Physician compensation: How to align compensation with the needs of your medical group

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1 PhysicianRx A business intelligence prescription for hospital leadership Fall 2011 Physician compensation: How to align compensation with the needs of your medical group Bob Wilson, Business Advisory Services Managing Director A fast-growing number of health systems are acquiring physician practices and employing physicians. Today, this growth is driven by pressures to contain costs, maintain profitability, improve clinical quality, attract patients or form accountable care organizations (ACOs). Successfully employing physicians while keeping the organization on track requires a physician compensation structure that aligns rewards for physicians with the goals of the organization, such as productivity, quality and patient satisfaction. Yet implementing such a program requires careful consideration. Compensation can be a volatile issue within organizations, especially when they are looking to acquire local practices, attract experienced physicians from other locales, and recruit new doctors fresh from their medical training. Moreover, the IRS is paying closer attention than ever to physician compensation in tax-exempt health care settings. Below are some tips and considerations for establishing an effective and appropriate compensation program for your organization. The Centers for Medicare and Medicaid Services have issued a final rule regarding revisions to payment policies under the Medicare Physician Fee Schedule for calendar year 2012.

2 Determining compensation: What is right for your organization? There is no single model of physician compensation that is best in all circumstances. Compensation plans tend to evolve in a common progression that coincides with the maturity of a medical group, the financial pressures facing the group or its hospital sponsor, and the particular clinical model that the group aspires to. Income protection through a salary model Many hospital system-sponsored medical groups begin as an aggregation of practice acquisitions. These groups initially establish a compensation model that provides a maximum amount of income protection for physicians. This often takes the form of a fixed salary or a substantial income guarantee. Unfortunately for these immature groups, however, the absence of financial incentives, the lack of a clear articulation of physician performance expectations, and the partial or total absence of performance oversight are often major contributing factors in daunting financial losses. As financial pressures mount, low- or no-risk pay models often prove to be so costly and unsustainable that hospitals must introduce alternative compensation schemes that put more financial risk on physicians for not achieving performance goals. For these groups, a more quantitative, objective approach to determining compensation tends to work better. Interestingly, while salary-based compensation typically does not work well for early-stage groups, some of the most mature medical groups employ a salary-based compensation plan very effectively. This seems to work well for one reason: culture. Over time, those mature groups have developed a culture of clarity about performance expectations for physicians. Their infrastructures and processes support that culture by promoting behavior that reinforces physician performance expectations. Those organizations seek out and retain physicians that they believe will fit well and thrive in their culture, and they tend to attract physicians who understand the logic behind performance expectations. Moreover, the clinical delivery model for many of the more mature medical groups is oriented more toward coordinated team care as opposed to individual encounter-based care with distinct handoffs between providers. Productivity-based pay Since low or highly variable physician productivity performance is a common and chronic problem in the early stages of group maturity, hospitals often replace fixed salaries or other guaranteed compensation plans with those that emphasize productivity, which is usually measured by work relative value units (wrvus). If survival is the primary concern for an early-stage medical group that is experiencing financial distress, productivity-based pay plans can prove to be an essential tool for survival. Some organizations add nuances for example, wrvus that are tiered according to a sliding scale. This tier structure might include lower values for wrvu production that is below a target such as the Medical Group Management Association (MGMA) median, and higher values for wrvu production that is meaningfully above the target (e.g., greater than or equal to the 60th percentile of the MGMA median). The purpose is to create strong disincentives for low productivity and more robust incentives for high productivity. This can be particularly effective if pervasive low productivity is a key driver of poor medical group financial performance. Some organizations that are transitioning from a salary-based model to a productivity-based model continue with certain floor income guarantee features to soften the transition. 2 PhysicianRx Fall 2011

