by Peter B. Nichol

Physician compensation model shifts

Aug 09, 2016
CareersHealthcare IndustryInnovation

Exploring the adoption of physician compensation models.

The introduction of healthcare regulations and initiatives is about to disrupt the income of practicing physicians. Healthcare practices will need flexible procedures and processes, to enable staff productivity. Often value-based payment is referenced as a progressive trend. However, this is only one of dozens of physician payments models in effect today.  Let’s explore physician compensation models. 

Physician compensation models

A recent publication in the Physician Leadership Journal addresses physician compensation models. The alignment of financial incentives and performance criteria threatens to improve care reimbursement, population health and per capita costs.

There many foundational models for physician compensation; each offer modified incentive structures and inherent risks:

1. Fee-For-Service (FFS). This model focuses on paying for service with the focus on throughput and productivity. The risk with FFS is the tendency for overuse.

2. Fee-For-Value (FFV). In this model, stakeholders are identified, and they define value, paying based on their definition of value. The risk in this model is general misuse, as definitions are tailored to stakeholders’ needs.

3. Straight Salary. Standard annual pay for doing the job. The fixed salary can lead to misuse, yet more alarming is under-use.

4. Pay-for-Performance (P4P). This model allocates pay based on predefined performance targets. This pay structure often includes performance targets, which are similar to base salary and bonus structure arrangement. The appeal of this model is there is limited opportunity for misuse, but overuse can occur sometimes leading to a decrease in service quality.

5. Capitation. The classic payment based on a fixed amount per member (patient) per month.

6. Bundled Payment. This model is based on episodes of care across a healthcare continuum of individuals, teams, and organizations. While this does align services to organizational need, the likelihood of under-use is more common.

7. ACO model. Assumes savings from which pay is based on other metrics aligned to the Triple Aim, but can lead to under-use.

8. Concierge Model. Less common and uses a combination of fee-for-service and an annual retainer. This model can be more expensive, and therefore the risk of overuse is low.

9. Direct Contracting. This model removes the insurance intermediary and pays based upon a contract with the employer. This model has limited to no value-based performance incentives and can result in both misuse and overuse.

10. Production RVU with 15% Performance. This model pays physicians based on a percentage of their productivity. The RVU is an acronym that stands for “relative value unit” assigned to each encounter, procedure, or surgery. There are also derivatives of this model such as a percentage of profit or net income and bonus compensation based on a percentage of salary.

11. Volunteering. Volunteering is not practical for scalable commercial use because the pay is based on non-monetary compensation. The effect of limited payments controls makes this model susceptible to overuse, underuse, and misuse.

When calculating physician productivity and compensation, there are two key pieces:

  1. Volume-based metrics (usually associated with the number of patients a doctor sees), and
  2. The amount of revenue a physician is billing or collecting.

Like many compensation models, they often raise more questions than are answered. For example, is there a financial cap, can the cap float between billing periods, and how are ancillary incomes handled. A few models after the first or second year, move to a rolling compensation model, which after year-X the compensation is based solely on productivity. Tiered compensation models are a bit more complicated, which we won’t cover in this article. RVU inventive models are a reasonable bridge for the transition to evidence-based medicine.

Physicians’ adoption of value-based care

In 2015, the Catalyst for Payment Reform (CPR), an independent, nonprofit corporation working to catalyze improvements in how Americans pay for health services in the U.S., released that 42 percent of payments were tied to value. In contrast, recent results from the National Scorecard on Payment Reform show that only 24 percent of the payment to primary care physicians is value-oriented. This percentage drops from 24 percent to 10 percent for payments to specialists. The U.S. Department of Health and Human Services (HHS) has a lofty goal. The vision of HHS is to link 50 percent of fee-for-service Medicare payments to quality or value by the end of 2018, leveraging alternative payments methods. These aggressive goals directly impact physicians.

Before expansive payment reform takes hold, a series of progress advancements across three fronts are required. These areas include providers in value-based payment (VBP) arrangements, reimbursements tied to value-based payments, and membership related to value-based payments. This shift to value-based payments will only occur when reimbursements and members are linked. To be of value, the performance metrics need to be physician driven. It’s not surprising healthcare practices are unprepared when investment income is spent on compliance and not innovation.