Many physician private practice employment compensation models will start off with a base salary, signing bonus, and moving stipend. However, in the long term, most will compensate you based on a portion of how much money you bring into the practice. It’s critical to understand the pros, cons, and pitfalls that come with these net collections physician compensation models.
In “Net Collections” models, your future compensation is tied to your total cash collections from your work and subtracted by a few key items that we will discuss here. It’s important to understand in every physician contract what your future earning potential may be. We encourage all physicians to push past being overly focused on starting base salary and shiny one-off sweeteners, like signing bonuses and moving stipends. Make sure the future compensation model is fair, appropriate, and consistent with regional market factors for the type of volume that this position requires.
In this blog, we’re going to create a starting point for analyzing various net collections compensation models and make sure you understand the primary points to consider as you’re evaluating opportunities.
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Private Practice vs. Other Practice Settings
We often see net collections based compensation models in independent physician-owned practices. We get queasy when hospital systems or academic centers are compensating you purely on net collections. Many hospital systems and academic centers are not-for-profit entities that are required to perform some amount of charity care to maintain their not-for-profit status.
We could spend a lot of time talking about whether the amount of charity care they provide is worthy of their not-for-profit status, but we’ll leave that policy discussion for another day. Additionally, negotiations between hospital systems or academic centers and insurance companies is incredibly complex. It’s sometimes hard for the employer to figure out who should be paid for what, depending on how those payer models are structured.
If a hospital system or academic center offers a net collections model, this is often a yellow flag and might require further investigation on how much of your work might go uncompensated, and thus not factor into your total collections. Our fear is that they are not always great at fully collecting for your work, and the charity care responsibilities might impact your total compensation via reduced net collections.
For private practices owned by private equity, we see a bit of a mixed bag. Some will compensate purely on a productivity model, such as work RVUs, because they have a very mixed payer model. They sometimes want to ensure that physicians who see more patients with lower-compensating insurance, such as Medicare or Medicaid/Medicaid patients, are still earning an appropriate amount compared to their counterparts who might have a more lucrative payer mix.
Not accounting for this could create wild swings in individual physician compensation structures, and they probably don’t want to create that internal animosity. Some private equity groups don’t really want you to know how much money you’re earning the practice. They may intentionally shy away from pure net collections models because understanding their profit margins is to your advantage in future compensation negotiations.
Flip the Script: I’m Hiring an Employer. Are You Good at Your Job?
Consider this mindset shift as you exit training. In a way, you are a small business with an exceedingly valuable deliverable, and you’re interviewing service providers to help you run your business. You want and deserve a fair compensation deal.
An important consideration in net collections physician compensation models is how good a job the employer will do for the money you’re paying them to do it. You’re hiring them for key business functions, including but not limited to the following:
- Fill your schedule with patients.
- Market your practice.
- Handle overhead expenses efficiently.
- Staff your clinic competently.
- Schedule and allocate OR time or other procedural aspects appropriately.
- Obtain appropriate reimbursement rates for your services.
- Identify and source appropriate clinical locations and space.
- Quickly and fully collect for your work!
You could “insource” these functions by starting your own independent private practice, but hiring another company to do this for you could be a great move. There are many moving parts to this, and we understand the desire to outsource these critical decisions to companies that already know what they are doing. This is why employment in a pre-existing private practice may make sense for you – recreating the wheel can be cumbersome and expensive.
Collections are a bit of a challenge in healthcare. It can take time and hard work to get payment out of insurers and Medicare/Medicaid. There’s often a lag in payment, which can be 90 days, 180 days, or sometimes even longer. Collecting the majority of the value of your work may be relatively easy. However, collecting from some insurance companies and certain Medicare/Medicaid payments can be more challenging when trying to recover the last 10% to 20% (this varies based on specialty and payor).
If a company you hire does a really good job of collecting, and their total percentage of collections is higher than others, this can be great for you. I have no problem with them being rewarded for this hard work. However, if they tank that hard stuff, namely the last 10% to 20% of collections, you probably need to know this and understand how this will impact your total compensation. This is vital in net collection models. If they want to be compensated at a very high rate and make big profits from weak collection efforts, this might not be a practice that you want to be in.
