1 Indiana Medical Group Management Association 2015 Practice Management Conference Strategies for Setting Compensation and Performance Standards Friday May 8, KSM Business Services, Inc.
2 Agenda Introduction Why This Topic? Fundamental Shift in Reimbursement Methodology Medical Practice Financial and Productivity Challenges Impact of ACA on Physician Practices Foundations for Salary and Incentive Compensation Management Benchmarking and Creating a Salary Administration Guide Keys to Managing Employee Compensation Keys to Managing Incentive Compensation Best Practices for Aligning Staff Incentives Conclusions Comments/Questions 2 ksmcpa.com
3 About Katz, Sapper & Miller Accounting and consulting firm based in Indianapolis; Offices in Fort Wayne and NYC 34 partners, 270+ employees Founded in 1942 We are: Largest accounting firm based in Indianapolis (Indianapolis Business Journal, 2013) Top 100 largest accounting firm in nation (INSIDE Public Accounting, 2013) A Top 100 Firm (Accounting Today, 2013) Best of the Best Firm: 2013, 2012, 2010, 2009, 2008 (INSIDE Public Accounting) Best Places to Work in Indiana: 2006, 2007, 2008, 2009, 2010, 2011, 2012, 2013 (Indiana Chamber of Commerce) 3 ksmcpa.com
4 About Us Lisa Curry Director, Healthcare Resources Public accounting in healthcare since years in healthcare industry providing tax, accounting and consulting services. Tax planning Tax compliance Financial statement analysis Buy-in and buy-out calculations John Martin Managing Director, Healthcare Consulting Healthcare industry since years in healthcare industry; Financial Planning Strategic Planning and Market Assessment Physician/Hospital Alignment Hospital and Medical Practice Operations and Management Hospital and Physician Integration and Alignment 4 ksmcpa.com
5 KSM Healthcare Services Health Systems/Hospitals Strategy development Strategic planning Market assessment Business development Financial services Revenue cycle perf. improvement Chargemaster/fee schedule review Physicians/Practices Strategy guidance and counsel Tax, financial planning Acquisition guidance Due diligence Financial operations Receivables/collecting process Cash flow, expense management Integration Employment PSA Lease Management Company ASC/Joint Ventures Valuation Benchmarking FMV/CR Opinions Transaction support Compliance 5 ksmcpa.com
6 Session Description/Learning Objective Salaries & benefits are typically among the three largest expense items on the medical practice income statement. Successful practices must strategically evaluate staffing levels, compensation structures, and staff incentives. This is especially true in light of reimbursement and patient/procedure changes brought about by healthcare reform. In this session you will gain an understanding of: 1. The impact of healthcare reform on group practices and hospitals 2. How reform is changing compensation discussions 3. Salary benchmarking and setting a salary administration guide 4. Best practices for aligning staff incentives 5. Developing strategies for setting performance based incentives 6 ksmcpa.com
7 Why This Topic? 2014 KSM Business Services, Inc.
8 How Did We Get Here? The federal government, think tanks, and private payers have put increasing pressure on providers to document and improve the value of the care delivered Providers, hospitals and physicians alike, are being asked to develop strategies for delivering higher value care Additional patients taking advantage of the government system with a reduction in the aggregate spend on healthcare services Challenges: Can we reconstruct our practice s to be profitable at Medicare rates? Are we prepared to participate in alternative reimbursement models? 8 ksmcpa.com
9 IHI Triple Aim Initiative Improve Population Health Improve Patient Experience Reduced Per Capita Cost of Care Institute for Healthcare Improvement 9 ksmcpa.com
10 Overview Healthcare Reform is: Driving Systemic Change in Reimbursement Models Shift from Volume to Value based reimbursement Quality and Satisfaction based components of compensation Driving Systemic Change in How Physician s are Measured Improvements in Quality of Patient Care Improvements in Patient Experience Reduced Cost of Care Delivery Placing Increasing Pressure on Medical Practice Income Intense Downward Pressure on practice income Mounting overhead (meaningful use, EMR, etc ) Driving New Staff Compensation and Incentive Strategies Develop New Non-Physician Staff Standards and Expectations Reward High Performing Staff Reward Staff Participation in Quality Initiatives Discourage Under Performance 10 ksmcpa.com
