Collections-based compensation models are becoming increasingly common in dermatology and other advanced practice areas. Rather than relying on work RVUs (wRVU), which calculate payments based on time and complexity, collections-based models tie pay directly to the actual dollars a provider brings to your practice. For many groups, this feels like a more straightforward way to reward productivity. And because dermatology services tend to be less variable than those in many other fields, the approach often makes sense.
Still, even with a seemingly straightforward structure, collections-based models can come with challenges. Here we break down the key differences between wRVU and collections-based compensation, highlight common pitfalls many dermatology practices face, and offer practical strategies to help streamline your processes and keep providers aligned.
Understanding Collections-Based Payments
It’s important to understand how collections-based compensation differs from wRVU-based compensation. Here’s a quick breakdown:
Collections-Based Payment
At a high level, collections-based models pay dermatologists (or other clinicians) a percentage of the money the practice collects from their services. This percentage often varies based on tiers or thresholds, but the core idea is simple: the more money your practice collects, the more your team members earn.
wRVU-Based Payment
A wRVU-based model is different because it compensates providers based on assigned value units for services, regardless of how much your practice collects. RVU models tend to be more predictable, which some providers prefer. But they don’t always reflect the actual revenue your practice brings in.
The connection between compensation and practice revenue can feel fair and motivating, but it also introduces more variability. Payer mix, billing delays, and patient volume can all affect take-home pay, so even busy providers may not see pay increases if collections are slow or reimbursement rates drop.
Common Pitfalls of Collections-Based Payment Models
If your practice uses a collections-based compensation structure, or you’re considering making the switch, you need to be aware of several potential challenges, including:
1. Tracking and Tier Complications
Collections take time to process. Payments can lag weeks or even months behind services, which makes it harder to track performance in real time. When compensation is tied to incentive tiers, this lag can create confusion. Providers may not know where they stand or when they’ve hit a new threshold, opening the door to misunderstandings, missed bonuses, or even disputes over pay.
For instance, a provider who performed a high volume of procedures in Q1 may not see that reflected in their earnings until Q2 due to billing delays. Without visibility into their collections timeline, they may mistakenly believe they’re underperforming, or worse, being underpaid.
The challenge gets even trickier when each provider hits milestones at different points in the year. Some might hit their bonus in March, while others might not get there until the fall. Without a system to track progress clearly and individually, it becomes more difficult to manage payments fairly.
2. Payer Mix Variability
Collections-based payments are tied to more than volume. They also depend on the type of payer covering each visit. A shift in payer mix, like more Medicaid patients or fewer private insurance visits, can reduce collections even if your practice’s patient volume remains steady. That type of change can throw off financial forecasts and make it harder for your providers to hit their targets.
These challenges are particularly acute depending on geography. For example, if your practice is located in a region with a higher Medicaid population, this can significantly impact collections.
Many dermatology practices overlook payer mix until it’s already impacting revenue. Since even small shifts can lead to measurable drops in collections, incorporating payer mix variability into the core of your compensation strategy is crucial.
3. Net Collections Aren't Always Straightforward
In dermatology, there’s more nuance to net collections than meets the eye. Procedures may involve retail products, cosmetic supplies, or materials with significant overhead costs, like laser medical devices. If those costs aren’t deducted from gross revenue before calculating provider pay, it can lead to overcompensation, undercompensation, or general confusion around earnings. Make sure your providers know what’s included in net collections and what isn’t. Without that clarity, your team may question whether their compensation truly reflects their contributions to the practice.
4. Lack of Transparency
For a collections-based model to work well, providers must understand how their work translates into pay. If this data isn’t shared regularly or the rules aren’t clear, trust starts to break down. Transparency, however, builds confidence in the system. It also helps providers stay motivated and focused on what drives results.
5. Legal Considerations
Collections-based models can raise regulatory questions. Depending on how they’re structured, they may intersect with Stark Law or the Anti-Kickback Statute. For instance, be cautious about paying bonuses based on referrals or shared collections from ancillary services, like pathology or aesthetics. It’s always a good idea to have a legal review of your setup, ensuring it aligns with current regulations. Even a minor contract detail can cause major issues if it blurs the line between what’s legally permissible and what’s not.
6. Burnout Risk
One of the biggest concerns associated with collections-based pay is burnout. When provider income is closely tied to practice revenue, it can create pressure to focus on volume. For example, providers may feel like they have to complete more procedures just to maintain a certain income threshold, which isn’t sustainable long term. Therefore, it’s important to keep an eye on balance and avoid pushing productivity at the expense of provider well-being.