Conversely, if they do a great job at collecting your work and take a reasonable cut from you, we think this is appropriate. This math will differ a bit based on your specialty and the payer mix, but this mindset shift is very important when entering private practice.
Net AFTER Overhead: Overhead is Deducted BEFORE Collections Count
Some net collections models include a deduction for your allocated overhead before you start getting credit, but some do not. In net after overhead models, you need to understand how much your employer is charging you for the valuable services that they create.
Let’s say your work creates $1M in total collections. You need to understand what is deducted from that $1M before you start receiving a percentage of collections as your compensation. Some contracts will state vaguely that they will deduct various overhead expenses without providing any further clarification. If this is included in your contract, then you likely need to do more digging and understand, on average, what the total typical overhead deductions are for others who are working in a similar capacity to you.
For example, I have seen competing opportunities, both that are net after overhead, where one overhead allocation averages $250,000, and another averages $100,000. This leads to very different total compensation outcomes.
If the overhead they are deducting from your practice includes items that you don’t benefit from, then there could be some room for negotiation here. Many employers, particularly bigger employers, might have one set model for how they allocate overhead, and changing it in a negotiation could be difficult. It just depends on the practice.
Overhead might be very individual to the physician (a more capitalistic model). Sometimes it’s simply split evenly across all physicians in the practice (a more socialized model). It might also be allocated depending on your total collections relative to the other physicians in the practice. For example, under the individualized option, you might be solely responsible for covering the salary for your nurse, your MA, and your office equipment, but evenly split expenses related to the office lease and front desk staff. That would be an example of a more individualized approach to allocating overhead.
On the other end of the spectrum, a more socialized model may have an even distribution of overhead, regardless of who uses what. For example, one physician might have two MAs and two nurses but be paying the same overhead as a physician with one MA and no nurse. If this is your model, this might be an area to reconsider or potentially negotiate, or at a minimum, understand that it is important for you to convince the employer to allocate appropriate staffing needs to your practice.
There are middle-ground approaches here, but understanding this is important for your future earnings, and it isn’t always clearly defined in the contract.
Net BEFORE Overhead: Pure Percentage of Collections
Under net before overhead models, the total percentage of collections that you can take from your work is often lower than models that are net after overhead. That’s okay, and there are advantages and disadvantages to both. Let’s make sure you’re comparing apples to apples when evaluating job opportunities.
If your compensation model is net before overhead, then it’s possible that the employer has a financial incentive to avoid staffing and allocating tons of expenses to your practice. Those expenses go directly to their bottom line; they are paying for it. For example, a net before overhead model might say that, regardless of the amount of expenses you have, you receive a set percent of your collections.
This creates a financial incentive to push for more staffing and more support in your contract negotiations because it may not affect your individual bottom line. Employers must be thoughtful about this, though, because while adding appropriate support staff might increase your total collections, the amount of increase in collections needs to eclipse the additional expense for them to see it as a good business investment.
In these models, you might want to consider negotiating for certain staffing needs in your contract instead of leaving it to a future dispute. For example, I have worked on dermatology net before overhead contracts, where one of our primary negotiation points was to secure two MAs for all clinic days.
Net of Company Profits
Some practice compensation models will say that the physician must essentially guarantee that the practice has a certain amount of profits from the relationship, but the physician keeps 100% or the vast majority of collections once overhead and company profits have been allocated.
This could be very profitable for super high-earning and busy physicians, as the marginal rate of return for more volume could be very attractive. For example, you might see a model that says the company essentially charges the physician $400,000 per year to manage the practice, and the physician must cover any staffing, equipment, supplies, and collections costs first. But anything over those deductions is 100% owned by the physician. This is often a benefit for high producers, but creates big financial risk if things don’t go well.
Is This Negative Accrual from Day One?
When you’re under a net collections model, you’ll often experience an initial delay in earnings. Depending on your specialty, it might take months or even a couple of years for you to build up your practice to a volume that is profitable and earns you something consistent with your total compensation goals and reasonable expectations for your specialty and practice setting.
