The four forces reshaping physician compensation in 2026

Physician compensation has never been a simple math problem, but in 2026 it is a particularly difficult one. Medical groups and health systems are simultaneously contending with persistent workforce shortages, flat or declining reimbursement, rising operating costs and the regulatory constraints that come with employed and affiliated practice models. The result is a compensation environment where offering a competitive package is necessary but no longer sufficient, and where getting the underlying model wrong can create problems that are expensive and legally complicated to undo.

Tynan Kugler, M.P.H., MBA, CVA, a principal in PYA’s consulting practice, who has spent more than two decades working in provider compensation and services valuation, sees these pressures from the inside. In a conversation with Medical Economics, she walked through the four forces she considers most consequential right now — supply-and-demand imbalance, the continued shift toward employment, reimbursement pressure and the ongoing tension between productivity and value-based pay — and explained what organizations and physicians alike tend to misunderstand about how compensation offers actually get built and evaluated.

This interview has been edited for length and clarity.

What are the biggest forces shaping physician compensation today?

I would say there are really four.

One is the supply-and-demand imbalance. Another is the continued shift to employment and system affiliation, or alignment with private equity-backed organizations. We also cannot have a conversation about compensation without talking about reimbursement pressure. And then finally, there is the continued interplay between productivity and value, so compensation paid on a productivity basis versus compensation tied to outcomes and quality.

On the supply-and-demand side, especially in primary care, we continue to see persistent shortages, and that puts upward pressure on compensation. When we do provider needs assessments, we continue to see significant shortages in family medicine, internal medicine and obstetrics. We also see shortages in specialties like neurology, rheumatology, gastroenterology and hematology-oncology. Hospital-based specialties like anesthesiology and radiology are another area of pressure, and in some cases those specialties are needing financial assistance in ways that would have been unusual in the past.

On the affiliation and employment side, many independent practitioners have sought employment, and some are still continuing to pursue employment or affiliation depending on the specialty. That is driven by quality-of-life issues, financial pressure, recruitment challenges and succession planning. We are also seeing hospitals and health systems develop primary care concierge practices, and academic health systems are increasingly looking at community affiliation strategies.

Then there is reimbursement. Declining reimbursement and payer-mix pressure compress margins and affect how much organizations can sustainably pay. On the employed side, it is not just a financial question. It is also a commercial reasonableness question. It is not just how much an organization can sustainably pay, but how much it can sustainably lose. On the independent side, it can be the difference between recruiting the next physician needed for a succession plan or having to ask a hospital for financial assistance.

And finally, the productivity-versus-value issue is still front and center. Work RVUs remain the dominant metric in employed models, but we are seeing more of a hybrid approach. That means base compensation that is competitive and supportable, with additional compensation at risk tied to things like quality and outcomes. Primary care, in particular, has generally been ahead of some other specialties in adopting quality metrics.

How are medical groups trying to keep physician pay competitive while also managing rising costs?

It really is like walking on a tightrope.

The most effective organizations are not simply raising salaries every year. That is just not sustainable. Instead, they are looking at how to redesign compensation models, how to leverage productivity and care optimization and how to think through their cost structure more carefully.

On the redesign side, for primary care in particular, that often means moving toward more of a hybrid model. You have a competitive, market-aligned base salary, but you also include a work RVU-based incentive or value-based metrics. What is different now is that on the hospital side there is probably more attention being paid to quality, panel size and access measures, such as time to the next nonemergent appointment or time to a first new-patient visit.

We are also seeing shorter guarantee periods. Historically, three years was common, but more organizations are ratcheting that down to one or two years. That still allows for ramp-up time while helping control cost. We are also seeing more targeted use of sign-on bonuses rather than simply inflating salary.

Care optimization is another piece of this, and that applies to both independent and employed settings. Organizations are looking very closely at advanced practice provider (APP) strategy. APPs are central to care delivery now, but there can be tension in how their compensation models interact with physician compensation models. Historically, APP compensation has not always been tied to productivity in the same way, and physician compensation models have not always fully accounted for the work involved in managing or collaborating with APPs. That is an area organizations are having to think through more carefully.

When finances are tight, why is physician compensation such a difficult area to pull back on?

It is difficult because physician compensation sits at the intersection of market dynamics, legal and regulatory considerations and the operating realities of care delivery.

When compensation is set, it creates a floor. Once that floor rises, it becomes very hard to step back down. That is why it is so important to get the underlying compensation model right, not just for one specialty but philosophically across the organization.

The reality is that when demand exceeds supply, physicians have other options and employers have limited leverage to reduce pay. If reimbursement is flat or falling and expenses are rising, organizations can feel like they are constantly chasing a curve they cannot quite get ahead of.

There is also the regulatory reality. In employed models, changing agreement terms is not something that happens on a dime. Contracts have to be renegotiated, and there are regulatory inputs that affect how often compensation can change.

Then you have benchmark data. Benchmark data is only a starting point, but when you look across survey sources over the last few years, compensation tends to be flat or increasing, not declining. So when the market data is flat or moving upward, it is hard for a health system to say it wants to reduce compensation. That is why this becomes such a challenge.

How are physician shortages changing the compensation conversation?

