The Contentious Process of Compensation

For doctors in solo practice, income calculation is straightforward: they take home the portion of their own revenue left after paying their own expenses. Group practice physicians put all their revenue into and pay all their expenses out of one communal pot. They receive a salary set by the organization, and the formulas used to calculate that compensation are often complex.

Salaried work can be an attractive proposition for doctors, guaranteeing financial stability even in hard times and allowing them to focus on medical care, not medical economics. But even in the most collegial of groups, the process of setting salaries can be extremely contentious. Most group practices, including the Palo Alto Medical Clinic, base pay on more than productivity, and have an explicit expectation that high earners will subsidize those who bring in less revenue. This policy helps equalize natural disparities in revenue generation between different specialties – good news for primary care physicians, who generally bring in less money, but often a problem for surgical specialists, who can command higher fees.

Compensation disputes, more than any other issue, test and sometimes break the bonds between group practice physicians. "When a feller says, ‘it's not the money, it's the principle of the thing' – it's the money. There isn't any question that this is the rock on which a great many clinic ships have foundered," Dr. Russel Lee said in a 1953 speech to the American Association of Medical Clinics.

The Palo Alto Medical Clinic's founding partners divided up their profits informally. Each person was asked to suggest the amount that he or she deserved for the year. "It had this effect: They were modest about what they put down," said Dr. Lee. "I never had to cut one down, and I had to build some of them up because they were too modest." That said, having given the physician what he or she requested, "I saw to it that they earned it." The group was greatly helped by the generosity of Dr. Blake Wilbur, who willingly gave up a significant portion of earnings from his lucrative surgical practice to the rest of the group. The doctors all said they felt the partnership was more important than their personal interests.

As the Clinic grew, dividing its income between partners became more complicated. At the same time, changes in medicine impacted how money flowed into the practice. With the development of new technologies, certain specialists received increasingly higher fees, and the revenue disparity between disciplines grew wider. Meanwhile, the creation of Medicare and Medicaid in 1964 provided physicians with reimbursement for services they had previously provided pro bono to the elderly and indigent. These public assistance programs, which paid standard amounts for procedures based on their "relative value," also led to changes in how the Clinic established its fees and judged its physicians' productivity.

By the late 1960s, setting salaries – known as "drawing accounts" – had become one of the Executive Board's major responsibilities. The concept that high earners would subsidize low earners grew more formal, with the compensation system engineered so that internists and medical specialists took home roughly 60 percent of the money they booked; family practice and pediatric physicians, 50 percent; and surgeons and anesthesiologists, 40 percent. Nevertheless, the individual partner's drawing account was influenced by a number of informal factors, not all of them related to productivity. Doctors were credited for community service activities and for taking leadership roles both internal (such as Clinic committees) and external (such as City Council membership). The Executive Board also considered strategic issues, such as how much it would take to keep a popular physician from leaving the group for more money elsewhere.

High-productivity partners sometimes chafed at giving up their earnings, while low-productivity physicians complained they were under-compensated for important work that brought in less money, such as time spent building relationships with patients. The vast majority of them continued to accept that the good of the group came first, but this did not stop them from trying to get as much as possible for themselves. "Drawing account day, in general, was very stressful," said Dr. Maurice Fox, who served on the Executive Board in the 1970s and '80s. "A representative spokesman for one department after another would come in and say, ‘This is what we want.' Those were the days of Khrushchev, and one doctor took off his shoe and hammered on the table to get more money for his department. Nobody enjoyed it." Later, another department head reportedly felt that if a shoe was effective, a Colt .45 automatic would be even more so. Dr. R. Hewlett Lee, who was on the board at the time, said that the sight of the weapon lying on the table did sway the board members, although no one but the department head knows whether it was chambered or even loaded.

In rare cases, physicians left the Clinic over financial disputes. The most notable departure occurred in the mid-1970s, when three ophthalmologists quit to establish their own, more lucrative single-specialty practice. But despite their grumbling, most partners saw – and still do see – the compensation system as fair, transparent and predictable, and not enough of a concern to outweigh the Clinic's many positives. "We really did feel ourselves to be part of the same thing, and the problems were worked out," Dr. Fox said.