Is it Time to Re-Design Your Physician Compensation Plan?

The Current Trends in Physician Compensation and How to Re-Design Your Existing Compensation Plan

The fact that physician compensation has become a frequent topic of discussion at medical practice board meetings should come as no surprise.  As hospitals continue to acquire medical practices health systems continue to consolidate and perhaps most importantly healthcare transitions from fee-for-service to value-based payments; the profit margins for medical practices and consequently physician compensation continues to get squeezed.

The transition from fee-for-service to value-based payments is difficult at best for those practices who do not consider making changes to their physician compensation plans.  For those that do, they are likely to have greater success with participation in value-based payment models that reward providers for meeting quality measures and controlling healthcare costs.  They will be more likely to receive “quality” or “bonus” payments that can come in the form of ACO shared savings, pay-for-performance, bundled payment initiatives, and other value-based payment arrangements that are negotiated with payers.  True success can only be realized however, if physicians are incentivized to meet the goals put in front of them which are the common goals of the practice.  One of the best ways to do this is to re-direct compensation to those physicians who strive to meet these goals.

Historically, many practices compensate their physicians based on productivity – usually collections or RVU’s.  Many practices also charge direct expenses against each physician’s earned revenues based on individual utilization of practice resources.  This creates a culture that fosters over-utilization since performing unnecessary procedures, for example, may help a physician to meet their contractual level of productivity and/or cover their share of direct expenses.  This is the exact opposite of the goals that need to be achieved when participating in value-based managed care contracts where practices are rewarded when, and if, they meet quality metrics such as patient satisfaction, patient safety, use of health IT, efficient use of healthcare resources and care coordination, to name just a few.  In the end, strict productivity-based compensation plans tend to promote a culture of individual practices who are simply sharing overhead (and space) instead of operating as one practice with a team-oriented approach.

So how does a medical practice go about transitioning from a productivity-based compensation plan to one that compensates physicians based on achieving goals that are aligned with those of the practice and it payers?  Or to put it another way, how can a practice motivate its physicians to work together so they can achieve success in meeting the goals established in their value-based managed care contracts?

While one size does not fit all, a common approach is to retain funds in a separate “bonus pool”; a pool that will ultimately be paid to those physicians who meet certain quality metrics.  For example, a percentage of revenue from all physicians; say 5 or 10%, can be retained right “off the top” and kept in the bonus pool.  Value-based payments received from shared savings arrangements, Patient-Centered Medical Home initiatives or other value-based managed care contracts can also be retained in the same or a different bonus pool.  Funds are then distributed periodically from the bonus pools to those physicians who meet certain pre-determined goals of the practice, with the focus on meeting certain levels of quality metrics that are dictated in value-based managed care contracts.

While the methods used to calculate the allocation of the bonus pool among the physicians can vary from practice to practice, most use some type of “point system” in conjunction with a “weighting” of selective factors.  Early on, compensation should be weighted more toward historical productivity-based compensation and over time weighted more toward value-based compensation.  This will give physicians time to fully adjust to the new compensation structure without any immediate risk of a reduction in compensation.

In conclusion, changes to how physicians are compensated should be rolled out gradually so as not to disrupt the practice and to give physicians the opportunity to adapt to the new quality measures that they will be held accountable to meet.  Physicians need to understand exactly how their compensation will be determined, so the plan needs to be detailed, easy to understand and fully transparent to all participants.  The physicians should recognize that changes are necessary in order to remain competitive, to have greater success with value-based managed care contracting, and to be an active participant in the new world of value-based payments.

If you are considering making changes to your existing physician compensation plan or would like to evaluate the effectiveness of your existing plan in meeting practice goals, please contact one of the partners in Gettry Marcus CPA’s health care group.

Gettry Marcus CPA’s health care group is comprised of CPA’s who provide accounting, tax, audit, financial, and business consulting to physicians, hospitals and other providers across the health care spectrum.  If you would like to discuss how one of our health care CPA advisors can assist you, please contact Lee Ferber, CPA.