Physician Compensation in an Era of Value-Based Care

Value-based revenue poses physician compensation dilemmas because receipt of payments may be partially or tangentially connected to physician-specific services. For example:

• A case manager may ensure adherence to a therapy program managed by occupation and physical therapists.

• The practice may receive a performance payment attached to more effective management of patients by staff and mid-level providers.

A successful patient service strategy to ensure and monitor adherence to physician recommendations for health as well as therapy may result in fewer office visits offset by incentive payments for saving money or monitoring patients.

Value-based payment may involve significant new nonphysician expenses. For example:

• The practice/healthcare organization (HCO) may maintain a call center staffed with mid-level providers and nurses that generate shared savings or other value-based revenues.

• A fee per patient per month may include remote patient management tools that cost the practice/HCO a monthly fee. The out-of-pocket cost could vary by the types and number of monitoring tools used by each patient.

• Physicians who personally managed every patient service may transition to a more collaborative patient service strategy utilizing nurses for patient outreach and education as well as physician assistants (PAs) for treating patients under the supervision of the doctor to meet productivity and patient service requirements.

• Value-based strategies may require additional clinical staff and investments in training on patient service strategies that may be new to the practice/HCO. In some cases, the tactics may be specific to the value-based plan.

Value-based revenue may be based on additional work and effort outside of the fee-for-service (FFS)-based services provided by the same practice. For example, the practice may be paid on an FFS basis for a select group of CPT codes as well as receive payments not connected to any service codes for success with patients and cost reduction.

In theory, you could experience a decrease in physician reimbursement due to lower level of services enabled by the incentivized value-based arrangement. For example, your practice may replace monthly physician visits with biweekly telemedicine encounters with a nurse or PA while the patient is seen by the doctor based on the telemedicine strategy. The implications of these changes are substantial:

• Physicians may need a larger base of patients to keep the appointment book filled and office busy. For example, if a problem typically requires a weekly patient visit for wound care, the practice may be able to use telemedicine and other patient management techniques to replace office visits. In that way, the patient is served at less cost while having more contact with the practice/HCO. From an efficiency perspective, these strategies will require fewer physician services but additional practice/HCO staff efforts per patient. Doctors who want to maintain their CPT services revenue level must balance their patient service monitoring efforts with a larger panel of patients to yield the same level of office visits, and procedures.

• Although doctors may benefit from value-based profits from other practice/HCO activities, they will need to spend time establishing clinical protocols for staff and mid-level providers as well as monitoring clinical and call center activities. For example, clinical staff may follow up with patients on the status of their health problem and guide patients using the treatment plan defined by the doctor. Some practices/HCOs may assign doctors to monitor the call center.

• Non-physician resources present an additional cost that must be accommodated and budgeted into value-based payments. For example, the practice/HCO may set up cost centers to be allocated to value-based revenue before allocating the remaining revenue to physicians. Considering the variety of differences between the value-based arrangements and the FFS business model, practices/HCOs need to develop physician compensation strategies that reflect the costs and changes in patient service patterns driven by value-based reimbursement.

The key questions include:

How will costs be allocated to value-based revenue? The practice/HCO may have additional costs associated with general strategy as well as specific costs to fulfill a value-based contract. For example, a value-based contract may require new patient education materials or 24/7 monitoring of incoming patient information. The practice/HCO needs to track costs and develop a mechanism to allocate the costs to value-based arrangements and any other expenses such as out-of-pocket testing to determine the revenue available for physician compensation.

How should adjustments to fees be credited to physicians? Medicare Merit-Based Incentive Payment System (MIPS) is an example of how adjustments are made to the fees paid to the practice. In other situations, a value-based arrangement may be based on a reduced-fee schedule for CPT services supplemented by value-based payments for patient service and/or performance. TIP: Reduced fees may also be tracked to verify the realization of the value-based arrangement.