11 Fundamental Shift in Reimbursement Methodology 2014 KSM Business Services, Inc.
12 PAYMENT FOR VOLUME PAYMENT FOR VALUE 12 ksmcpa.com
13 Blended Compensation Models a Priority to CMS HHS has set a goal to have 30% of Medicare payments in alternative payment models by the end of 2016 and 50% by the end of Source: CMS Press Release, Fact sheets: Better Care. Smarter Spending. Healthier People: Paying Providers for Value, Not Volume, 1/26/15 13 ksmcpa.com
14 Healthcare Reform Impact on Reimbursement As we continue along the healthcare reform continuum, physician practice revenue will be increasingly tied to alternative reimbursement models including: Shared savings programs Bundled payments Value based reimbursement Quality outcomes and Cost efficiency To prepare for the changing reimbursement models, many practices are looking at physician compensation plan revisions Physician compensation plans are beginning to include measures based on patient satisfaction and clinical quality 14 ksmcpa.com
15 Medical Practice Financial and Productivity Challenges 2014 KSM Business Services, Inc.
16 Medical Practice Financial Challenges Medical practices are facing intense pressure on practice net income and physician/shareholder value As the reimbursement model(s) shift from volume to value, medical practices must reinvent the way in which they deliver care Over the past several years Reimbursement has continued to decline Operating expenses have continued to increase Non-physician compensation continues to grow The shift to value based reimbursement is likely to have the greatest impact on procedure dependent practices (i.e. specialists), materially changing their revenue structure 16 ksmcpa.com
17 Physician Productivity Productivity is taking on a new meaning In addition to being compensated for the volume of work and number of patients, physicians are also being compensated on: Improvement in care delivery Documentation of care delivered (MU) Improvement in the quality of the care received by the patient Appropriate reductions in operating expenses Physician compensation plans are being modified to reflect this new emphasis on value driven patient care Many physician groups and hospitals are now participating in service line co-management agreements, centers of excellence and specialty specific institutes Critical to long term practice viability One side effect: reduced physician productivity due to lost clinic time 17 ksmcpa.com
18 Impact of ACA on Physician Practices 2014 KSM Business Services, Inc.
19 Impact of ACA on Physician Practices The ACA is causing medical group practices to completely redesign how care is delivered New reimbursement models reward: Quality Satisfaction Cost reduction Less emphasis placed on volume of procedures performed or number of patients treated Physicians and hospitals are now being asked to work together to manage populations of patients 19 ksmcpa.com
20 Shifting Practice Priorities Physician measurement and compensation dynamics are changing, non-physician staff measurement and compensation dynamics should change as well Expectations of physicians are changing rapidly: New emphasis on improvement in care delivery New means of being compensated (i.e. service line co-management agreements, etc ) Adjustments to compensation plans to reflect these changes Medical practices find themselves increasingly focused on: Internal process improvement Improvement in patient and physician satisfaction scores Cost reduction initiatives Participation with hospitals in new care management models We need to begin rewarding non-physician staff for these same behaviors Non-physician compensation and incentives should be linked to these new metrics 20 ksmcpa.com
21 Focus on Staffing Medical practices find it very challenging to manage the increasing demands being placed on non-physician staff while simultaneously carrying the minimum number of FTEs required for clinic efficiency There is continuing pressure on medical practices to: Improve overall practice financial performance Preserve Shareholder/Physician income and value Improve staff productivity and optimize clinic staffing models Integrate information technology into the practice: improve physician and staff productivity; right-size staff levels Greater emphasis is being placed on identification and retention of top Places an even greater priority on finding and keeping the right mix of staff performers!!! Employee selection and retention are critical now more than ever 21 ksmcpa.com
22 Foundations for Salary and Incentive Compensation Management 2014 KSM Business Services, Inc.
23 Critical Administrative Duties All levels of a medical practice must be actively involved in compensation management Administrators o Need to lead their physicians and board in a rational approach to establishing salary guides/ranges and incentives for high performers Physicians o Work with administrators to provide input and gain an understanding of compensation process AND o Advocate for rational and consistent approach to staff compensation to promote retention Governing body (Shareholders, Board of Directors, Executive Committees, etc.) o Review, challenge, and approve recommendations of administrators and physicians with respect to establishing staff salary guides/ranges and performance standards 23 ksmcpa.com
24 Organize the FTE Schedule Most practices maintain an FTE listing or current staff roster The FTE schedule is the basic tool in our effort to adequately manage compensation and incentive bonuses FTE schedules should be organized by departments and positions within each department These staff classifications should follow the general practices of MGMA or other industry organizations Proper diligence in setting up the FTE schedule is critical to adequately managing human resources, payroll costs, and compensation benchmarking 24 ksmcpa.com
