Why physician compensation is harder than ever to get right

Physician compensation has never been a simple math problem. In 2026, it is a particularly difficult one. Medical groups and health systems are trying to stay competitive in a tight labor market while managing flat or declining reimbursement, rising operating costs and the regulatory guardrails that come with employed and affiliated practice models. The result is a compensation environment where a strong offer is necessary but no longer sufficient.

Tynan Kugler, M.P.H., MBA, CVA, a principal in PYA's consulting practice with more than two decades of experience in provider compensation and fair market valuation, walks through the four forces she considers most consequential right now and explains what both organizations and physicians tend to misunderstand about how compensation actually works.

What four forces are reshaping physician compensation right now?

Kugler organizes the current environment around four intersecting pressures. The first is supply and demand. Persistent shortages in primary care — family medicine, internal medicine, obstetrics — continue to put upward pressure on compensation, alongside growing gaps in specialties like neurology, rheumatology, gastroenterology and hematology-oncology. Hospital-based specialties including anesthesiology and radiology are also under pressure in ways that would have been unusual a decade ago.

The second force is the continued shift toward employment and system affiliation, driven by quality-of-life concerns, financial pressure, recruitment challenges and succession planning. Hospitals and health systems are expanding primary care concierge practices, and academic systems are increasingly pursuing community affiliation strategies.

Third is reimbursement. Declining reimbursement and payer-mix pressure compress margins and shape what organizations can sustainably offer — not just as a financial question but as a commercial reasonableness question. "It is not just how much an organization can sustainably pay, but how much it can sustainably lose," Kugler said.

The fourth force is the ongoing tension between productivity and value. Work relative value units, or wRVUs, remain the dominant metric in employed models, but hybrid approaches are becoming more common — a competitive base salary paired with incentive compensation tied to quality metrics, outcomes and access measures like time to next appointment.

Why is physician pay so hard to pull back once it's been set?

Once compensation rises, Kugler said, it creates a floor that is extremely difficult to lower. Market benchmark data — drawn from major national surveys — has been flat or increasing, not declining, which makes it hard for any organization to move in the other direction even when finances are tight. "When the market data is flat or moving upward, it is hard for a health system to say it wants to reduce compensation," she said.

Contractual structure compounds the problem. In employed models, changing agreement terms requires renegotiation and has regulatory implications that limit how quickly adjustments can happen. Organizations that set compensation reactively — responding to each recruitment challenge in isolation rather than building a consistent framework — often end up with models that are difficult to defend and harder still to unwind.

The most effective organizations, Kugler said, are not simply raising salaries year over year. They are redesigning compensation models, tightening guarantee periods — historically three years, now often one or two — and using sign-on bonuses more strategically rather than inflating base pay. Advanced practice provider (APP) strategy is also getting more attention, particularly how APP compensation models interact with physician models and how to account for the work involved in managing or collaborating with APPs.

How do shortages change the compensation conversation?

In areas with acute supply-and-demand imbalances, compensation packages tend to sit at the higher end of what fair market value and commercial reasonableness parameters will support. Rural markets in particular often carry more robust packages than urban ones for that reason. Beyond the base number, shortages are reshaping the full recruitment toolkit: sign-on bonuses, relocation allowances, loan repayment assistance and, increasingly, stipends for residents and fellows still in training — a mechanism for securing future workforce needs before a physician has even finished residency.

"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," Kugler said.

What should physicians understand about how offers actually get built?

Most hospitals and health systems operate within a compensation philosophy or framework — a set of guidelines approved by leadership and the board that governs how offers are reviewed and what the guardrails are. Individual offers are then evaluated against that framework based on the physician's specific facts and circumstances.

An experienced physician moving to a new market brings historical productivity and compensation data, but that history may not translate directly. A new physician out of residency may have no productivity history but significant student loan debt. An owner-physician transitioning from private practice brings community-based data that paints yet another picture. Each situation is benchmarked, the proposed compensation model is reviewed for market alignment, and the organization assesses whether the offer is supportable given factors like specialty shortages, prior difficulty filling the role and reliance on locum tenens coverage.

"There is typically much more structure behind the offer than many physicians realize," Kugler said.

Where does AI fit into compensation analysis?

Kugler is measured on the subject. Artificial intelligence (AI) can be useful for data aggregation, flagging compensation outside certain guardrails, scenario modeling and accelerating research. But when it comes to fair market value opinions and commercial reasonableness determinations, the analysis still has to be expert-led. "The technology cannot do that on its own," she said. A valuation professional has to form, apply and defend the opinion based on the specific facts at hand — something AI can support but not replace.

Her closing advice applied to both sides of the negotiating table: understand what you are trying to get out of the arrangement, know what can give and what cannot, and approach it collaboratively. "Compensation is complicated," she said. "There are many different forces at play."