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The fundamentals of physician compensation models have changed dramatically since my first employment contract in the early 1990s. Compensation plans have taken different forms over the years.

My income was based on other factors beyond billings or revenues. I dealt with the complexities and nebulous issues of corporate citizenship or ownership, governance responsibilities within the medical practice and on hospital committees, and group and patient satisfaction. I also had to deal with managed care contracts which have largely been abandoned.

Compensation models today are primarily based on either a straight salary or salary plus bonus based on net or gross revenues. For new physicians, most compensation packages being offered are determined by local and regional market factors. They result from analyses provided by organizations such as MGMA (Medical Group Management Association), the American Medical Group, or the American Medical Association (AMA). Physicians need to know which data sources are important in their particular market.

While Medicare physician pay rates affect the medical marketplace, they may not affect your situation. This is especially important for new physicians to understand. Advocacy may be necessary, but getting that first job contract is more important.

Nationally, Medicare rates may affect patient access to care more than individual physician salaries. New physicians must pay close attention to the details of their prospective patient mix since their physician productivity can be affected by which patients they will be seeing. This is why many independent physician practices either stop seeing Medicare patients or explore the option of concierge medicine for their practice.

For most physicians, flexibility in choosing a particular compensation plan may be challenging. A lot of employers will have standardized physician contracts. However, even well-established medical groups, large managed care organizations, and hospitals have space for negotiating terms, particularly if certain specialties are needed. As a rule, physicians should focus more on whether the position is a good fit.

Centers for Medicare and Medicaid Services

The situation may not improve in 2024.

On July 13, 2023, CMS released the proposed 2024 Physician Fee Schedule. CMS is proposing to decrease the conversion factor by 3.34%, to $32.75 in calendar year 2024, as compared to $33.89 in CY 2023. This reflects the expiration of the 2.5% statutory payment increase for CY 2023; a 1.25% statutory payment increase for 2024; a 0.00% conversion factor update under the Medicare Access and CHIP Reauthorization Act; and a -2.17% budget-neutrality adjustment.

In addition, CMS proposes to delay the implementation of its policy to define the substantive portion of a split (or shared) visit based on the amount of time spent by the billing practitioner. Under this policy, if a non-physician practitioner performed at least half of an evaluation and management visit and billed for it, Medicare would only pay 85% of the physician fee schedule rate.

The bottom line is that regardless of location nationally, many surgical specialties and primary care will face a 2% to 3% cut. Nonsurgical specialties such as cardiovascular services will remain the same in reimbursements.

What does this mean for new or returning physicians signing contracts?

Physician supply and demand play a large role in physician compensation. Most physicians should be assured that while Medicare rates remain under financial pressure, physicians of all specialties are still needed. Understanding the dynamics of Medicare reimbursement may not provide physicians with the big picture of physician compensation and benefits. Physicians need to be aware of their patient mix.

Here are the main types of compensation models. Each has pros and cons, and all can be affected by Medicare rates.

I. Salary or salary plus incentive

  1. As a physician signing a contract, the salary guarantee is usually derived using local, regional, and national criteria. If you are being offered a bonus, incentive, or special benefit, find out how it is calculated. Is it obtainable?
  2. Most physician contracts offer a salary minimum or guarantee. Is that minimum within reason for the local market? Contract Diagnostics can help get the most recent and accurate physician compensation information.
  3. Salary guarantees offer a sense of security, particularly to new physicians.
  4. Is there a minimum productivity expected?
    • What does the physician contract state if the minimum is not met?
    • Is the local patient mix Medicare or Medicaid heavily so the physician is behind even before getting started?
    • Physicians may not be motivated toward entrepreneurship or furthering their skill sets without a bonus or incentive.

II. Productivity-based compensation

  1. If the physician contract is solely productivity based, you may need advice from the experts.
    • Is productivity based on billings, collections, or resource-based relative value scale (RBRVS) units assigned to procedures or patient types?
    • What overhead costs are allocated to physicians and are there fixed and variable components? In other words, can overhead costs affect long-term salary or benefits? As an employee of a large healthcare organization, physicians may not have much control over expenses.
  2. Productivity is a challenging subject. Always inquire about the relative percentages of commercially insured, Medicare/Medicaid insured, and uninsured patients you will see.
    • Many physicians feel their productivity is not solely based on the number of patients they see or procedures they finish daily.
    • Productivity-based compensation can foster intragroup competitiveness and conflict.
    • For example, physicians working on collection-based productivity compensation will be less likely to want to keep seeing Medicare patients as Medicare rates decline. Medicare Advantage plans may mitigate these issues.

III. Capitation or productivity plus capitation

  1. The concept of capitation means prepaid healthcare premiums are allocated to contracted provider groups for all coverage, including specialty coverage of a particular enrollee population. This model was popular when I started practice but has declined in many markets. Physician compensation is calculated after health plan payments are disbursed to a physician group, usually equally among physicians.
  2. Capitation remains prevalent in HMO-intensive markets such as California, Minnesota, and the Northeast.
  3. Physician groups in these markets may boast that they deliver cost-efficient care.
  4. The downside is that capitation-based income can see financial pressures from marketplace factors and poor practice negotiations. Individual physicians’ salaries can suffer as a result.

What do physicians need to consider in signing employment contracts?

While decreases in Medicare physician payments and other issues regarding healthcare are important, physicians need to consider asking pertinent questions when signing employment contracts. These questions can be difficult to figure out. Physicians need the experts at Contract Diagnostics to guide them through the process.

I. Ask how the compensation plan works for all physicians and if it will change over time.

Some employment contracts guarantee a year or more compensation, but what happens after that trial period? There may be a transition to salary based on productivity. There needs to be clarity about when and how this may happen so you are prepared.

II. Ask how overhead expenses are calculated and allocated.

You may be on a fixed salary, but overhead affects you, mostly in independent practice settings. There is fixed and variable overhead. Many physician practices spend half of their revenue on overhead, and this may be a significant factor if you are offered a partnership.

III. Ask about the income distribution for partners.

You may be signing an employment contract for salary or salary and incentive bonus, but you should ask about the partners being paid. You will want to know about your future.

IV. Ask about the buy-in to become a partner.

Even large practices in various settings have some type of ownership opportunities. While a straight salary sounds attractive at first, you may want to know about the details for long-term earning potential.


Whether you are a new physician finishing residency or one in practice for years, the news about Medicare physician pay rates will continue to raise concerns. However, physician compensation models have been streamlined over the years.

Consideration and understanding of the intricacies of specific compensation models is vital for professional development and satisfaction. Now more than ever, physicians need information and advocates who truly understand physician compensation and benefits.

Are you getting paid what you are worth?

Contact us at Contract Diagnostics and learn how to get a 15-minute phone call where we will discuss your specific situation and a better way of presenting compensation data to you. We can show what other physicians in your area are earning by specialty and then help you optimize your compensation to give you the best chance of getting paid what you are worth.

About the Author

Dr. Drew Sutton, MD, has walked the long road of a successful medical career, amassing invaluable insights and expertise. With a wealth of knowledge derived from his time in the trenches, he understands the myriad challenges and opportunities that come with physician contracts and compensation. Dr. Sutton is not just sharing theoretical knowledge; he imparts lessons learned from his own hands-on experience in the medical profession. Dr. Sutton has been where you are, and he’s navigated the path to where you want to be.

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