by Mark Spurlin, CPA
The answer is likely yes (and they often do).
The reason for this dichotomy in pay is multifaced, but it can be largely attributed to economies of scale. In private practice, fixed overhead costs are often shared by a smaller number of physicians, the administrative (non-billable) time burden is higher for the physicians, and a private practice generally has limited leverage with commercial insurance payors to negotiate favorable payor contracts (particularly under traditional fee-for-service models). These economic forces place constraints on the overall profitability of a private practice relative to their hospital-owned counter parts.
It should also be noted that whereas these economic constraints impose practical limitations on what a private practice doctor can earn (i.e., in private practice physician earnings are limited to available profits), a hospital may be able to subsidize employed physicians if the prevailing market rate of compensation exceeds the profit generated by the physician group. This is not without limitations, however, and it is of utmost importance that any compensation paid is compliant with the applicable healthcare regulations. Compensation must be consistent with fair market value, not calculated in a manner to takes into account to the value or volume of referrals, and the arrangement must commercially reasonable.
In an open and unrestricted market, the forces of supply and demand will ultimately determine the compensation that is paid for any good or service, including physician services. In today’s healthcare environment there are many other factors that should be considered when setting physician compensation, and prevailing market compensation often exceeds what can be earned in private practice.
At Root Valuation, we help physician leaders successfully navigate business and employment transactions to that their value is fully realized. Have a question about physician compensation, contact us at (720) 458-3777.