Physician compensation: 5 questions before you roll out a new model

When my team is brought in to a medical group to discuss physician compensation, the conversation tends to start with the mechanics—what alternative models look like, methods of reporting, and any legal implications.

But we challenge our partners to take a step back. Even the best-conceived mechanics will not hold up to clashes with physician ethos, unplanned shifts in reimbursement, and mismatched system-level goals.

Before an organization selects and rolls out a new compensation model, here are five strategic questions to ask, with comments from compensation experts Josh Willefordand Sarah Cavalier.

1. What’s the rationale behind the compensation redesign?
Josh: It’s common to see compensation as a way to reduce the cost structure and increase productivity. As the physician investment rises, with salaries often the biggest piece of that pie, it’s not a surprising motivator. But it’s not an effective one and can cause real damage to culture, physician satisfaction, and the patient experience.

The most successful projects we’ve worked on have been with organizations that focus on topline health system growth and they rework compensation to increase margins through increased market share. There can be some initial anxiety when teams switch gears to invest in compensation but those efforts ultimately improve physician alignment, reward coordination and patient-focused care, and drive more revenue within the system.

2. How will you navigate the inevitable political landmines?
Sarah: Our team has supported around 60 compensation engagements, so we’re used to taking arrows as the third party. Compensation matters should be treated with care—but hot-button issues can’t be ignored. For example, a large organization that has been acquiring practices for years may have inherited legacy payment plans—or agreed to special deals—and now has 75 different payment models to manage. In tackling tricky (and unsustainable) arrangements like that, it’s crucial to understand what’s actually important to the physicians.

Our approach involves interviewing a meaningful percentage of the medical group, across representative specialties. Without pointing fingers, we then facilitate discussion around common issues such as distrust in management or dissatisfaction in current pay practices—all to inform a more thoughtful compensation approach that’s better for physicians and the enterprise as a whole.

3. What’s the plan for decision-making and change management?
Josh: A dedicated steering committee should review the blinded and consolidated feedback that comes out of that listening tour, and ultimately weigh different models and select the new design. We encourage a diversity of perspectives to be represented on the committee—from those that are already bought into change, to those that are fighting it. When naysayers get on board, the chances of acceptance across the medical group are that much higher.

Once the new plan is approved, the committee should invest time in creating policy documents and a physician compact to memorialize the changes and expectations. This is important from a legal standpoint, but also fuels a culture of transparency and trust.

4. Is the compensation strategy forward thinking?
Josh: Your compensation plan should allow for flexibility over time without having to reinvent the wheel. For example, when there are material changes to the way the medical group is paid—such as jumping from 5% to 30% of revenue coming from value-based contracts—an organization would need to adjust its compensation allocations. But if you design the basic infrastructure with an eye toward flexibility, physicians expect these types of changes, which makes them easier to make within the existing model.

The compensation plan should also be structured in a way to retain and attract top talent. Even though some of the changes will inevitably cause tension for current staff in the short term, a transparent and thoughtful compensation plan can be a sound investment in long-term employment stability.

5. Does your organization have realistic expectations for the new model?
Sarah: It’s true that compensation helps align physicians with performance goals and system objectives for key performance areas like patient access to care and network coordination. But leaders must keep in mind that it won’t solve underlying cultural issues or fundamental economic challenges; it also shouldn’t be a tactic to incent behavior that could be shaped more effectively through alternate strategies. Compensation is just one important vehicle to drive behavior and align physicians with system strategy.

Ron Charpentier is a National Partner, Consulting at Advisory Board, with decades of expertise in physician enterprise strategy and management, supporting clients through multi-year transformational change. Josh Willeford is a Vice President, Consulting at Advisory Board and provides clients with analysis, modeling, and forecasting to advance hospital-physician alignment. Sarah Cavalier is a Senior Consultant, Consulting at Advisory Board, specializing in provider compensation plan redesign, general ledger accounting, revenue recognition, and projections and budgeting for multispecialty physician practices.

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