Cockroaches should take lessons from the billable hour. Detractors notwithstanding, it has survived every economic downturn of the last 30 years including, apparently, this one. Although a recent ALM survey noted that almost 75% of client payments in 2009 were pursuant to “alternative fee arrangements,” almost 80% of those were simply discounts from attorneys’ hourly rates. (http://amlawdaily.typepad.com/amlawdaily/2010/10/billing.html)
Here’s the real problem: Whenever the regime eventually crumbles, the worst aspects of the billable hours culture will persist. Take fixed fee caps, for example. Even if they benefit some clients financially — a big “if” that’s a separate discussion — they create a Hobson’s choice for associates.
On one side is the pressure not to log all time. Keeping matters within internal budgets makes billing partners look good in their year-end reviews.
On the other side stands the billable hour as the definitive metric for measuring individual productivity. They might be working on fixed fee matters, but attorneys must still account for their time. Large firm minimum hours requirements aren’t going away.
What happens when externally fixed fees meet internal billable hours cultures? Ask your doctor.
Do you sometimes get the impression that your family physician is rushing through an appointment? That’s because the doctor is responding rationally to something called the relative value unit (RVU) — medicine’s equivalent to the billable hour.
In 1964, the AMA created reimbursement codes for the newly enacted Medicare program. Fifteen years later, a Harvard School of Public Health economist began investigating ways to compare the seemingly incomparable: the time and effort associated with doctors’ diverse tasks. The typical economist’s study sought to develop relative values for measuring productivity across a range of different activities — from well-child checkups to brain surgery.
The academic exercise remained theoretical until 1985 when Medicare expanded the inquiry: Might such a scale be used to control costs associated with spiraling “reasonable, customary and prevailing fee-for-services” payment schedules? In 1992, Congress linked the relative value unit system to the Medicare codes used for reimbursing more than 7,000 different physician tasks. Private health insurers soon adopted RVUs for reimbursement, too.
Physicians now generate RVUs to earn a living, but time becomes a critical limiting factor. For example, whether a family physician spends 10 or 30 minutes on a routine office visit, Medicare and insurance companies set physician reimbursement at the activity’s predetermined RVU value (0.7). That gets multiplied by the uniform RVU rate (about $40/RVU) for a total of $28. (The final bill exceeds $28 because practice expense and malpractice RVU-factors get added.)
Specialists’ tasks have greater RVU values than general practitioners.’ Compared to a 15-minute routine visit worth 0.7 RVU, a 30-minute colonoscopy is worth several times that. Such differences relate to physician training, skills, mental effort, judgment, stress, and other aspects of the work. But cynics note that specialists have dominated Medicare’s RVU schedule advisory boards.
Behavior has followed incentive structures:
— RVU-driven compensation differences have created shortages of family physicians.
— Specialists mean well, but they tend to view patients myopically through the prism of their expertise, rather than as entire beings. Piecemeal medicine results.
— The system encourages pills, procedures, and tests. Prescription drugs promise quick fixes that move patients out of their doctors’ offices sooner. Procedures generate high RVU values; tests requiring expensive equipment likewise reap generous reimbursement.
Meanwhile, doctors must meet minimum annual RVUs, sometimes pursuant to explicit contractual requirements. That should sound familiar to any big law associate.
As physicians ceded control of hospitals to lay managers, RVUs became a key tool by which the MBA mentality of misguided metrics overtook that profession. Don’t take my word for it. Ask your doctor — if he’ll give you the time.
What would happen if clients and the courts that approve fee petitions started “fee-capping” lawyers the way Medicare and insurance companies have sliced into doctors’ incomes since 1992? Probably unintended consequences no less dramatic than those still surprising the medical profession. Many haven’t been pretty.
Here’s the real kicker: Unlike the legal profession, most physicians have always liked their jobs.
As always, with great style and panache, Professor Harper illustrates one of BigLaw’s many gravity defying foibles, namely the irreconcilable and inconsistent demands that associates bill as many hours as possible in the new AFA era where lawyers are simultaneously pressured to work as efficiently as possible and spending too much time on a project is a punishable offense. Which devil gets its due? The one demanding hoards of hours or the one demanding quick and efficient service.
I also recently discussed this particular enigma at http://kowalskiandassociatesblog.com/2010/09/14/222/
Professor Harper also wisely points us to the experiences of the medical profession in this regard. Like Professor Harper, Dr. Atwal Gandar, the renowned surgeon, MacArthur Fellow. and New Yorker journalist (who enjoys the same keen intellectual prowess of Professor Harper) has poignantly pointed out that paying physicians on a simple fee for services basis only provides economic inducements for physicians to order and provide more services, needed or not and certainly does not provide better medical care or better medical results. Compensating associates (and indeed law firms as a whole), based on hours billed breeds only more hours, not better results.
This issue is among the essential questions I’ve covered at greater length in my book, “Navigating the Perfect Storm: Recruiting, Training and Retaining Lawyers in the Coming Decade” (Ark Press, 2010), http://kowalskiandassociatesblog.com/2010/11/18/navigating-the-perfect-storm-recruiting-training-and-retaining-lawyers-in-the-coming-decade-now-available-in-paperback/ which Professor Harper was gracious enough to have shared some kind words about with me.
Although I often agree with the general thrust of the blog, I think the stock complaint about “misguided MBA metrics” is short-sighted. Metrics are a good thing, not a bad thing. Because law does not properly use them is not the fault of idea of metrics. What do you propose as an alternative? The industry has gotten away too long with an inefficient business model which is now being exposed as being ripe for change, and like every other industry in history law needs to quantify value and economic profit and loss, even if it has be dragged kicking and screaming into the modern world where financial results actually matter.
Thanks for your comment. The key word is “misguided.” I’m not an anarchist. (In college, I completed a four-year combined B.A/M.A. degree program in economics.) There’s nothing wrong with metrics; the problem arises when decision-makers use a few of them as a substitute for independent judgment. The word I sometimes use with the phrase “MBA mentality of misguided metrics” is “myopia.” For a long time, the law properly regarded itself as a different from “every other industry in history.” It was and, in many ways, still is a noble profession. But as many large firm leaders decided that the only metric that mattered was short-term profits for equity partners, bad things happened to the profession and, more importantly, to the people in it. (To understand that evolution, read my novel, The Partnership.) What do I propose as an alternative? First, those considering legal careers should get better information about what awaits them before embarking on that expensive path. Bringing expectations into balance with reality would lead to a happier profession. Second — and it won’t happen because the current model is too lucrative for those running the show — leaders focusing exclusive on short-term profit-maximizing metrics (billings, billable hours, leverage, and the current year’s equity partner profits) should recognize that they’re ignoring other important values. These include mentoring (training), collegiality, a sense of community, encouraging client relationships that will survive to the next generation of firm partners, regarding clients and their problems as something more than revenue streams, and recognizing that some managers are now imposing demands on associates that they themselves never faced. When long-term means next year’s equity partner profits, it’s the myopic MBA mentality of misguided metrics that is “short-sighted.” At least, that’s my view.