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80 South 8th Street
Minneapolis, MN, 55402
United States

(612) 888-1160

Leadership Coaching Corner

Physician Compensation: Crossing the Chasm from Volume to Value

Davis Fansler

We are in the midst of a monumental move away from predominant fee-for-service reimbursement models in favor of structures that pay for value in healthcare. While fee-for-service reimbursement is expected to be a part of how health services are reimbursed for the foreseeable future, payers are beginning to reward accountability for clinical quality, population health, cost reduction and patient experience. Physician compensation plans that pay clinicians exclusively for volume are evolving to incorporate incentives for improved outcomes and exceptional patient experience. Failure to do so, could jeopardize the viability of a provider organization, whether large health systems or small independent practices. 

Traditionally, physician compensation plans may have been viewed merely as a formula for dividing the physician compensation pie into individual slices. More recently, many health care organizations have found benefits in viewing their physician compensation program as a strategic tool to maintain or grow the size of the compensation pie by aligning incentives with key strategic initiatives. Organizations should be mindful about how their physician compensation plan can help their business stay relevant and nimble in the face of sweeping payment reform. If current strategic plans and/or compensation models are in conflict with the direction of healthcare reform, they must be updated.

You Get What You Pay For

If physicians are compensated primarily on productivity, such as work Relative Value Units (wRVUs) or net receipts, a higher volume of services is what physicians will likely produce. This leaves few incentives for a physician to devote time and effort to the improved clinical performance of the practice. Many argue that this overemphasis on quantity and volume has led to a costly system with little focus on accountability for cost and quality.

Newer compensation methodologies do include incentives for productivity, quality and patient satisfaction.  Estimates vary on how widespread the trend is but a survey by HealthLeaders Media noted that 57% of physician compensation plans factor in quality metrics and 50% used patient satisfaction to guide physician payment incentives. This trend is expected to rise significantly in the coming years, especially with improved access to reliable measurement tools and metrics.

Quality and patient satisfaction incentives still represent only a small percentage of most physician compensation packages. One survey suggested these factors comprise around 3-5% of the compensation, but noted an expected increase to 7-10% in the next few years. 

Paying for physician citizenship, time devoted to administrative, strategy or improvement activities should also be considered. Traditionally, these duties have been expected as part of a physician’s job and not paid as a component of the compensation structure. Healthcare reform, however, demands greater physician involvement in non-patient care activities as physicians are expected to embrace and drive benchmarks for quality and patient satisfaction. Building in financial incentives to recognize and encourage the increased participation is recommended.

The trick is to create a balance that will keep physicians productive, motivate responsibility for patient care and experience and encourage active citizenship to guide improvements.  Working toward 60-80% production-based pay, with the remainder at risk based on other incentives, may be a realistic goal for many organizations over the near term, though most are not there yet.

Considerations for Hospitals and Health Systems

Health systems have advantages to incorporating qualitative outcome-based measures into physician compensation plans. 

First, they typically have more capital to help ease the transition to new compensation models. This means they can set aside funds to create a “soft landing” for physicians whose income could be negatively impacted by the new measures in the short-term. This capital allows time for physicians to adjust their practice without drastic and sudden negative financial consequences. 

Second, health systems often have better developed health information technology (HIT) infrastructures to access and measure quality data. It is an advantage to have internal staff with the skills to extract important quality metrics. 

Third, health systems and hospitals tend to have significant leverage with payers to negotiate for nonproduction-based reimbursement models. Negotiating payment for population health initiatives such as medical home models can be easier for larger health systems, for example. Incorporating quality and patient satisfaction incentives into physician compensation packages is an easier sell when payers are already reimbursing for them.  

One of the main challenges for tax-exempt hospitals and health systems is that greater attention must be given to regulatory and compliance issues. Physician compensation cannot exceed fair market value parameters in order to comply with the Stark and anti-kickback laws and other IRS regulations. Independent review is necessary to ensure compliance when considering changes to the compensation model or when negotiating with new physicians. 

Needs for Small to Medium Sized Independent Physician Practices

It is no secret that independent group practices face significant obstacles to survival. Independent medical groups can survive, but only by being nimble and responsive to the payment reforms. Remaining indispensable in the healthcare marketplace will require a shift away from production-only compensation that still dominates independent practices. To do so, three considerations should be on the strategy board:

1.    Build a Solid Foundation for Data Collection. Determine what useful quality metrics can be gleaned from electronic health records and collect patient experience data from surveys. The practice must develop ways to regularly measure and report group and individual results to providers, patients and payers. 

Engaging payers to learn their priorities will be important in determining metrics to start tracking. Independent practices often lack the leverage with payers that larger health systems have. Even so, payers are becoming more open to working with smaller groups to incentivize items that impact quality and overall cost of care such as cancer screenings, immunizations, coronary artery disease management and wellness checks. 

Even if payers are not ready to pay for non-production items just yet, getting ahead of the game to understand what measures they are most interested in for the future is useful to know now. Practices do not need to wait for payers to catch up before building non-production incentives into their compensation.

2.    Strong physician leadership development. Surviving the shifting reimbursement environment takes strong physician leaders devoting time to strategy and business planning. 

When physicians are not compensated accordingly for these efforts or given proper authority to direct changes, the result is usually a practice with minimal focus on strategy. This is dangerous when haphazard planning and lack of responsiveness to reforms can mean the death of an independent physician practice.

A culture of patient first, organization second and physician third must be established. A commitment to such a culture will be paramount given that culture eats strategy for lunch every day. As a result, leaders must convince colleagues to adjust autonomous behaviors in favor of group goals such as reducing variation or improving patient experience. This is especially difficult if physicians were attracted to the independent setting to preserve their autonomy.

3.    Design compensation to compel physician accountability for outcomes and behavior. A solid compensation plan should incentivize physicians to redirect their efforts toward patient centricity and the shared goals for the practice beyond mere volume. 

Capital restraints, autonomous practice culture and limited HIT are some barriers independent practices often face to creating a successful, strategic compensation plan for the new era. These are not insurmountable challenges for medical practices willing to do what it takes to stay independent and indispensable. 

Finding the Right Formula

There is no one-size-fits-all physician compensation formula. Multiple factors must be considered including:

  • local/regional marketplace comparisons
  • fair market value 
  • practice specialties
  • capital available to fund a transition 
  • relationships with payers 
  • current physician contracts 
  • group culture
  • access to quality, cost and patient satisfaction data

It is critical to seek help from an expert experienced in developing strategic physician compensation plans. This will ensure that the plan considers important aspects of the changing marketplace, complies with regulatory standards and is tailored to the strategic goals of the health system, hospital or independent practice.