As the healthcare delivery system undergoes the transition from an environment where greater volume generally equates to higher revenues, to a world where utilization (i.e. volume) will no longer be a source of revenue but viewed as an expense, a question naturally arises - “How is one supposed to compensate physicians in a world turned upside down?” Here enters the vaunted term “value-based compensation” to answer the question – save that few people can then actually explain the intricacies involved to execute a “value-based compensation” arrangement. However, fear not, the basic composition of value-based compensation arrangements are what we will explore today.
Many health systems are actively pursuing clinical alignment with physicians in their communities in the pursuit of the “Triple Aim.” These clinical alignment efforts are often based on a mutual commitment to delivering evidenced-based care that focuses on components such as improving quality, efficiency, and coordination of care. These clinical alignment efforts inherently require the health system and their physicians to establish metrics, standardized processes, targets, and compacts to truly bind the parties to a unified mission or vision. However, many health systems have embarked upon implementing these inherently necessary steps in clinical alignment while still providing their physicians with employment agreements based strictly on production based metrics such as WRVUs – which clearly incentivizes the physicians to increase utilization and steer patients towards more complex procedures. The production based model represents hospitals’ attempts to mitigate post-employment production decreases that result in losses.
Defining Goals
Health systems pursuing clinical alignment must first take a step back and define the goal of their physician compensation plan in a value-based environment. These goals should be stated in terms such as adequately compensating physicians for their performance in actively transforming the system’s patient care in a manner that promotes improved health for the patient population. Establishing the goal of the physician compensation plan in a value-based environment then allows the system to focus on developing a physician compensation plan utilizing the proper incentives to adequately compensate physicians for pursuing the system-wide goals that make alignment an attractive proposition in the first place.
Value-based compensation plans should be comprised of two components:
1) Fixed annual compensation
Fixed annual compensation should be set at fair market value as determined by factors such as the physician’s specialty, time, experience, local market conditions, and required effort to fulfill the required obligations of managing a given service line. For example, typical services required in a service line with strong physician alignment would require the physician devote times to administrative committees for such activities as budgeting, strategic planning, developing clinical protocols, community events, staff training, case management, etc.
2) Incentive compensation
The incentive compensation should be based on the physician’s performance in achieving mutual agreed upon targets tied to quality metrics, shared cost-savings, or patient panel size management – which will be selected dependent upon the physician’s specialty and the care processes that are most important to achieving the parties’ mutual goals (again, often the Triple Aim). The incentive compensation component (also subject to fair market value considerations) is clearly the more difficult of the two components of the physician model to devise, as the health system must adequately deliberate on their specific local market conditions before proposing an incentive compensation plan in an effort to avoid any inadvertent financial consequences. Finally, just because greater amounts of compensation should be tied to quality and other components, this does not entirely eliminate the need to tie a portion of the physician’s incentive compensation to productivity as physicians still must produce at a level that ensures patients’ adequate access.
Testing is key
An important component to successfully implementing a value-based compensation plan is to test the model to ensure the incentive component does not lead to significant changes in aggregate physician compensation – which could in turn alienate physicians or result in significant Stark, anti-kickback, and false claims act exposure.
The physician should be able to quickly understand the incentive component of compensation, as the physician’s compensation should be utilized as a means to further solidify a collaborative symbiosis. This is where an experienced Valuator can help craft physician compensation plans that transition to value-based care in method that provides clarity to all parties and meets regulatory standards.
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