The question arises, though: who must sacrifice during those early years of growth? Is it you or the practice? If your contract is negative accrual from day one, that means that any low earnings from the beginning of your practice must be paid back with your future collections before you start receiving a bonus.
For example, let’s say you must make $60K per month before you start making more than your base salary of $30K per month, but you average $40K per month in net collections during the first 6 months of practice. Now, you’re in a $120K hole, and must earn $60K per month PLUS repay the $120K negative accrual before you start receiving more than your base salary.
This can be very painful if your growth is slow or if you transition away from that practice within the first couple of years before the practice is fully matured. Some negative accrual contracts require the physician to pay back any negative accrual before they can leave, which can be very costly if you are transitioning early on! Watch out for this in small private practices.
This also often means physicians who take time away from practice for parental leave are losing money during parental leave, instead of being paid for parental leave. Considering our prior example, if you take two months off for parental leave, you would earn $0 for two months but would return from parental leave with a $120K hole that you must outearn before you start bonusing again. Ouch!
There are pros and cons to these models, but we often try to negotiate for removing any negative accrual aspect from your practice for the first couple of years, and consider a negotiation around suspending this during parental leave. This also adds a mental and social weight, as you might experience undue pressure in the beginning when you’re working hard trying to build your practice, but not seeing financial rewards.
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Payer Mix Matters
When you’re working under a work RVU-based comp model, you typically don’t have a compensation benefit from seeing more patients that are paying cash or the typically more lucrative employer-sponsored insurance plans, when compared to a full panel of Medicare and Medicaid patients. However, when you’re paid on net collections, this now matters a lot.
Often, insurance companies will pay 150% or more of the Medicare/Medicaid rates for the same services, and sometimes, cash pay patients are paying even more than that. We operate in a silly system where the amount of reimbursement for your services depends heavily on who is paying, and it’s often not the patient who pays. As such, your patient mix now has a massive impact on your future earning potential under productivity-based compensation and collections-based models.
This is sometimes a negotiable point, and we have sometimes asked for clauses in contracts that require the employer to do a good-faith assessment of payer mixes and offer a reasonably consistent mix for others in the practice. However, we also see this as a potential gender and racial compensation gap issue in the firm. I’ve spoken with many physicians in net collections models who feel that being a woman or a physician of color has led to a differing allocation of patients, creating a less lucrative payer mix.
On the surface, two physicians may have the same compensation model, but in practice the outcomes can be very different based on payer mix and allocation of patients. In some cases, medical groups may try to balance these disparities by introducing a hybrid compensation model that blends collections with quality incentives like patient satisfaction. Still, the core issue remains: payer mix is a major driver of physician income under these systems.
I don’t have data on this, and someone should do a deep research dive on this issue. My working theory is that it is one of the many ways that create a divergence in the income gap in private practice.
How Much Do Physicians Earn Here, On What Volume?
At the end of the day, it’s important to understand in net collections models what other physicians working in a similar way as you can collect out of the total opportunity, and what they must do to obtain that compensation.
In some instances, it is possible to sidestep these discussions by simply getting an outline of the total compensation ranges from physicians who are 2 to 5 years out of practice, and comparing them to the number of patient visits and/or surgeries they perform. Understanding what fully developed and steady-state physicians are earning in the practice can be more important. This is a common strategy in the firm in private practice, net collections, and dermatology contracts.
Do your due diligence here, and that often requires questions during the interview and contract negotiation stage that ask for information regarding historical collections from similarly situated physicians. We’ve seen many instances where a physician comes to us with two opportunities, perhaps with varying net collection percentages offered, but the total earning potential doesn’t correlate with the percentage of collections made.
Example: Dermatology
For example, this dermatologist had two offers. Both had a straight salary of $350K and a signing bonus of $25K, and paid 40% of collections under a pure collections model. Upon further digging, one was collecting on average $125 per patient visit, and the other was collecting $150 per patient visit. A differential like this may not sound like a lot now, but it can add up quickly in the long term!
