C. COMPENSATION FOR PRACTICE OVERHEAD While the potential elements of compensation for a physician in private practice are the same as for a physician not in private practice, there is an additional consideration for practice overhead that must be understood among private practice physicians when negotiating directly with a hospital, health system or AMC.

Practice overhead is defined as every expense that a group or individual physician bears that is not cash compensation (i.e., physician benefits, malpractice insurance, support staff compensation and benefits, billing and collections service fee, office lease, office maintenance and others). For private practice physicians to earn an income, these overhead expenses must be paid first. Therefore, when negotiating a service contract with a hospital, health system or AMC, the cost of overhead must be considered.

D. IMPLICATIONS Many physicians (particularly those less established in their careers) gravitate toward a stable compensation formula that is easily understood and minimizes the downside risk. However, fixed compensation plans can result in significant misalignment between individual compensation and the economics or strategic priorities of the organization.

Fixed-Only Compensation Formula • Pro:

• Cons:

Variable-Only (Production- or Value-Based) Compensation Formula • Pros:

• Con:

Even the owners of single-physician private practices pay themselves a salary and performance bonus. Therefore, a mix of the compensation methodologies is generally the most appropriate approach to determine compensation.

Beyond the fixed and production-based components of compensation, many physicians (across all specialties) also have a quality or value-based component of compensation. To establish such incentives, physicians and employers first consider what methodology or metric aligns with organizational priorities (and economics).

There is a growing market of shared risk and prospective payment models, such that implementing a value-based element of compensation is often financially viable for employers, even if it results in physicians earning higher compensation. If utilized, this component mitigates risks outside of physicians’ control (e.g., COVID-19 disruptions). From the employers’ perspective, a value-based component of physician compensation is supported by value-based (not fee-for-service) payer arrangements, wherein reduced costs of care and/or improved outcomes are rewarded. IDSA will be releasing a Value-Based Arrangements Guide this spring, which will provide more information and guidance on this topic.