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5 Best Practices for Developing Value-Based Physician Compensation Structures

Curtis Bernstein, CPA, CHFP, ASA, of Altegra Health discusses how healthcare providers can successfully implement a value-based physician compensation structure.

DoctorHospitals and health systems have shown a growing interest in acquiring physician practices in recent years. The percentage of non-independent, or hospital-employed, physicians has risen to just more than 40 percent in 2013 from approximately 35 percent in 2007, according to a study from Accenture, a management consulting, technology services and outsourcing company.

When a hospital acquires a physician practice, one important aspect of the transaction is developing a compensation structure that aligns the goals of both the hospitals and the physicians, says Curtis Bernstein, CPA, CHFP, ASA, managing director of valuation and transaction services at consulting firm Altegra Health's Denver office.

"With reimbursement moving to pay for quality, health systems are starting to integrate some of those quality measures into compensation plans with the goal to provide the best care for the lowest cost," he says. Transitioning physicians who might not be used to a value-based model to the new payment structure can pose some challenges, however. Mr. Bernstein shares some tips healthcare providers should keep in mind to implement a successful compensation structure that rewards quality of care.

1. Identify performance metrics. Hospitals should examine their different departments and evaluate their strategic goals and priorities for each area to determine where they need to concentrate on improvement, Mr. Bernstein says. When applying this technique to developing physician compensation models, hospitals should be sure to seek the physicians' input on what metrics they want to monitor, improve and benchmark internally and externally.

For example, one common metric hospitals track is turnover, or time between surgeries, in the operating room, he says. A facility with a higher turnover time than its peers might incentivize its physicians to lessen that time by linking their pay to that metric. Mr. Bernstein says he knows of health systems putting these types of compensation arrangements in place with their medical directors, taking the hourly pay rate, looking for priorities of improvement within the health system and adding additional pay onto that hourly figure depending on whether the directors' departments meet goals for quality metrics.

Providers also need to be prepared to do what it takes to monitor those metrics effectively. Hospitals may need to acquire new technology and may have to commit to implementing an information technology program. "Make sure the hospital actually has the ability to track various metrics and meet with physicians on a regular basis until they're comfortable with what they're looking at," he says.

2. Decide who to incentivize with those metrics. Hospitals and health systems can choose to tie only medical directors' pay to quality metrics, or they can choose to apply compensation quality incentives more extensively. "Do you just incentivize the medical director who's ultimately responsible, or do you go as far as possible?" Mr. Bernstein says, speaking from the perspective of providers contemplating how to structure compensation.

For instance, in the operating room turnover example, "they might also incentivize their operating room manager and nurses as well based on those same metrics, so everyone's aligned in improving efficiency in the OR," he says.

3. Start implementing performance-based pay early. Initially switching physicians over to a productivity-based compensation plan during an acquisition and then attempting to transition them to a value-based arrangement is a decision Mr. Bernstein says has caused some of his clients to run into problems. It's difficult to develop the compensation plan and get everyone on board with it while already in the process of a transaction with a physician group.

"A lot of the more sophisticated health systems put the incentive up front," he says. "When the system is buying the physician practice, there's a great opportunity to implement them into employment agreements."

4. Take your time and ease physicians into the compensation model. Although it's best to put forth the idea of a value-based compensation plan before the transaction is underway, hospitals and health systems shouldn't rush the process of making the new compensation model a reality, Mr. Bernstein says. "Physicians aren't used to looking at hospital financial statements," he says. "You can't expect someone to just change the way they've practiced for years overnight."

The hospital or health system should take some time to get physicians used to the new model, which means transitioning from a productivity-based model to a value-based one over the course of three to five years, he says.

5. Communicate. That transition requires a lot of communication. "You need to make sure everyone understands exactly what's happening and how it works," Mr. Bernstein says.

The first step is sitting down with physicians to explain the compensation model change, he says. Depending on the size of the physician practice staff, the hospital or health system will then want to arrange individual meetings with physicians. It's particularly important to make sure physician leaders understand and can explain the transition to their staff.

Mr. Bernstein recommends putting the explanation in writing as well. For example, a hospital that plans to link pay to operating room turnover metrics should write out how the compensation plan will work and what the physicians stand to gain if they improve efficiency and quality.

Conclusion
Overall, Mr. Bernstein says creating value-based compensation models, comparing hospitals and health systems to competing providers within the market and identifying potential savings will become easier as the industry continues to shift and more information becomes available. "As we move toward more quality-based reimbursement, it seems like there's going to be more data available to analyze these types of arrangements," he says.

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