Compare these two:
| Example: Dermatology | |||
| Option 1 @ $125 | Option 2 @ $150 | ||
| Hours per day | 8 | 8 | |
| Days per week | 4.5 | 4.5 | |
| Weeks per year | 47 | 47 | |
| Days per year | 211.5 | 211.5 | Days per week x Weeks per year |
| Hours per year | 1692 | 1692 | Days per year x Hours per day |
| Patients per hour | 4 | 4 | |
| Patients per year | 6768 | 6768 | Hours per year x Patients per hour |
| $/patient | $125.00 | $150.00 | |
| Total annual collections | $846,000.00 | $1,015,200.00 | Patients per year x $/patient |
| 40% of collections | $338,400.00 | $406,080.00 | Total annual collections x Net Collections rate |
Also consider how volume plays into the equation.
- If the higher-collecting employer’s resources also allowed for an average of 5 patients per hour, that would be $507,600 in total compensation.
- If the lower-collecting employer’s resources only allowed for an average of 3 patients per hour, that would be $253,800 in total compensation.
In net collections models, there are often bigger factors in total future earning potential than a couple-point changes in percentage of net collections. You really need to understand the full picture before proceeding.
Example: Outpatient Adult Psychiatry
Here’s another example from an outpatient adult psychiatrist comparing two opportunities. The first was hospital-employed and paid $70 per work RVU. On average, this physician would see about 10 patients per day (which also considered cancelled appointments and unfilled slots, sometimes called ‘white space’).
We estimated that about 15% of those patient visits would be new evals, with the rest being follow-up visits. The position required 230 days of work per year (side note: consider thinking about time off in the inverse… how many actual days of work must I provide? Take the total number of weekdays in a year, and subtract all time off, including holidays, CME days, vacation, sick, etc.).
Initial evals in outpatient adult psychiatry are typically CPT Code 90792 and pay 4.16 wRVUs, and follow-ups are typically CPT Code 99214 and pay 1.92 wRVUs. There would be some 13s and some 15s, but this was a good general starting point for our evaluation. We estimated that the employer would allow most of those visits to also bill the G2211 add-on code, which pays an additional .33 wRVUs. Here is how the math worked:
| Example: Adult Outpatient Psychiatry, Hospital Employed Option | ||
| Compensation per wRVU | $70 | |
| Patients per day | 10 | |
| Days of work per year | 230 | |
| 15% are 90792s | 1.5 | |
| 85% are 99214 | 8.5 | |
| 80% can add G2211 | 8 | |
| Total patient visits, annual | 2300 | Patients per day x Days of work per year |
| Total wRVUs from 90792 | 1435.2 | 15% of annual patient visits at 4.16 wRVUs |
| Total wRVUs from 99214 | 3753.6 | 85% of annual patient visits at 1.92 wRVUs |
| Total wRVUs from G2211 | 607.2 | 80% of annual patient visits at .33 wRVUs |
| Total wRVUs annually | 5796 | *Sum of all wRVUs, annually |
| Total compensation | $405,720 | *Sum of all wRVUs x Compensation per wRVU |
This psychiatrist had a second opportunity in a private practice. The practice paid a Net ‘Before’ Collections model at 65% of collections, and physicians in the group were making around $400,000 on average. However, we also asked about the average number of total patient visits annually, and we learned that they were seeing a much higher volume of 3,500 patient visits per year. While compensation was potentially the same, that physician would need to see more than 150% of the volume in this private practice option to make around the same amount of total compensation.
When looking solely at compensation, the better option was likely the hospital-employed opportunity. Now, obviously, please consider the advantages and disadvantages of the entire deal, rather than focusing solely on compensation. It’s certainly possible that seeing 3,500 in the private practice was as taxing as 2,300 in the hospital-employed setting, or that the advantages of being in a private practice outweighed those of hospital employment.
Summary
You need not be afraid of net collections compensation models, but you should make sure you clearly understand your prospective employer’s model before you proceed. This often requires a bit more due diligence than pure work RVU models that are more common in hospital-employed settings or some private equity-owned practices. You almost certainly need to pull out a calculator 😊.
Net collections models may leave you a bit exposed to changing payer mixes and difficulties in collecting for your work. Understanding these pros and cons, instead of shying away from them, is the best practice here.
If you’d like any help navigating this type of opportunity, we do this regularly in the firm and would be happy to assist you.
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