3 Productivity and performance measures Once the threat to financial survival becomes less acute, it is important to consider introducing other value drivers into the compensation model but without losing sight of the centrality of productivity. These value drivers often involve incentives for clinical quality, customer service and patient experience, and other dimensions of financial stewardship. Some relevant metrics relate to clinical quality; service quality (as measured by such factors as patient satisfaction scores, appointment lead times and waiting room time); and financial performance (as measured by department or division financial performance, specific cost management metrics, and charge ticket lag times, for example). But keep in mind that in order for the organization to achieve maximum physician buy-in, the physicians themselves should have direct and active input into the definition and design of new incentive metrics. The graph below depicts a frequent progression of physician compensation model types as a medical group becomes more mature in its culture, infrastructure and operations. Considerations when designing performance metrics As groups consider revamping their compensation plans to take into account other performance criteria beyond individual productivity, we believe that a number of principles should guide the design of these plans: Initially, the percentage of total compensation determined by nonproductivity-based performance metrics should be significant enough to motivate related performance e.g., percent. But it should not be so large that the plan unduly de-emphasizes the importance of productivity as a continuing driver of overall financial performance, particularly given today s fee-for-service payment environment. As a medical group matures in its culture of accountability and builds upon its physician performance governance infrastructure, productivity as a key measure of physician performance will become a more accepted norm. At that stage, the dominance of productivity may be lessened in the group s compensation plan, perhaps to as little as 50 percent. The percentage of total compensation determined by other performance metrics, such as those pertinent to clinical quality, customer service and financial goals, can be correspondingly increased. When productivity metrics are introduced into the compensation model, every metric must be clearly aligned with the overarching goals of the medical group and the sponsoring health system. Each metric must be relevant and meaningful to physicians; individual physicians and departments must have the ability to influence the achievement of the metric directly. For example, clinical quality metrics must be tailored to the unique clinical practice in each specialty. Further, financially oriented performance metrics are usually most effective when applied at the department level rather than at the medical group or system level, because individual physicians can relate the goals of their department to their daily activities and have greater influence over the achievement of those goals. Next generation Population management Total cost of care Risk sharing Salary + performance objectives Productivity + more weight on performance incentives Progression of comparable models Productivity + performance incentives Productivity without guarantee Productivity with guarantee Salary/substantial guarantee Early Maturing Mature Progression of medical group maturity 3 PhysicianRx Fall 2011

4 The table below summarizes the pros and cons of several common compensation models. Compensation model Salary or substantial guarantee Productivity with some income floor guarantee Productivity without guarantee Productivity plus other performance criteria (20 25%) Productivity plus more weight on other performance criteria (26 50%) Salary plus performance incentives Pros Physician income protection Competitive with other salary options available to physicians Moderate alignment with revenue payment streams Moderate physician income protection Introduces physician responsibility for overall performance Full alignment with revenue payment streams Often yields highest revenue improvement in the short run Offers financial incentives for optimal patient access and business development Introduces compensation for other criteria (quality, service, financial) Begins alignment with emerging revenue stream criteria Physician satisfaction improves Emphasizes productivity Aligns partially with system goals Assumes productivity as a given Heavy emphasis on other criteria (including system goals) Demonstrates maturity of medical group culture Assumes productivity is clearly understood as a minimum specification Heavy emphasis on other criteria Demonstrates maturity of medical group culture, optimal development of clinical delivery model, and readiness of next-generation compensation model Cons No performance expectations difficult to introduce later Minimal negotiation leverage Minimal physician buy-in to system objectives Minimal patient access incentives An alignment gap remains Does not fully engage physicians to optimize patient access and business development No physician income protection Negative physician perception ( production mill ) Ignores other desirable performance criteria Criteria may not be well-defined, meaningful or measurable Criteria may not be well-defined, meaningful or measurable Suitable only when culture and infrastructure are well-developed While there is no one right compensation model for all organizations, there is probably a best fit for your medical group. 4 PhysicianRx Fall 2011

5 Looking ahead A well-designed physician compensation model can be a powerful catalyst for promoting physician performance that is in sync with the overall strategic objectives of the medical group and the sponsoring health system. On the other hand, a poorly constructed compensation plan can promote behavior that runs counter to the organization s goals. While there is no one right compensation model for all organizations, there is probably a best fit for your medical group. That model will depend on where your group is on its journey toward maturity and will need to be changed as your group evolves. As the forces of market reform shift more financial risk to providers for the care and health of communities whether through bundled payments, global or partial capitation, or other forms of risk sharing health systems and their sponsored medical groups will need to rethink their compensation models. The objective is to create new forms of financial incentives that align with the systems strategic goals and take into account changes in payment practices. Future compensation models must contain incentives to promote cost-effective population-based health management across the entire continuum of care. In addition, compensation models will need to offer physicians a financial incentive to strive for optimal clinical quality and outcomes. About the publication PhysicianRx is a supplemental publication to Health CareRx, published by Grant Thornton LLP, focused on issues related to physician strategies, operations and integration. The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest-quality service to public and private clients in more than 100 countries. Grant Thornton LLP is the U.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity. Contact information Bob Wilson Managing Director Health Care Business Advisory Services T E Content in this publication is not intended to answer specific questions or suggest suitability of action in a particular case. For additional information on the issues discussed, consult a Grant Thornton client service partner. Grant Thornton LLP All rights reserved U.S. member firm of Grant Thornton International Ltd 5 PhysicianRx Fall 2011

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