Hospitals and health systems are navigating mounting financial and operational pressures that are reshaping physician compensation. Declining reimbursement, rising provider costs, workforce shortages, and regulatory complexity are forcing executives to revisit compensation structures and alignment strategies. As these models become more sophisticated, success will depend on thoughtful, strategic approaches that balance performance, partnerships, and financial sustainability. 

This article explores the external market forces impacting compensation and alignment and examines four themes shaping the future: rising subsidy pressures, evolving alignment models, compensation as a growth driver, and evaluation of partnerships. 

External Market Forces Shaping Strategy 

Physician compensation is shaped as much by external market forces as by contract mechanics. Today, three categories of pressure are top of mind for healthcare leaders, each with direct implications for how organizations design, negotiate, and sustain compensation strategies. 

Reimbursement Pressures 

Financial headwinds continue as reimbursement declines collide with rising physician costs. For the fifth consecutive year, The Centers for Medicare & Medicaid Services (CMS) cut the Medicare conversion factor, reducing it by 2.8% in 2025 (from $33.29 to $32.35). Since 2020, the factor has decreased by more than 10%. While CMS has proposed two higher conversion factors for 2026, part of the increase reflects a temporary, one-year adjustment from the reconciliation budget package of the One Big Beautiful Bill Act.  

At the same time, over $1 trillion dollars in federal healthcare spending cuts are planned through 2034, expected to leave 15 million Americans without health insurance. Medicaid and Affordable Care Act (ACA) eligibility changes, as well as uncertainty around programs like 340B following a 2025 executive order, further heighten the pressure. Together, these shifts underscore the need for compensation models that can withstand volatility in funding and coverage, supported by strong change management practices. 

Workforce Dynamics 

Workforce shortages remain one of the most pressing constraints. Twenty percent of practicing physicians are already age 65 or older, with another 22% between ages 55 and 64, leading to a projected shortage of up to 86,000 physicians by 2036. As a result, hospitals face both escalating salary costs, which have risen an average of 5% annually from 2018 through 2022, and rising expectations, as nearly half of physicians report feeling underpaid. 

To maintain coverage, organizations are relying more heavily on advanced practice providers (APPs). A 2024 MGMA poll found that 63% of medical groups planned to add new APP roles in 2024, continuing a trend from 2023 when 65% said the same. 

Recruitment Pressures 

Competition for talent is intensifying. To remain attractive while adhering to fair market value, health systems are increasingly turning to creative and high-dollar incentives, such as signing bonuses, loan forgiveness, relocation packages, and even housing support. In 2024, 55% of physician and APP positions offered relocation allowances, 51% included signing bonuses, and 17% provided loan forgiveness. 

Beyond cash incentives, benefits are emerging as the new frontier in recruitment and retention. More physicians view childcare, enhanced paid time off, flexible scheduling, and expanded wellness programs as differentiators when evaluating opportunities. These shifts highlight that “total compensation” is no longer limited to salary and incentives, now encompassing a broader package of benefits and supports that align with evolving workforce expectations. 

Rising Subsidy Pressures on Hospital-Based Services 

Why & Where Subsidies Are Rising 

Declining reimbursement, rising provider compensation, and increasing overhead are making subsidies an increasingly common tool to sustain hospital-based service lines. Recent industry shifts, including fee schedule cuts and new regulations, such as the No Surprises Act (NSA) and independent dispute resolution (IDR) process, have accelerated the need for financial support to prevent service disruption. As a result, many hospitals are now facing subsidy requests that are sometimes double or more compared to current agreements, while others are seeing groups seek subsidies for the first time. 

Two specialties where VMG Health has seen the most subsidy activity are anesthesia and radiology. Anesthesia groups are facing numerous external forces affecting operations, including workforce shortages and aging providers, changing regulations (NSA and IDR) affecting reimbursement, and continued cuts to the MPFS anesthesia conversion factor.  

Radiology groups are facing similar headwinds, including eroding reimbursement and decreased wRVU values for common procedures, increased overhead costs, expensive night coverage, and provider shortages coupled with rising compensation further exacerbated by the specialty’s demand outpacing the supply. 

What Leaders Can Do 

Hospital and health system executives should expect continued requests for enhanced subsidies and be ready to approach these discussions strategically: 

  • Assess local and regional workforce dynamics. Understand the compensation trends, shortages, and recruitment challenges in specialties where subsidy pressures are greatest. 
  • Review compliance-driven coverage requirements. Ensure obligations, such as trauma center or regulatory coverage needs, are clearly factored into financial planning. 
  • Analyze current hospital spend and budget implications. Establish a clear baseline of what is being paid today and the financial impact of potential increases. 
  • Conduct detailed operational and financial reviews. Evaluate productivity, service coverage, efficiency metrics, and other drivers underlying subsidy requests. 
  • Revisit contract terms and performance expectations. Consider linking subsidies to measurable outcomes, incentives, or service commitments to drive value. 
  • Explore alternative staffing or alignment models. Assess whether employment, shared coverage, or APP utilization could reduce long-term subsidy exposure. 
  • Develop a contingency plan. Recognize that partnerships can change. Be prepared with an up-to-date RFP or another mechanism to secure coverage that reflects your ideal state. 

Evolving Physician Alignment Models 

Over the past decade, there’s been a steady shift from independent physician practices toward more integrated models—a trend that shows no signs of slowing. Full employment remains most common, particularly in primary care and hospital medicine, while professional services agreements (PSAs) and other affiliation structures continue gaining traction in specialties where autonomy, group identity, or local scale remain important. 