25 Benchmarking and Creating a Salary Administration Guide 2014 KSM Business Services, Inc.
26 Use a Salary Administration Guide If your practice does not have a current salary administration guide, then one should be developed to manage costs and employee expectations: Initial salary administration guide : 1. Create uniform corporate departments 2. Create job classifications 3. Assign each employee to a job classification 4. Benchmark pay ranges 5. Consider unique market factors 6. Industry and internal benchmarks 7. Annually measure salary ranges against these benchmarks 8. Set high, mid, and low ranges for each job classification Continuing (annual?) tasks of salary administration guide 1. Periodic global updates 2. Department specific market adjustments as necessary Adhere to the Guide 26 ksmcpa.com
27 Salary Benchmarking Regional differences exist Make sure you set benchmarks for your particular region Sources MGMA AMGMA Sullivan Cotter Industry Specific Societies Use multiple sources Comparable staff position information Provides broader range of salaries from which to compare Develop more accurate salary ranges for your group 27 ksmcpa.com
28 Developing a Salary Administration Guide Salary ranges should be set by position within each department using the benchmarking process described on the previous slide At a minimum, the salary administration guide should have values for low, middle, and high earning points creating the salary range within each job classification Each employee within a particular job classification should be compensated within the lower and upper bounds of the salary range for that position The salary administration guide may be adjusted periodically for: One time changes in market conditions by position, or Adjustments to keep up with inflation and cost of living Before making annual or market updates to the salary administration guide, make sure changes are supported by position specific benchmarking 28 ksmcpa.com
29 Sample Salary Administration Guide Developing a salary administration guide does not have to be complex, in fact is should be simple and straight forward one example: Department/Position Low Point (2) Mid Point (1) High Point (2) Administration Chief Executive Officer $ 80,000 $ 100,000 $ 120,000 Chief Financial Officer $ 64,000 $ 80,000 $ 96,000 Patient Accounts Manager of Patient Accounts $32,000 $ 40,000 $48,000 Billing Representative $ 24,000 $ 30,000 $ 36,000 (1) = Based on MGMA or other industry benchmark (2) = Measured from the Mid Point: -20% to +20% 29 ksmcpa.com
30 Keys to Managing Employee Compensation 2014 KSM Business Services, Inc.
31 Keys to Managing Employee Compensation Position Classification Compensation Set Salary Ranges When the salary administration guide is first set: Certain employees may be earning above the maximum for their position Each situation is handled individually Top of pay class: Compensation is maxed Annual raises may take the form of an annual payment Additional raises may be earned if the employee transitions into a job classification with a higher pay scale 31 ksmcpa.com
32 Productivity Standards and Strategies Salary administration guide established and approved Set job specific productivity standards and expectations Can the practice: Flex staffing to match clinic volume peaks and valleys Set clinical efficiency standards practice-wide Direct expense physicians for inefficiencies which lead to staff overtime Increased clinic standardization leads to: Improved staff efficiency Ability to right-size number of practice FTEs Better payroll cost control 32 ksmcpa.com
33 Productivity Standards and Strategies (Cont d) Physician productivity standards (if any) will be set: As part of any revisions to the physician compensation plan By physicians and administrators working together to set meaningful standards Staff productivity standards will be set based on Input from the executive leadership Department directors and managers Board of Directors 33 ksmcpa.com
34 Productivity Standards and Strategies (Cont d) Department level productivity and performance standards should be set annually (takes time) Executive leadership team should work with department managers to set stretch goals for the coming year Productivity standards are set and recommended to the board For board approval Consistent monitoring by management Status reported to the board at least quarterly Department managers will utilize the same criteria to evaluate their staff It is critical that productivity standards and performance goals be set that support the group s overall strategic and operating plans for the coming year 34 ksmcpa.com
