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Building compensation plans in a pay-for-performance era


New compensation models will be key as payers look to reward quality vs. volume


It is becoming more common for physician groups to reward certain quality metrics as part of their internal reimbursement structure. The trend is affecting a small but increasing portion of physicians’ pay.

By now, pay for performance is an established concept in the world of third-party reimbursement. Primary care physicians (PCPs) derived 3% of their total compensation last year based on quality measures, while performance-based data was linked to 2% of total compensation for specialists, according to the Medical Group Management Association- American College of Medical Practice Executives’ (MGMA-ACMPE) Physician Compensation and Production Survey.

“Quality and patient satisfaction metrics are not yet dominant components of physician compensation plans right now, however, as reimbursement models continue to shift, the small changes we’ve observed recently will gain momentum,” Susan L. Turney, MD, MGMA-ACMPE president and chief executive officer (CEO), explained in an announcement.

Recruiting firm Merritt Hawkins has seen even stronger evidence of the growing trend, as 39% of its 2013 search assignments that offered physicians a production bonus also included payments based on quality metrics. This figure was up from fewer than 7% in 2011, according to a report released in August.

Align compensation with reimbursement

This shift in payment structures is an inevitable result of the healthcare marketplace transitioning away from paying for volume in favor of rewarding quality, says Deborah Walker Keegan, PhD, FACMPE, president of Medical Practice Dimensions, Inc., and principal of Woodcock & Walker Consulting in Asheville/Arden, North Carolina.

Thus, medical groups should look at ways to align their compensation models with the way revenue flows into the practice, which may now include incentives for patient satisfaction, quality of care, and cost containment.

“Talking about productivity alone is inconsistent with the changes in the delivery system,” Walker Keegan says. “It’s been inconsistent with value-based reimbursement and inconsistent with alignment with the fund-flow model. If you’re going to get paid on value, it’s time to think about compensation with some of those value components in it because you need to focus attention on physicians and clinicians meeting certain goals related to federal programs and payer changes.”

Choose the right metrics

Where many practices struggle, however, is in selecting the right metrics to reward, says Craig Samitt, MD, executive vice president of HealthCare Partners in Torrance, California. Samitt is also a commissioner of the Medicare Payment Advisory Council and former president and chief executive officer of Dean Health System in Wisconsin.

“The measures need to be reliable, reproducible, measurable, and valid-and that can often be the hardest challenge because there aren’t many proven quality measures that apply to each and every physician,” Samitt says.

Start by looking at where payers are already offering incentives or plan to in the near future. For example, if you have a primary care practice that is part of a larger group, you are already being evaluated on Medicare’s value-based modifier, although it hasn’t impacted your reimbursement yet, notes Bruce A. Johnson, JD, a Denver, Colorado-based physician compensation expert.

In addition, with reimbursements based on patient satisfaction around the corner, it makes sense to start tracking and rewarding your scores internally, Johnson says. Quality measures dealing with chronic conditions, as many current government and private-payer programs do, are also important for groups to get a handle on.

Some payers may allow practices to pick from a list of metrics, including obesity, diabetes, hypertension, or congestive heart failure, says Gail Levy of The Levy Advantage consulting firm in Baltimore, Maryland. “Depending on the deal, a physician might agree to receive 90% of his salary, but I wouldn’t advise going any lower,” she says.

Avoid ‘compensation layering’

But putting this puzzle together isn’t easy, Samitt warns. Groups need to consider which measures to use, what percent of an incentive to apply to each measure, and how difficult the targets will be to achieve. “There are many elements of the transition that are complex that take some degree of finesse to do it successfully,” he says. 

What you want to avoid, according to Walker Keegan, is a phenomenon she calls compensation layering, or having too many “add on” systems to a group’s compensation formula. For example, groups might attempt to give physicians a cut of the additional money they earn from participating in Meaningful Use, e-prescribing, the Physician Quality Reporting System (PQRS), bundled payments, performance payments, and more. “That is unwieldy,” she says. “Then you’re focusing attention on too many variables and you’re trying to micromanage the compensation plan.”

Rather, Walker Keegan advises groups to take a step back and determine what portion of physicians’ compensation should be related to quality, additional production beyond the norm, service, access, and so on. “We weight those additional categories and identify either flat dollar amounts, percent to total points, and percent of base compensation that may be at risk, and move that way rather than trying to take every dollar that comes into a practice and filter it to the physicians through compensation layering,” Walker Keegan says.

Consider additional costs

Another factor in determining the worth of your pay for performance plan is the extra work you and your staff will have to do to maintain the program. Many programs require significantly more administrative work-even with electronic health record systems, a program that only helps a sliver of your patient population may cause you to hire another employee.

“You might end up retooling your practice for 20% or 30% of your practice and getting no added income,” she says.

However, Levy says that some plans offer the help of a nurse or administrator. In this case, there may be certain compensations added just for participating in the program.

“Some of these plans require added personnel, sometimes you don’t need to add new staff, you just need to train them,” Levy says. “There are additional costs in the extra tracking and reporting you have to do. Some plans provide a nurse or a navigator, but if you have to hire an additional nurse, that’s a big risk.”

Dividing the pie

Another complexity in creating a performance-based compensation plan is determining how bonus dollars should be allocated. Specifically, you need to decide for every metric whether you’ll apply the incentive to individuals, to one or more departments, or to all of the physicians in the group, Samitt says. “The most effective measures are the ones that reward all three, so you really want a blend,” he says. For instance, he recommends that patient satisfaction measures be applied at the individual level, quality and accessibility measures applied by department or specialty, and cost measures applied at the overall organization level. That way no individual physician feels conflicted about a cost decision.

When this transition is done well, practices stand to benefit from improvements in quality, service, and cost, Samitt says. However, a critical component to success is involving physicians in the process.

“My experience in healthcare organizations is that change happens most effectively when we involve physicians in the change process, not when we make changes around the physician or to the physician,” he says. “[Compensation redesign] can’t be done by a group of executives in a room that rework the incentives and then roll them out to the physicians.” Samitt adds that physicians can be charged to lead their own compensation redesign within defined parameters.

Light at the end of the tunnel

Nonetheless, expect the transition period to be difficult, warns Walker Keegan. “It’s very hard for practices to manage in a mixed-model reimbursement and to manage a compensation plan that’s aligned with mixed-model reimbursement,” she says. “Mixed-model reimbursement is one of the toughest models to be in, and we’re going to be in it for some time as we try to figure out what this end-state reimbursement reform is all about.”

In the meantime, it’s important to emphasize to physicians the upsides to joining the movement toward value-based compensation, Johnson says. “Those that do it well can actually increase their reimbursement because they’re going to be focusing their attention on the things that matter to their payment,” he says.

Being an active participant in these changes, Johnson adds, can help offset some of physicians’ anxiety about the sustainable growth rate, for example, and the mounting pressure to become hospital employees.

“If a physician is interested in trying to retain [his or her] independence and their autonomy, it behooves them to begin to focus their attention on these things because internal and external reimbursement will hinge on these quality measures down the road,” he says. “It puts them more in the driver’s seat to try and control their own destiny.” 


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Jennifer N. Lee, MD, FAAFP
© National Institute for Occupational Safety and Health
© National Institute for Occupational Safety and Health