Depending on the situation, practices/HCOs may want to segregate value-based-driven payment adjustments that are affected by value-based arrangements and allocate the adjustments through another mechanism. For example, the adjustments could be used to offset additional costs for the value-based program and the remaining monies allocated to physicians based on charges, patient base, and/or contribution to earning the value-based revenue. A doctor may invest a lot of time guiding patient interventions that decrease office visits, but generate substantial shared savings payments. When developing the physician compensation strategy, the practice/HCO needs to consider the performance baseline for all providers. If a physician does not support the performance requirements and is reimbursed at a lower level, the practice/HCO must decide how potential revenue losses are handled.

Consider the MIPS adjustment for the 2020 performance year for the 2022 payment year: One provider does nothing and is assigned a negative 9% adjustment, and another provider does everything and gets a positive 9% adjustment plus part of the $500M bonus pool in 2022. The lower MIPS-scored doctor would receive $91 for a $100 claim, and the higher MIPS-performing provider would receive $119 ($9 for the MIPS adjustment and $10 for an outstanding MIPS score.) If the doctors are paid 50% of their receipts, then the lower-performing provider will be contributing $4.50 less (50% of the $9 negative adjustment to the $100 claim) to practice expenses, while the higher MIPS scorer would be contributing $14 more to practice expenses than the lower-performing provider (50% of the $28 difference between the $91 and $119 remittances).

Such differences could be manifested in many ways among and within value-based arrangements. For example, doctors could use different treatment plans under case management or doctors could differ regarding techniques and commitment to saving expenses under a shared savings arrangement. To equitably distribute money among clinicians, the practice/HCO may need to track internal performance by provider and use value-based support as a factor in physician and clinician compensation. For example, the practice/HCO may compare the average episode of care cost among doctors in the practice as well as national cost averages.

Should value-based payments be adjusted before crediting receipts to physicians?

The key policy issues to consider follow:

Should value-based payments be adjusted before crediting receipts to physicians? The practice/HCO may incur costs to support the value-based arrangement. Out-of-pocket costs such as remote patient monitoring services could be directly costed to the patient and payer plan. Similarly, you may establish a set price for clinical call center support or allocate a per-call/contact charge based on the staff level (i.e., nurse, or PA) servicing the patient.

How will physicians be credited with value-based revenue generation not directly attributed to the physician? Value-based success is based on effective clinical care as well as practice/HCO help and guidance for patients. Numerous measures are available to determine success, including quality measures, and internal performance measures that help the practice/HCO manage patient service and care. For example, a practice may require an active treatment plan for all current patients (a Chronic Care Management requirement). Strategies to support these efforts must be based on physician involvement. Clinical consideration and patient wellness must be considered when establishing the value-based strategy and tactics, as well as continuing efforts to monitor performance and patient care.

Practices/HCOs will need to determine how to recognize physician efforts and contributions to value-based programs outside of the office visit. For example, physician compensation may include an allocation for managing clinical standards or an innovative care strategy for a value-based program.

How will payments be credited to individual physicians? After the practice/HCO develops its strategy for allocating costs and the timing of revenue recognition, a plan for allocating revenue to physicians can be created. The challenge is that value-based revenue will represent an increasing portion of revenues and any mistakes in allocations would be problematic. For example, a simplistic value-based revenue allocation may overstate physician revenue and lead to cash shortages and underpaying the people who are dedicated to supporting the value-based arrangement. Indeed, the lack of an organized approach to value-based physician income could undermine the ability of the practice to meet value-based performance and patient service requirements that drive revenue and profits.

The practice should have a general structure to address each value-based type as well as plan-specific adjustments for the nuances of a plan. For example, the scope of covered services and patient management tasks may vary.

The practice should have a mechanism for each plan for each period to calculate the distribution to the physicians as follows:

Determine revenue earned from the value-based plan. The specifics of the value-based plan will drive the recognition of revenue. The payment should be evaluated for the relevant period. Payments in advance should be evaluated after the close of the next month, while payments for the prior month would be evaluated for activity in the month just ended.

The allocation of revenue may span periods and will require close attention to cash flow. For example, an episode of care fee may have to be allocated over a period of several months to ensure that funds are available for follow-up care and patient service. Similarly, reserving portions of capitation payments for future services may be a reasonable approach to address a growing capitation base.