35 Keys to Managing Incentive Compensation 2014 KSM Business Services, Inc.
36 Allocation Strategies / Aligning Staff Incentives 1. Board reviews budget and establishes a specific amount for staff raises and bonuses 2. Allocate the staff raise/bonus amount to each department based on Department FTE s as a Percent of Total FTE s 3. Each department head allocates the raise/bonus amounts to individual staff based on performance relative to others in their department Challenge for most staff is realizing that the annual bonus is now based on meeting goals and expectations that are set in advance Some goals will require cooperation of other departments and/or the company as a whole 36 ksmcpa.com
37 Allocation Strategies (Cont d) Critical shift in thinking: Everyone understanding that the guaranteed bonus of old has gone away and bonuses will now be based on contributions to practice, department and individual goals Some measures will be set at the practice level Group may project growth in net revenue of 5% If group achieves 5% 100% of that portion of the incentive is earned by each department If the company falls short of the 5% target That portion of the bonus may be reduced proportionately 37 ksmcpa.com
38 Allocation Strategies (Cont d) Some measures will be set at the department level To achieve the 5% corporate growth target Switchboard must answer additional calls Without additional staff Maintaining service levels (no increase in wait time) If department hits its call handling goals Department earns 100% of that portion of the incentive If the department falls short of the target That portion of the bonus may be reduced proportionately 38 ksmcpa.com
39 Allocation Strategies (Cont d) Some measures will be set at the individual level Individual goals support practice and department goals Quality Improvement program participation Attaining quality improvement standards set through the practice quality improvement program If individual hits his/her individual goals Individual earns 100% of that portion of the incentive If individual falls short of his/her individual goals That portion of the bonus may be reduced proportionately 39 ksmcpa.com
40 Allocation Strategies (Cont d) Where the rubber meets the road: How should incentives be distributed to individual employees? Historical raise and bonus allocation Some practices allocate raises and bonuses to staff equally Makes the annual evaluation process easier for the manager Downside is that this approach does not reward high performers In fact, could cause high performers to reduce productivity or seek employment elsewhere 40 ksmcpa.com
41 Allocation Strategies (Cont d) Where the rubber meets the road: How should incentives be distributed to individual employees? Sample future raise and bonus calculation Staff rewarded for meeting group, department and individual goals - May alter their work/spending habits to help achieve goals Assuming the group raise pool is 2% and the bonus pool is 5%, - Low performers: 1% / 3% - Average performers: 2% / 5% - High performers: 3% / 7% 41 ksmcpa.com
42 Best Practices for Aligning Staff Incentives 2014 KSM Business Services, Inc.
43 Best Practices for Aligning Staff Incentives Historically staff incentives have been handed out across the board and without regard to relative contribution among employees One goal of aligning staff incentives is to ensure that staff are working together with physicians and administrators to achieve company goals Some medical practices have started to allocate bonuses and incentives as follows: 1/3 Personal Accomplishments 1/3 Department Accomplishments 1/3 Corporate Accomplishments 43 ksmcpa.com
44 Corporate Goals and Objectives As healthcare evolves from reimbursement based on volume to reimbursement based on value, the group practice should consider setting corporate goals along those lines Sample overall corporate goal allocation: Quality improvement: 50% Financial Success: 25% Program Development: 15% Patient Satisfaction: 10% 44 ksmcpa.com
45 Quality Improvement Programs As reimbursement moves from volume to value of services, quality improvement programs become critical Implement practice-wide quality improvement program Challenges Physician adoption of physician directed clinical measures Identifying physician outliers Addressing physician outliers Sample operations quality program components Improve days in accounts receivable Reduce patient no-show rate Improve call handling Clinic appointment efficiency Clinic runs on-time consistently A portion of each employee s potential bonus should be tied to quality improvement program initiatives 45 ksmcpa.com
46 Conclusions 2014 KSM Business Services, Inc.
47 Conclusions Gone are the days of guaranteed staff raises and bonuses No longer sustainable for staff to receive annual raises and bonuses while physician income, in some cases, stagnates or even declines Entire organization needs to be incentivized to improve overall financial performance and care quality of the group As group, departmental and individual goals are met: Employees should be rewarded for their contribution Employees who contribute the most stand to gain the most High performers are more likely to stay Low performers are more likely to leave Result is a more cost efficient group practice!!! 47 ksmcpa.com
48 Comments? Questions? 48 ksmcpa.com
49 Katz, Sapper & Miller Thank You Lisa Curry Director, Healthcare Resources Group Phone: John D Martin Managing Director, Healthcare Consulting Phone: ksmcpa.com