One of the biggest ways is through guaranteed compensation and through recruitment and retention incentives.

That includes sign-on bonuses, relocation allowances, loan repayment and increasingly stipends for residents or fellows who are still in training. Those stipends are not compensation for residency itself. They are a way for hospitals to secure future workforce needs by supporting someone while they are still in training, with the expectation that they will come work there afterward.

It also means that in areas with greater need, compensation packages may sit at the higher end of what is supportable from a fair market value and commercial reasonableness perspective. It is not uncommon for rural areas, for example, to have more robust compensation packages than urban areas, because the supply-and-demand imbalance is often more acute.

So shortages are absolutely reshaping not just the compensation number, but the total compensation package and the tools organizations are using to recruit and retain physicians.

Where do organizations typically have the most flexibility when structuring physician compensation packages?

Fundamentally, organizations have flexibility in the totality of how they design their compensation models, as long as they meet regulatory requirements. The challenge is that very few organizations are starting from scratch. Most are looking at an existing model and asking what levers they can pull to move it forward.

There is probably the least flexibility with base compensation and, in many cases, productivity metrics. That is partly because those areas tend to correlate most closely with market data, and they are also the compensation elements physicians care most about.

Where we tend to see more flexibility is with incentive compensation. Quality metrics are one area, even though those can sometimes feel more nebulous than productivity. Often there is room for collaboration there because the hospital is trying to move certain outcomes and needs physician engagement to do it.

Recruitment and retention incentives are another area where there is flexibility. Sign-on bonuses and forgivable loans, for example, can often be structured in different ways to meet the needs of the organization and the physician, as long as they stay within supportable market and regulatory parameters.

How do organizations balance competitive pay with fair market value and commercial reasonableness requirements?

The high-performing organizations treat compensation as a strategic discipline, not just a valuation exercise.

The ones that are most successful look at competitive pay, regulatory compliance, shortages, burnout and the shift to value-based care all at the same time. That helps them avoid the problem of setting compensation first and then trying to force it into a fair market value or commercial reasonableness bucket later.

Packages that integrate quality, administrative work, teaching or care coordination can help differentiate an organization. And the fact that compensation has to be compliant with Stark law and the Anti-Kickback Statute does not mean it cannot also be flexible or meet the organization’s needs. It just has to be done thoughtfully, not reactively. There can be a natural alignment between competitive pay and compliance if both are considered together from the start.

Where does artificial intelligence fit into physician compensation analysis or fair market valuation?

It is obviously a hot topic, and it is certainly reshaping how organizations organize, interpret and find information. But our perspective is that when it comes to physician and advanced practice provider compensation analysis and valuation, technology should strengthen professional judgment, not replace it.

Artificial intelligence can be very useful for data aggregation, data analysis, flagging compensation that sits outside certain guardrails, scenario modeling and research. For organizations that want to test compensation plan changes, for example, it can help model different approaches.

But when you move into fair market value support or a fair market value opinion, it still has to be expert-led. You can use modern tools to accelerate research and analysis, but the valuation professional still has to form and defend the opinion. The technology cannot do that on its own.

A third-party expert’s role is to look at benchmark data, standardize it, analyze it using professional judgment and then apply it to the specific facts and circumstances at hand. That helps reduce the risk of creating one-off exceptions that are hard to defend later. And a professional can explain why a certain approach was appropriate for a particular arrangement. Artificial intelligence can augment the analysis, but it cannot independently determine fair market value or commercial reasonableness.

What should physicians understand about how compensation offers are actually evaluated?

Most hospitals and health systems have a compensation philosophy or compensation guidelines. In other words, they have a framework for how compensation is set, how offers are reviewed and what their guardrails are. Those frameworks are often approved by leadership and the board.

Once you get past that, then it becomes a question of how a particular physician’s facts and circumstances fit within that framework. An experienced physician moving into a new market is going to be evaluated differently than a physician coming straight out of residency, and differently again from an owner-physician moving from private practice into hospital employment.

An experienced physician may have historical productivity and compensation data, but that history may not directly translate to the new market. A new physician coming out of residency may have no historical productivity or compensation, but may have significant student debt. An owner-physician may have historical productivity and compensation in that same community, which gives a different set of data points.

Those facts get reviewed, historical compensation and productivity are benchmarked if available, the proposed compensation model is benchmarked and then the organization looks at whether the offer is supportable. That includes not just benchmark data, but also other factors like whether there is a specialty deficit, whether the organization has been struggling to fill the position and whether it has been relying on locums coverage.

If the offer is supportable and commercially reasonable, then the parties move forward, often through a letter of intent and then a contract. But there is typically much more structure behind the offer than many physicians realize.

Is there anything else you think physicians should understand about this issue?

A few things.

First, not all roles are equal, so compensation components are always evaluated based on specific facts. Base salary, quality incentives and recruitment incentives can all be assessed differently depending on the situation.

Second, alignment matters as much as compensation. The structure of the compensation model should align with how the physician works and what the organization is trying to accomplish.

And finally, compensation is complicated. There are many different forces at play, so it is important for everyone involved to understand what they are trying to get out of the arrangement, what can give, what cannot give and how to work collaboratively through it.