Although money can’t buy happiness, it can buy a comfortable standard of living. When evaluating a practice opportunity, ask yourself “Will I be able to earn a living?”

Most employers guarantee a new physician’s compensation. In some employment agreements, the base salary remains level or increases. In other agreements, though, the base salary decreases or vanishes after a year or two as the compensation model becomes more heavily weighted toward physician productivity or profitability.

Many hospitals offer recruiting incentives to physicians who join a local private practice or start a new private practice. Regulated by the federal Stark III law, these income or collections “guarantees” are structured as loans to the physician. When the guarantee period ends, the physician is obligated to either continue practicing in the area or repay the loan.

Such compensation models intend to motivate the physician to build his or her practice. If the physician’s practice doesn’t grow, his or her compensation shrinks.

Here’s how to assess and mitigate the risks of your prospective employer’s compensation model.

Ask your prospective employer to estimate your compensation over the next three to five years. A verbal or written description of the practice’s compensation model is not enough. Ask for realistic projections based on hard data.

Ask how busy you might be when you begin practicing. Will you be opening a new practice, expanding an existing practice, or replacing an established physician?

How fast might your practice grow? Are the practice’s other physicians practicing at or above capacity? How strong is the demand for physicians in your specialty in the community? How will your employer help you build your practice? 

Your prospective colleagues are your surrogates. Ask them about their experiences. Have they been able to maintain, if not increase, their incomes? (Click here to learn more.)

If your prospective employer’s compensation model includes a productivity-based component, learn whether it measures work Relative Value Units (wRVUs), charges, or collections. The key values are the break-even threshold for earning additional compensation above your base salary, and the payment rate for each for each wRVU performed or dollar charged or collected.

Work RVUs are a close proxy for your actual work effort. A typical office visit for an established patient (CPT 99213) has .92 wRVUs associated with it. A typical threshold of 4,000 wRVUs per year represents about 90 visits per week (4,000 divided by .92, divided by 48 work weeks). A payment rate of $20 - $30 per wRVU above the threshold is fair.

Charges are a less precise proxy for your work effort. Many practices base their fee schedules on expected insurance reimbursement. Other practices are less precise.

Although collections are an even less reliable proxy for your work effort, collections are a fair basis for calculating compensation. Estimate your collections by multiplying anticipated charges by the practice’s collection ratio (collections divided by gross charges) for the past 12 months.

Collections are directly affected by your patient panel’s payer mix, i.e., proportions of insurance plans, and your practice’s collection effectiveness. Your employer must break even on its costs of employing you and operating your practice. Typical practice expense ratios approach 60% of collections. Calculate a fair collections break-even threshold by multiplying your base salary by 2.5. Above this threshold, your incremental expense ratio is about 30% of collections, leaving about 70% gross profit. A payment rate of 25% to 50% of collections above the break-even threshold is fair.

Cautions: As the practice’s newest physician, your panel might contain proportionally more patients with poorly reimbursing insurance, thus depressing your collections. Ask about the employer’s payer mix, reimbursement rates, and collection effectiveness. In addition, since you don’t get credit until the practice receives the income, when you leave, you forfeit the bonus you would have earned on the amount the practice later collects.

You face the highest risk with a profitability-based compensation model. Profits equal collections minus expenses. You have little or no control over your practice’s expenses. You rely on your employer to run the practice efficiently and effectively. Unfortunately, not every employer meets this standard.

Compensation is one of many factors to consider when deciding whether to accept an employment offer. How do you anticipate your continuing career with the practice? First, can you see yourself working in the practice? Are the patients and cases interesting? Does the practice have a positive, supportive culture? Do you anticipate collegial relationships with physicians and others? Will your career develop to your satisfaction? Are the community and lifestyles it offers attractive?

If you are considering a private practice, ask whether you might be offered the opportunity to become an equal shareholder in a few years. If so, learn more about that opportunity. Do not accept reduced compensation in exchange for the promise of a low buy in price; if you do not receive an offer, you will likely forfeit the difference you might have earned or saved.

Bottom line: Estimate your practice’s size and growth to project your compensation. Insist on fair compensation for your work to assure that you will earn a comfortable standard of living in your new practice.