CAUTION: Holding cash for future expenses could prove a problem for cash basis practices/HCOs at the end of a year. For example, cash being held for future services may result in taxable income to owners of a cash-based practice/HCO.

In other instances, the practice/HCO needs to avoid a cash crunch. For example, failing to allocate out-of-pocket expenses to an incentive payment could leave no money to pay for remote patient monitoring services.

Subtract value-based costs to the plan for the period. The practice/HCO may have non-physician costs that are mission critical for the value-based situation. For example, the costs of the call center could be allocated through a per-patient charge for each value-based plan or derived from the services for patients under the plan. The value-based costs could include hard costs such as remote patient monitoring charges or lab tests.

Subtract support and management costs needed to fulfill the value-based requirements. The practice/HCO may have other costs that are allocated to the value-based plans through an allocation. For example, the practice/ HCO may have expenses for patient education or an electronic interface with a patient portal that is required by the value-based plan. Such costs may be required for a specific plan or may be shared by several plans.

Distribute remaining revenue. The remaining revenue can be distributed to the physicians per practice/HMO rules. For example:

• Revenue could be distributed to physicians based on their quality and clinical performance measures. In other cases, revenue distributions could be based on the number of doctor’s patients under the value-based plan. Physicians may be able to block patients from the value-based plan or due to the nature of the plan, the physician may not see patients from a plan. In these cases, physicians who do not serve patients may not receive money from the plan.

• A physician with low performance-measure scores used by the payer to calculate a value-based incentive may receive a smaller portion of the payment. Indeed, the practice/HCO may establish a distribution formula that includes credit for meeting the plan objectives and the number of plan patients served. TIP: The practice/HCO has a vested interest in succeeding with all doctors. Therefore, the practice/HCO should monitor the payer performance measures at the provider level. TIP: The practice may want to include the physician’s performance in maintaining records per monitoring operations.

The net amount paid to the physician would depend on how the practice/HCO allocates expenses. For example, some organizations pay a percentage of physician-attributed revenue less an overhead rate and physician benefits while others directly allocate expenses to each physician. Some practices/HCO directly charge physicians for their nursing staff and midlevel assistants.

These value-based tactics are much more complicated than the FFS-based physician compensation models. Indeed, practices have been dealing with a low level of value-based arrangements for many years. However, the success or failure of these low-volume arrangements were not substantive compared to FFS volume. The move to value-based models and higher at-risk arrangements requires a new look at compensation and incentivizing performance.

Failure to meet value-based requirements could have a substantial effect on financial performance.

The changing healthcare business models are increasing the importance of value-based business. Failure to meet value-based requirements could have a substantial effect on financial performance. Failure can result in penalties or lost opportunities to earn incentive and performance payments. To maximize revenue and allocate value-based revenues that are fair to the practice/HCO and providers requires a new look at the policies, as well as tactics to maximize revenue and fairly compensate physicians.

Compensation Checklist

General Readiness

• Establish profit centers for value-based accommodations such as call centers.

• Assess costs of accommodations for value-based arrangements such as clinical standards, documentation tools, CEHRT setup, and patient education.

• Develop general physician compensation guidelines for each value-based type, addressing the calculation of funds to be distributed and the mechanism based on the timing of services and payments.

• Create policy for compensating physicians for strategic and tactical support for value-based services.

Value-Based Plan Setup

• If possible, negotiate terms and conditions within the current capabilities of the practice/HCO.

• Assess value-based requirements and determine any changes to staffing, operations, and technology costs.

• Determine the costs that should be allocated to the plan before distribution of revenue to providers.

• Set up quality and operational requirements needed to support the value-based plan.

Operational Value-Based Requirements

• Ensure that costs are being properly collected to support physician compensation calculation.

• Monitor provider activities to meet performance and quality standards for the value-based plan.

Manage Results

• Evaluate financial results for each value-based arrangement, including cost allocations and patient service requirements.

Excerpted from: Ronald B. Sterling, CPA, MBA. Non-Fee-For-Service Revenue Cycle Management: Managing Patient Service and Clinical Performance to Maximize Healthcare Practice Profit. American Association for Physician Leadership®, 2017.