Becker's Hospital Review

57 Executive Briefing: Physician Compensation Sponsored by S ince the enactment of the Patient Protection and Afford- able Care Act in 2010, our industry has begun a trans- formation 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 val- ue" numerous times during this period. In the spirit of this particu- lar phrase, increasing numbers of physician employment agree- ments link some portion of compensation to the nebulous concept of "quality." However, we contend that a significant disconnect ex- ists 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 compensa- tion 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 phy- sician compensation models, the barriers to incentivizing value over volume, and the potential components of a future compensa- tion 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 collec- tions). Most salary guarantees offer production-based incentives for higher levels of production. Many physician employers are be- ginning 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 gener- ally 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 "citi- zenship" evaluations, in addition to patient care outcomes. There- fore, 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 down- side 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 obsta- cles impeding the development of compensation models that pro- mote 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 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 reve- nue production and value production renders compensation plans based on value nebulous at best. • Mistakes from the past — One of the most important take- aways from the last wave of physician employment in the 1990s was that incentivizing production is crucial to the economic performance of an employed practice. Other- wise, employed physicians can fall back on salary guar- antees 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 infe- rior to those of his peers proves to be a much more difficult undertaking. Integrating Value into Physician Employment Compensation Models By Jim D. Carr, ASA, MBA, Partner and Matthew J. Milliron, MBA, Manager, HealthCare Appraisers, Inc. www.HealthCareAppraisers.com | info@hcfmv.com | (561) 330-3488 DELRAY BEACH | DENVER | DALLAS | CHICAGO | PHILADELPHIA True quality (i.e., outcomes) actually determines a very small percentage of total compensation for a large portion of employed physicians.

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