Integrating value into physician employment compensation models

A significant disconnect exists between this desire and/or need to shift from volume to value and the compensation models currently utilized for the majority of employed physicians

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Since the enactment of the Patient Protection and Affordable Care Act in 2010, our industry has begun a transformation of the way healthcare is delivered in order to improve the quality of care while reducing the associated costs. Those involved with hospital-physician alignment have at least overheard, if not spoken, the expression "shift from volume to value" numerous times during this period. In the spirit of this particular phrase, increasing numbers of physician employment agreements link some portion of compensation to the nebulous concept of "quality." However, we contend that a significant disconnect exists between this desire and/or need to shift from volume to value and the compensation models currently utilized for the majority of employed physicians. Most current employment compensation models continue to offer strong incentives for physicians to provide more services rather than higher quality care. This brief examines current trends in integrating "value" into employed physician compensation models, the barriers to incentivizing value over volume, and the potential components of a future compensation model that will indeed bring about a shift toward value.

Current approaches to integrating value into employed physician compensation models
Today's common compensation models base most, if not all, of an employed physician's compensation directly upon some measure of production (e.g., work relative value units or professional collections). Most salary guarantees offer production-based incentives for higher levels of production. Many physician employers are beginning to shift currently-employed physicians away from salary guarantees to pure production-based compensation models upon renewal of their employment agreements. Clearly, such models provide strong incentives for physicians to produce volume.  

But how well do such models incentivize physicians to produce value? Many current employment compensation models include what is commonly referred to as a "quality bonus" that generally amounts to 5 percent to 10 percent of total compensation. Furthermore, the measures used to determine the amount of the quality bonus often include patient satisfaction scores and "citizenship" evaluations, in addition to patient care outcomes. Therefore, true quality (i.e., outcomes) actually determines a very small percentage of total compensation for a large portion of employed physicians. Finally, such quality incentives rarely bear any downside risk; the physician earns the bonus for meeting the specified objectives without foregoing any compensation that otherwise would have been earned for failing to meet them (or another set of minimum standards).
An industry outsider looking at such models might reasonably conclude that our goal is to generate volume at the expense of value. To understand this disparity, we must examine the obstacles impeding the development of compensation models that promote the desired results.

Barriers to incentivizing value over volume
In designing employment compensation plans to encourage a shift from volume to value, we encounter numerous obstacles, including:

  • Following the money — Despite the discussions to the contrary throughout the industry, the majority of reimbursement for physician services is based upon the volume of services, not the value of those services. The uncertainty between revenue production and value production renders compensation plans based on value nebulous at best.

  • Mistakes from the past — One of the most important takeaways from the last wave of physician employment in the 1990s was that incentivizing production is crucial to the economic performance of an employed practice. Otherwise, employed physicians can fall back on salary guarantees while the productivity of the practice declines and economics suffer.

  • Objectivity vs. subjectivity — Volume is objective and easy to measure. Conversely, value is subjective and difficult to measure (i.e., it often requires normalization for acuity, comorbidities, etc. and sophisticated IT systems to enable valid comparisons). Showing a physician that her production benchmarks poorly against that of her peers is not a difficult exercise. Convincing a physician that his outcomes are inferior to those of his peers proves to be a much more difficult undertaking.

  • Chicken and egg — Most employers or their valuation consultants rely, at least in part, on production benchmarks to establish fair market value compensation (i.e., for a physician employed by an entity receiving the physician's referrals). Such benchmark information is readily available (i.e., via published surveys of production data). To date, the industry lacks solid sources of benchmark data upon which to base comparisons of value.  Without this information, how does an employer determine FMV compensation related to quality?

  • Quantifying quality — To quantify value requires specific measurements. Can you reasonably compare the value created by two physicians by comparing their performance against a single metric (or a uniform set of metrics)? To measure the value created by a physician accurately may require a specific set of measurements tailored to the services provided by that physician. At present, individualized quality metrics certainly complicate the administration of compensation programs.

Potential components of a future value-based compensation model
Many within and outside of the healthcare industry are endeavoring to overcome these barriers. As the pendulum swings further toward value-based reimbursement for physician services and our industry compiles more and better data on outcomes, we believe that new compensation models will emerge that shift the financial incentives for employed physicians to encourage both volume and value simultaneously.

Obviously, we have learned how to incentivize volume effectively. This development will continue to be useful going forward as the population ages and the number of physicians available to treat that population continues to decline. However, our ability to create incentive systems that reward employed physicians equally for the production of volume and value will be fundamental to reducing future healthcare spending. Perhaps surprisingly, the employment compensation models of a value-based world may not look all that different on the surface from the models utilized today.  

Today's compensation plans might pay an employed physician $40.00 for each personally performed wRVU produced by the physician.  Additionally, the physician may be eligible for a $15,000 "quality bonus," which is awarded based on performance against core measures and scores from patient satisfaction and internal physician satisfaction surveys. If the physician produces 5,000 wRVUs per year, the quality bonus represents about 7 percent of the physician's compensation.

Contrast today's model with a future production-based model that, in totality, offers the same $40.00 per wRVU, which still encourages the physician to maintain or increase production.  However, in the future model, the physician is guaranteed to receive only $25.00 for each wRVU produced; the remaining $15.00 funds the physician's value-based incentive pool. To add incentive for superlative performance, the employer contributes an additional $5.00 per wRVU to the incentive pool (i.e., for a total of $20.00 per wRVU). Collectively, the employer and physician review normalized outcomes data and develop a set of individualized metrics that appropriately measure the physician's creation of value. The incentive pool is then awarded as follows:

  • Physician fails to meet acceptable standards for a particular metric: no bonus tied to metric
  • Physician meets acceptable standards for a particular metric: 50 percent of bonus tied to metric
  • Physician meets superlative standards for a particular metric: 100 percent of bonus tied to metric

Such a future model creates incentives to produce both volume and value. In fact, by producing a high level of value, the physician may earn even more than under today’s volume-incentive model. Conversely, those physicians with high volume but low value would see significant reductions in income.

Necessarily, the ability to implement such a future model hinges on our ability to measure quality outcomes objectively and consistently. Furthermore, the ability to drive the highest levels of compensation to those physicians who create the most value, rather than the most services, is dependent upon a continued shift to value-based reimbursement for physician services. As these developments indeed unfold, the landscape of compensation models for employed physicians will continue to evolve.

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