RVU, net of overhead per RVU. If the (gross) multiplier per RVU is $80, and the per RVU overhead is $30, the net multiplier is $50 dollars per RVU.
Let’s say the total RVU count for the doctor in a given year is 30,000 Units, with a baseline of 25,000. In this case the productivity increase above the base is 5,000 RVU and multiplying that by $50 yields a $250,000 bonus.
Independent of the RVU system, doctors may be paid based on an “eat what you kill” model where the physician receives some share of the revenue he generated, net of overhead. According to Barry Rosen, there are different overhead formulas in use, some of which are fairer than others, and some of which create less constructive behavior. For example, there may be an incentive to get other departments to bear unfair amounts of the overhead. This can lead to interdepartmental conflict.
An efficient and fair system could be one in which each specialist in a group performs the procedures she is good at. Done properly, this can lift the entire group’s performance, resulting in higher net earnings for the group. But some incentives may lead physicians to compete internally over the provision of certain procedures, reducing efficiencies and overall earnings and causing interpersonal frictions. Prior to accepting the job offer, gauge whether your prospective employer suffers from compensation-related frictions or conflicts.
If you suspect such issues are real, consider looking elsewhere for employment. Being a doctor is challenging enough when you are surrounded by friendly, collaborative colleagues. Life’s too short to contend with workplace hostility and resentments.
To determine whether your compensation offer is competitive, you can refer to compensation survey results. Medscape and the Medical Group Management Association (MGMA) compile compensation data for physicians and private medical practices. The American Dental Association (ADA) compiles revenue, expense, and net income data for dental practices.
Dental Post survey on dental practices and dentist income