Although you can apply Physique to an object with modifiers, this can affect performance. If you use other animated modifiers in combination with Physique, this reduction is unavoidable. If the other modifiers are not animated, you can collapse the stack to remove modifiers prior to Physique. This can significantly improve performance.
How Physique reevaluates vertices coming up the stack depends on the stack update options.
In Physique, there are three stack update options available from the Physique Level of Detail rollout to determine how Physique handles animated vertices coming up the modifier stack.
Add Change adds in the changes from the stack and then applies mesh deformation. No vertex remapping or reassigning is done. This is the default option, and usually will give you the deformation that you want. There is no performance degradation from Physique.
Remap Locally resets vertex position on the spline used for bending and the link position used to interpolate twist. Use this option when vertices are sliding along the length of the spline, and you want them to bend and twist based on the spline position but don't want the weights to change.
Reassign Globally does a complete vertex reassign for each frame. Use this option when vertices are moving to different envelopes and you want them reassigned to the new envelopes. This option should rarely be used. The only reason would be if vertices are sliding along a link and you want the twist to be interpolated based on the new position.
Using Physique with Changing Geometry
Physique can effectively handle dynamically changing geometry. That is, if the geometry coming through the modifier stack to Physique changes, Physique dynamically adjusts to accommodate the changes to the geometry, while maintaining its own parameter settings, including manual vertex assignments. This is why, when using Optimize, you can effectively change the resolution of the geometry deformed by Physique.
Only in situations where the changes dramatically increase the density of data is there ever a need to manually adjust vertex assignments. Physique remembers your manual vertex assignments, and uses these assignments to reassign vertices when the geometry changes.