Best Practices for Implementing a Collections-Based Payment Model
The good news is that many of the pitfalls we’ve mentioned can be addressed—and even prevented—with a strategic implementation approach. Some practices dive in head first, while others start with hybrid models, combining base salary, wRVUs, and collections-based bonuses to ease the transition and test the structure before going all in. Regardless of your approach, here are our top tips for getting started:
1. Set Clear Definitions and Communicate with Providers Regularly
Above all else, define exactly what counts toward collections. Be specific about how net numbers are calculated and which costs are subtracted (e.g., materials, equipment, etc.) before compensation is paid out. Publish these definitions in a shared resource, like a digital compensation guide or provider portal, and review them with your team regularly.
Clarity is just the first step, though. Consistent communication is what makes it stick. Establish a cadence of monthly or bi-monthly check-ins with providers to review their collections data, answer questions, and flag any anomalies. These touchpoints create space for clarification before confusion builds.
It’s also worth developing an internal alert system to notify operations or finance teams of major shifts in collections, whether due to payer mix, denials, or reimbursement changes. This allows your practice to course-correct quickly and keeps compensation aligned with reality.
2. Automate Where You Can
Manually calculating providers’ pay and incentive tiers is time-consuming and error-prone. Even small mistakes can lead to big surprises, confusing providers, cutting off revenue, and affecting your practice’s bottom line. Automation can help streamline these processes. On one hand, it supports provider trust by offering consistent, transparent calculations, and on the other, it reduces the burden on operations and billing teams by minimizing manual reconciliation and last-minute number crunching.
Look for systems built specifically for healthcare (like Ludi’s DocTime) that track collections data, subtract non-care costs, apply compensation formulas, and calculate incentive tiers in real time. The right tools make it easier to manage complexity, ensure fairness, and maintain compliance as regulations evolve.
3. Set Expectations Around Thresholds and Bonuses
Many dermatology practices award bonuses and other incentives when providers hit certain thresholds. To avoid confusion and build trust, be upfront about how these benchmarks and incentive tiers work. Clearly outline the performance metrics, compensation formulas, and timelines involved, whether you’re using monthly, quarterly, or rolling calculations.
Let your providers know what it takes to move from one rate to the next and how their performance is being tracked along the way. Use regular touchpoints, like monthly reports or one-on-one check-ins, to highlight their progress, especially as they approach key thresholds. This simple adjustment can boost motivation and help prevent last-minute surprises or missed payouts.
Since each provider moves at their own pace, it’s crucial to have systems that track milestones individually. Personalized dashboards or automated alerts can help reduce confusion and ensure everyone stays aligned, regardless of their work style.
4. Protect Against Burnout
Don’t tie your entire incentive structure to productivity. Include non-collection-based incentives, like continuing medical education (CME) participation, patient satisfaction scores, or team-based collaboration metrics. These soft incentives create a more balanced approach to compensation and help sustain motivation, especially for high performers who might otherwise feel the pressure to chase volume.
5. Keep Your Policies Adaptable
Your compensation model should evolve as your practice grows. The more patients you serve and providers you bring on, the more important it is to align your financial objectives with day-to-day realities. Regularly review and update policies to reflect changes in payer contracts, procedure pricing, retail product margins, or newly added cosmetic services.
Be sure to keep providers in the loop, especially when adjustments affect how they’re paid. Likewise, build in regular check-ins, such as annual or semi-annual policy reviews, to clarify updates, answer questions, and address concerns before they turn into bigger issues. Staying flexible helps your compensation structure remain fair, competitive, and aligned with long-term goals.
We Can Help Optimize Your Collections-Based Payment Strategy
Collections-based compensation can be a strong model when it’s implemented thoughtfully. It ties pay directly to practice performance and motivates providers to stay productive. But it also requires clear tracking, regular communication, and a strong infrastructure to keep things running smoothly.
If you’re exploring compensation strategy updates or want help evaluating your current setup, we’re here to talk through what makes sense for your practice. The goal is to create a system that’s fair, motivating, and sustainable for your providers. With the right tools and a transparent approach, you can reduce complexity, improve trust, and build a collections-based model that works for everyone. Reach out to see how our DocTime suite can help facilitate these processes.
