Getting it Right: Traits of Effective Physician Compensation Models

As value-based payment models gain traction, healthcare organizations are feeling pressure to control costs and improve the quality of patient care, all at a time when the supply of physicians is falling short of demand.

In a recent post, we suggested that healthcare organizations can position themselves to win the war for physician talent by designing a physician compensation model that aligns individual incentives with those that meet the organization’s value-based care objectives.

But what does such a model look like?

While there is no one-size-fits-all model, successful plans tend to adhere to a few key principles:

1. Balanced.

   Most organizations will not be prepared to jump from volume- to value-based metrics overnight. Payment model reform is taking hold at different rates in different markets, so the right balance of productivity and value-based metrics will depend on local conditions. Organizations in markets where penetration of value-based payment models is low might want to introduce just one or two value-based metrics to start. As payment models shift, compensation plans need to be able to adapt to align with changing organizational goals. Gradual change tends to be more sustainable, as it allows the organization to demonstrate success, recruit champions and apply key learnings to a broader scope.

2. Meaningful.

   The right metrics depend on organizational objectives in the value-based care transformation. Most successful plans incorporate between four and eight measures. Organizations that are participating (or planning to participate) in models that involve upside risk might want to adopt some of the evidence-based quality measures from the Merit-based Incentive Payment System (MIPS) or the Healthcare Effectiveness Data and Information Set (HEDIS) as a starting point. Organizations that progress into two-sided risk payment models will want to start incorporating cost metrics, such as overall cost per patient visit. Physician practices participating in managed care plans will likely want to incorporate some measures of access, such as patient panel size or use of a care team model.

3. Motivating. Successful physician compensation models typically allow for upside opportunities while also subjecting compensation to downside risk. A large enough percentage of compensation must be at stake to influence an individual to change behavior. When changing compensation, however, it is usually best to provide a sense of security with a fixed salary or base draw. In addition to measuring performance in absolute terms, some plans incorporate a measure of performance improvement. However, one concern about the improvement method is that it can disadvantage consistently high performers and reward those who show improvement but still are relatively poor performers.

4. Transparent. Physician buy-in is critical to the success of an incentive system, and transparency is the most essential element to build trust in the system. When stakeholders clearly see that pay is based on the value of work, they are more likely to perceive it as equitable. Effective value-based pay systems use simple metrics that are based on accurate, accessible data. The plan should use measures that can be determined accurately and with sufficient detail so that physicians can see how those metrics affect their compensation. Engaging physician leaders early in the design process can help foster this sense of trust and transparency. It is important for physicians to understand that not everyone will be a winner, but that an incentive plan that encourages appropriate behaviors makes the organization stronger and more economically sustainable.

5. Compliant. Changing physician compensation must be done within the confines of regulations governing financial and referral relationships. When introducing value-based metrics, make sure that healthcare legal counsel and an experienced valuation team weigh in to help reduce potential compliance exposure, particularly within the areas of fair-market value and commercial reasonableness.

Changing compensation can cause considerable stress. But when physicians can trust that the system is fair, balanced, meaningful, transparent and compliant, they will be motivated to pursue organizational goals and facilitate the transition to value-based care.

Download our white paper and get the definitive guide to value-based physician compensation design and learn more on best practices to transition to the new plan.

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