Physician Compensation Models Explained for First-Time Practice Owners

Starting your own medical practice means wearing a lot of hats, from clinical leader to HR manager to financial strategist. And one of the most important decisions you’ll face early on is how to compensate your physicians. 

Guidance from a CPA for doctors can help ensure your compensation plan is not only competitive but also compliant with tax and regulatory requirements.

This isn’t just about writing paychecks. The way you structure physician compensation has a direct effect on how your practice grows, how patients are treated, and whether you can recruit and retain top-tier talent. 

For a first-time practice owner, it can feel like a balancing act. You need to provide competitive pay, stay aligned with reimbursement trends, and ensure your compensation structure supports long-term stability for your business. 

Many new practices find that outsourcing your healthcare accounting provides the extra support needed to manage these complexities without pulling focus away from patient care.

With the right physician compensation model in place, you can create a culture that supports both care quality and financial performance. But without that clarity, even well-intentioned practices can struggle with turnover, poor morale or revenue surprises. That’s why it pays to get this decision right from the beginning.

Let’s break down the most common models and help you find what works best for your goals, your budget, and your future as a practice owner.

How pay structures shape practice performance

At its core, physician compensation comes down to how you reward the people delivering your services. But under the surface, it reflects much more: your approach to risk, your growth targets and your values as a care provider.

Most compensation models use some mix of the following building blocks:

• Base salary: A fixed amount paid to the physician, providing income stability regardless of patient volume
• Productivity incentive: Bonus pay based on services rendered, commonly calculated through relative value units (RVUs)
• Collections-based pay: Compensation tied to actual revenue collected for services performed

There’s no universal formula. But generally, practices with tighter margins lean on productivity incentives to drive performance, while those prioritizing retention or work-life balance may offer more stability through salary guarantees.

First-time owners also need to consider how these models align with reimbursement trends. According to the KFF (2023), the industry continues to shift toward value-based care. That means pay structures that reward quality and outcomes (rather than sheer volume) will be better positioned for future payer models.

Another important variable is your specialty. For instance, a high-volume dermatology clinic might thrive on productivity-based pay. A pediatrics practice focused on continuity of care might prefer a hybrid model that rewards patient satisfaction and visit efficiency.

Compensation strategy also affects how well you attract and keep good physicians. New hires want clarity, predictability and a sense that their hard work will be fairly rewarded. Compensation models that are overly complex or constantly changing tend to raise red flags.

 

 

Fee-for-service: the traditional model with modern challenges

The fee-for-service (FFS) model is the most traditional approach to physician compensation. Physicians are paid based on each visit, procedure or billable service they provide. It is straightforward, transactional and familiar to many first-time practice owners.

One of the biggest advantages of FFS is its simplicity. There is a clear one-to-one link between services rendered and payment received. For small practices without advanced tracking systems or administrative teams, this model is easy to implement and manage. It also provides immediate incentives for physicians to see more patients and offer more services.

For specialty practices with high procedural volumes, such as cardiology or orthopedics, FFS can still be a strong fit. Each procedure typically generates significant reimbursement, so physicians can earn a fair income through direct effort. And because pay is directly tied to collections, practice owners can more easily align staffing levels with available cash flow.

However, FFS models are losing ground in today’s healthcare environment. Payers are shifting away from volume-based reimbursement and toward value-based care. That shift has made the FFS model less sustainable for many practices, particularly those focused on preventative care or chronic disease management.

Another concern is overutilization. Because FFS rewards volume, it may unintentionally encourage unnecessary procedures or short, frequent visits. That can create long-term challenges for patient satisfaction, quality metrics and compliance.

If you are considering this model, take a close look at your payer mix and reimbursement rates. Also think about how the model aligns with your long-term strategy. Practices that want to position themselves for value-based contracting or accountable care relationships may find more flexible models offer a better foundation.

RVU-based compensation: rewarding productivity

A productivity-based compensation model built around relative value units (RVUs) is another popular choice for independent practices. It’s clean, simple and closely tied to how much work a physician performs. In this model, each procedure or service is assigned an RVU value. Physicians are paid based on the total RVUs they generate, multiplied by a set conversion rate.

This setup can be especially attractive for high-volume practices with well-established patient bases. It encourages physicians to see more patients, complete more procedures and operate efficiently. The result is a system that directly links effort to reward.

