Decoding Healthcare Compensation: Models, Trends, and Legal Traps

Navigate the essentials of healthcare compensation. From traditional salary arrangements to innovative value-based approaches, we touch upon the key models and legal implications.

A woman sitting at a desk reviewing healthcare invoices.

If you’re a healthcare provider looking to enter into an employment contract, a new practice owner weighing how to pay your staff, or a curious patient wondering how your doctor makes money from the care they provide, know this: there isn’t just one way healthcare providers get paid. And how a provider gets paid affects not just the provider —  it can have a big impact on the patient experience. 

There are several compensation models used in healthcare. Each model has its pros and cons:

Salary Model

Some providers receive fixed salaries. Their earnings don’t reflect the number of patients treated, the treatments given, or the revenue generated for the practice. Some providers prefer this model because it guarantees a steady income, even when business slows. Healthcare practice owners, however, might hesitate to adopt such a model, fearing it doesn’t spur productivity. And, if the practice’s revenues fall, the practice will still owe salaried employees the same payments.

Hourly Model

Under the hourly model, providers earn a flat dollar amount for each hour worked. Providers who want to earn more can request additional hours. For practice owners, an hourly rate can offer control and security — they pay providers for the actual time they work. If business is slow, the practice can reduce providers’ hours. Still, hourly employees may not feel incentivized to help a practice grow if their hourly rate remains unchanged. Thus, the fee-for-service model comes into play.

Fee-for-Service or “Revenue-Based” Compensation

For new practice owners, it often sounds logical to pay providers based on the services they render. Particularly for those working non-standard hours, such as independent contractors or part-time employees, it can be helpful to tie pay to revenues. 

Staff can earn compensation based on a flat rate for each procedure performed or session billed to insurance. Alternatively, pay can be based on a percentage of the revenue tied to the employee’s activities. For example, it’s common in mental health to pay pre-licensed employees who need supervision a percentage of the revenue collected and then increase that percentage when the employee becomes fully licensed. 

This is considered a “fee-for-service” model because the provider receives payment based on the work done. The more the provider contributes to the financial success of the practice, the more they will earn. It sounds sensible, right? 

Unfortunately, the fee-for-service model, or any model where the provider earns more as the practice earns more, can incentivize providers to carry an untenable patient load, order unneeded tests, or perform unnecessary procedures.

Incentivizing volume over quality can lead to worse patient outcomes or low patient satisfaction. Treating too many patients can raise the risk of making mistakes or missing crucial information. And patients who undergo unnecessary tests and procedures might lose trust in their providers.

Downsides of Fee-For-Service for Providers

For providers, revenue or productivity-based compensation models also come with some risk to their financial and personal well-being.

  • If practice revenues dip, the provider’s income decreases.
  • Those who take insurance are at the mercy of negotiated rates and insurance reimbursements, which can ebb and flow over time.
  • Pressure to increase patient volumes and revenue can lead to burnout.

Still, revenue-based compensation is common and may be combined with other models, such as offering an hourly rate and a percentage of commissions on procedures. 

Legal Traps of Fee-For-Service Models

Notably, revenue-based compensation raises some legal risk. Those tempted to inflate insurance claims to boost revenue should be wary. Submitting overstated claims to Medicare or Medicaid can lead to False Claims Act violations and other types of fraud, waste, and abuse. 

See the related article, “Does Your Practice Accept Medicare or Medicaid? You Need a Fraud, Waste, and Abuse Compliance Plan.

Providers should also tread carefully with recommendations and referrals when receiving revenue-based compensation. All referral schemes in healthcare require scrutiny to avoid compliance pitfalls. However, revenue-based compensation models demand even closer evaluation. 

For instance, say that Provider A routinely sends friends and neighbors to Provider B in the same practice. It sounds harmless. After all, it’s natural to recommend someone whose good work we’ve seen up close. But if Provider A receives higher compensation due to the practice’s higher patient count, the arrangement could implicate the Anti-Kickback Statute. For physicians, it may also breach the Stark law. Thus, practices using revenue-based compensation schemes should be mindful of whom they’re treating and the sources of patient revenue.

Value-Based Care

Value-based care is the latest trend in provider compensation. In theory, it directly links providers’ pay to the quality of care they deliver. It seeks to incentivize providers who focus on quality as opposed to quantity.

Encouraging value sounds like a worthy goal, but how does this work? In value-based care programs, providers whose treatment results in healthier long-term outcomes for the patient can receive financial bonuses from their insurance partners. 

Federal payors and accountable care organizations (ACOs) already give incentives for value-based care. However, smaller providers might lack the infrastructure or capability to implement this model. Value-based care emphasizes long-term goals, which might apply only to some practices or practice areas. But while the value-based compensation model may not fit every organization, one can still look for ways to reward providers for delivering quality care.

Get Legal Support

Providers should receive fair compensation for their crucial work. Patients deserve treatment that isn’t rushed or overcomplicated to boost revenues. If you own a healthcare practice and are deliberating how to fairly (and legally) compensate your employees, consult an experienced healthcare attorney who can assess your needs and help you understand what is best for your practice.

For guidance on these or any other legal issues in any of the states where we have licensed attorneys, schedule a time to talk to us. Our law firm offers free consultations to help you determine if we’re a good fit.

This blog is made for educational purposes and is not intended to be specific legal advice to any particular person. It does not create an attorney-client relationship between our firm and the reader. It should not be used as a substitute for competent legal advice from a licensed attorney in your jurisdiction.

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