Key developments: 

  • PSAs have become more nuanced, with tiered incentive frameworks, shared savings potential, and group-level quality metrics. 
  • “Employment-lite” models, including management service agreements (MSAs) or “friendly PC” arrangements, allow health systems to operationalize alignment without assuming full employment risk. 
  • Co-management agreements and joint ventures, especially in surgical service lines, are increasingly used to incentivize both performance and alignment. 
  • Value-based enterprises (VBEs) are gaining traction as an overlay across all models. VBEs are a vehicle to share risk, advance bona fide quality initiatives, and create opportunities for enhanced provider compensation—particularly for mature, high-performing groups with strong system partners. 

Compensation as a Strategic Growth Lever 

When designed thoughtfully, physician compensation can be more than a mechanism for retention or fairness. It can serve as a lever to advance broader organizational goals like expanding patient access, growing service line volume, and improving care coordination. To be effective, incentive structures must align with both the provider relationship model (employment, PSA, or other affiliation) and the system’s operational capacity to support growth. 

Driving Growth with Compensation 

Many health systems are now intentionally embedding growth-oriented incentives into their compensation models that go beyond basic wRVU-driven incentives. For example: 

  • New patient visit bonuses: Encourage providers to expand panels and improve access for patients seeking initial consults. Success requires agreement on the scope of the access opportunity and clearly defined measurement standards. Leaders should also set reasonable targets, provide transparency into scoring, and recognize non-provider bottlenecks (e.g., scheduling staff, medical assistants, or clinic space) that could otherwise create perceptions of unfairness. 
  • Subspecialty access incentives: Implement compensation mechanisms like targeted bonuses or stipends for expanding capacity in high-demand niches (e.g., electrophysiology, advanced GI, spine surgery) where patient wait times are long and/or referral leakage is high. These incentives reward providers or groups for increasing access through added clinic sessions, adjusted scheduling, staffing adjustments, or expanded procedural expertise, while preserving autonomy and directly supporting strategic service line growth. 
  • After-hours clinic pay: Support extended access without requiring additional FTEs, particularly in urgent care, pediatrics, and primary care. 

These incentive structures can help organizations: 

  • Improve network retention and reduce patient leakage. 
  • Address access bottlenecks in high-demand specialties. 
  • Align compensation more directly with service line-level growth priorities. 
Note: Any new compensation incentive should be carefully evaluated for legal and compliance implications, particularly when tied to patient access or referral patterns. 

Beyond the Numbers: Evaluating the Partnership 

When assessing or renegotiating physician compensation, whether through employment, a PSA, an MSA, or another alignment vehicle, it is tempting to focus on financial mechanics such as base salary, wRVU rates, bonuses, or subsidy support. Increasingly, however, the structure of the partnership or relationship itself is just as important as the compensation model. 

Compensation as a Reflection of the Partnership 

Strategic alignment is not just about the size of the paycheck. It’s about creating a model that reflects the level of integration, accountability, and autonomy both parties expect. This is especially critical in specialties with complex operational footprints, such as: 

  • Cardiology: Often divided between employed and independent groups, where equitable call coverage, catheterization lab access, and procedural alignment can become flashpoints. 
  • Surgery: Where downstream hospital revenue depends heavily on case distribution, operating room time allocation, and block scheduling. 
  • Anesthesiology: Frequently contracted yet essential to surgical throughput, often requiring large hospital subsidies and continuous coverage guarantees. 

Key questions to ask:

  • Does the current agreement foster shared accountability for performance metrics like patient access, quality outcomes, or cost efficiency? 
  • How much autonomy does the physician or group retain, and is that autonomy aligned with system goals? 
  • Are there non-compensation levers at play, such as leadership roles, governance participation, or co-management incentives? 
Strategy Tip: Before adjusting a compensation plan, step back and evaluate the broader partnership framework. Compensation should be treated as one piece of a larger structure that also includes governance, performance expectations, accountability mechanisms, and cultural alignment. In some cases, dissatisfaction may stem less from the compensation model itself than from misalignment in these surrounding elements. 

Conclusion 

External pressures on reimbursement, workforce, and recruitment are not temporary hurdles; they are reshaping the physician compensation and alignment landscape for the long term. As subsidy demands rise, alignment models evolve, and compensation becomes a lever for strategic growth, leaders cannot afford to treat it as a back-office function. The path forward requires viewing compensation and alignment decisions as enterprise-level strategy: supported by data, responsive to national and local workforce realities, and grounded in true partnership with providers that advances access, quality, and long-term sustainability. 

References 

  1. VMG Health. (2023, June 15). Understanding & solving the new reality for anesthesia services. Retrieved from https://vmghealth.com/insights/blog/understanding-solving-the-new-reality-for-anesthesia-services/ 
  1. VMG Health. (2024). At the breaking point: Assessing subsidy support for radiology groups. Retrieved from https://vmghealth.com/insights/published-article/at-the-breaking-point-assessing-subsidy-support-for-radiology-groups/ 
  1. American Medical Association. (2024). 2025 Medicare Physician Payment Schedule (PFS) and Quality Payment Program (QPP) Final Rule Summary. Retrieved from https://www.ama-assn.org/system/files/ama-2025-mpfs-summary.pdf 
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  1. American Hospital Association. (2025, April 16). Administration issues executive order on prescription drug prices, 340B, site-neutral payment. Retrieved from https://www.aha.org/news/headline/2025-04-16-administration-issues-executive-order-prescription-drug-prices-340b-site-neutral-payment 
  1. Association of American Medical Colleges. (2023, March 20). New AAMC report shows continuing projected physician shortage. Retrieved from https://www.aamc.org/news/press-releases/new-aamc-report-shows-continuing-projected-physician-shortage  
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  1. AMN Healthcare. (2024, July 18). 2024 review of physician and advanced practitioner recruiting incentives. Retrieved from https://www.amnhealthcare.com/amn-insights/physician/whitepapers/2024-review-physician-and-advanced-practitioner-recruiting-incentives/