The biggest advantage here is transparency. Both practice owners and physicians can easily track performance and forecast earnings. It’s also relatively straightforward to administer, especially if your billing system already collects RVU data.

However, this model isn’t without its tradeoffs. RVU-driven compensation can unintentionally create pressure to prioritize volume over quality. Some physicians may rush through visits or avoid lower-paying services that take more time. In certain specialties, it can also lead to income variability that deters more risk-averse providers.

As a new practice owner, you should also consider how this model impacts culture. While it may drive strong short-term performance, it can also contribute to burnout if physicians feel constant pressure to hit high RVU targets.

But success with RVU-based compensation depends on fair benchmarks and a supportive work environment. If you choose this route, make sure you’ve got a compensation formula that’s competitive and sustainable, not just aggressive.

 

 

The hybrid model: The best of both worlds for small practices

The hybrid compensation model is exactly what it sounds like: a combination of base salary and a performance-based bonus. For small or first-time medical practices, this structure strikes an effective balance. It provides physicians with dependable income while also tying part of their earnings to productivity or quality outcomes.

This approach is particularly valuable when your practice is in growth mode. A guaranteed salary helps you recruit and retain top-tier providers by offering financial security. At the same time, bonus incentives give those providers a reason to be efficient, bring in new patients or hit patient satisfaction targets.

What makes this model shine is its flexibility. Bonuses can be customized to reflect your practice’s goals. Want to reward high patient volume? Base your incentives on visit counts or revenue. Prefer to encourage longer appointments and value-based care? Use quality metrics like preventative screenings, patient feedback or chronic care benchmarks.

That said, execution matters. If your practice lacks solid tracking tools or administrative resources, it can be difficult to calculate and distribute bonuses accurately. Without clear goals and consistent measurement, the incentive part of the model can lose credibility.

We often recommend this structure to healthcare clients building or expanding private practices. It’s practical, scalable, and supports long-term retention, which is critical for practice stability.

To learn how different compensation models align with your specialty and growth plans, visit our healthcare accounting and advisory services page.

Key factors when choosing a compensation model

Choosing a physician compensation model isn’t just picking a formula. The choice you make should align with your financial goals, operational capabilities and long-term vision for your practice.

Here are several factors every first-time practice owner should consider:

Budget predictability

Some models, like hybrid or salaried pay, offer a more stable financial picture month to month. Others, like FFS or RVU-based structures, may result in greater variability depending on patient volume or payer mix.

Physician recruitment and retention

The compensation model you choose plays a big role in attracting and keeping talented providers. Consider what kind of income structure will appeal to your target hires and how it fits with your market’s norms.

Practice goals and values

Do you want to prioritize growth and high throughput? Or are you focused on continuity of care and patient relationships? Your compensation model should support your clinical philosophy as well as your financial targets.

Administrative capacity

Some models require detailed tracking, reporting and goal-setting to be effective. If your practice has limited admin staff or systems, that could make implementation harder without the right support.

Reimbursement environment

With healthcare payers pushing more value-based contracts, consider how your compensation model might need to evolve. Models that already reward quality, outcomes, or patient satisfaction may position you better for future contracts.

From our perspective, the trend is toward alternative payment models that reward care coordination, efficiency and preventative outcomes. Your compensation model should not only support today’s reality but anticipate tomorrow’s expectations.

Choosing the right physician pay model for your healthcare practice

There is no one-size-fits-all approach to physician compensation. Each model, whether it is fee-for-service, RVU-based or hybrid, comes with strengths and tradeoffs. What matters most is choosing the structure that fits your practice’s size, specialty, goals, and financial position.

Make sure your model aligns with your values, supports long-term sustainability and can scale with your growth. That means planning ahead, building systems for tracking and accountability and keeping an eye on how reimbursement trends might affect your strategy in the years to come.

If you’re opening your first practice or rethinking your current compensation approach, it helps to have experienced advisors who understand both the clinical and business side of healthcare. At James Moore, we help healthcare providers align compensation models with strategic goals, improve retention, and maintain compliance in an ever-changing environment.

Looking to structure physician pay the right way? Contact a James Moore professional to build a model that supports your practice and your people.

 

 

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a James Moore professional. James Moore will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.