Three Marketplace ­Factors That Have an Impact on Physician and Provider Compensation

Providers — physicians and advanced practice providers (APPs) — are at the heart of the conversation, although other aspects of healthcare are affected as well. When physicians gather, the conversation often turns to compensation methods and the factors that impact them. Compensation is an influential force at the center of many of the transformations. Thus, it makes sense to spend some time focusing on three of the key factors affecting physician compensation — value-based healthcare, affordability, and growth/scalability — and their influence on physician and provider compensation.

Value-Based Healthcare

The shift to value-based reimbursement is affecting the three “P’s” of healthcare: patients, payers, and providers. Patients, due to rising costs, are being forced to accept high-deductible health plans and shop for their healthcare without the information necessary to purchase wisely. Payers are pushing risk to patients and providers through the implementation of new value-based programs. Providers are having to retool their operations to accommodate the new payment structures; some are questioning whether they can survive in private practice.

The impetus in the industry is to shift risk to providers — risk that did not exist in the volume-based world. This is changing the paradigm of healthcare. Figure 1 highlights this shift in risk based on the various payment structures.

Figure 1. Increasing provider risk

An excellent example of the shifting of risk is the Merit-Based Incentive Payment System (MIPS), which was established as part of the Medicare Access and CHIP Reauthorization Act (MACRA). Over several years, Medicare is adding risk to the historical volume-based payment model, starting with 4 percent up/down and increasing to 9 percent up/down.(1) Thus, providers who accept Medicare and are not a part of an alternative payment model, also established through MACRA, are not taking on some level of risk. What is important to providers now is not only “how much you do,” but also “how well you do how much you do.” This paradigm is a true game-changer. Comparing pre-MACRA and post-MACRA, Figure 2 illustrates how this transition is affecting provider compensation models.

Figure 2. Pre-MACRA vs. Post-MACRA reimbursement

Thus, in some way, shape, or form, value-based incentives are being tied into compensation structures, with key factors impacting “how much” being: 1) what commercial payers are doing in the market, 2) the specialty in question, and 3) the sophistication of the organization for tracking/reporting on value-based metrics.

The best approach for incorporating value-based components into a compensation structure is a “crawl, walk, or run” tactic, in which the organization starts small and builds from there. This method addresses not only the amount of value tied to value-based incentives, but also the types of metrics.

For example, an organization in its infancy may begin with the “crawling” stage. Here, the focus is on basic metrics such as patient satisfaction, good citizenship, meeting attendance, etc., which are the only metrics for which data are available. The next step may be the “walking” stage, incorporating certain process-based quality metrics to replace some of the more basic metrics in the “crawling” stage. Finally, in the “running” stage, the process-based metrics are replaced with outcomes-based metrics. The premise is that to run, one must first learn to crawl and walk.

Affordability

The weightiest line item on a healthcare organization’s or medical group’s financial statement is the provider compensation expense. As the economics of healthcare organizations tighten, more focus is directed at this line item.

Many organizations ask, “Can we afford to pay what we have been paying?” Stated differently, “Can we afford to pay what the market data say we should be paying?” Given the changes in market data over the past few years, this is a legitimate question. Specifically, the market data from the three most prominent provider compensation surveys show upward trends in provider compensation over the previous three to five years, while the professional collections generated has remained mostly flat. Couple these trends with increasing overhead costs, and the result is instability. Relief must come from somewhere.

If revenue is flat or decreasing, overhead is increasing, but physician/provider compensation market data is increasing, it is a bit of an unsustainable dynamic if an organization’s provider compensation is pegged to market data. This situation is further influenced by how organizations have historically used market data.

Often, organizations have used market data — specifically the total cash compensation (TCC) per wRVU — to establish the productivity incentive component of the model, adding more value for other components.(2) The challenge with this method is that TCC data are being used to set only one element of the compensation arrangement; thus, the true TCC per wRVU in the market ends up much higher. The result is a perpetual increase in market data and sustainability challenges within organizations. Table 1 highlights this trend for the specialty of family medicine.

Organizations attempting to tackle these challenges are beginning to use market data as a starting point for establishing the economics of their compensation model, then using the following measures:

1. Balancing the market data with authentic local market data, such as the organization’s actual collections per wRVU (and then a market-based compensation to collections ratio); and

2. Ensuring they understand the total economics of their compensation model makes sense in the context of the market data.

Concerning incorporating collections per wRVU in the decision-making process, refer to Table 2.

To ensure that organizations understand the overall economics of their compensation structure, leaders might consider using a top-down approach whereby the overall compensation rests on establishing what the organization can afford to pay. That may be defined as a shift-based rate, total compensation, TCC per wRVU, etc., driving the decision about where to allocate that money across the compensation model. Figure 3 illustrates this methodology based on a TCC per wRVU.

Figure 3. Top-down approach to compensation

Ensuring that guaranteed base compensation does not hijack the compensation structure is vital to affordability. In other words, if an organization has a well-developed incentive model but sets base compensation so high that the incentive structure never comes into play (due to the physicians having limited incentive because of their guarantee), even the best compensation structure becomes ineffective.

A creative way to address this predicament is through a hybrid guarantee structure in which a productivity threshold is associated with a physician’s guarantee such that if the physician comes within XX percent of the threshold, base compensation remains unchanged for the following year. If the physician is outside that threshold, base compensation is reduced for the upcoming year but by no more than
XX percent. This creates a prescriptive method for creating equilibrium between base compensation and productivity levels over time, ensuring that the incentive structure actually comes into play.

Figure 4 illustrates this concept, assuming a 10 percent productivity corridor and an adjustment of more than 10 percent of compensation from year to year. Note, this example addresses only changes in the base compensation level and not the overall incentive model. If a provider exceeded the productivity threshold in a given year, incentive compensation would also be paid in that year.

Figure 4. Compensation concept

In this illustration, note the following:

• Physician A generates 4,000 wRVUs.

  • Productivity is more than 10 percent below the base threshold.

  • Base compensation is reduced by 10 percent.

• Physician B generates 5,250 wRVUs.

  • Productivity is within the 10 percent productivity corridor.

  • Base compensation remains the same.

• Physician C generates 7,000 wRVUs.

  • Productivity is more than 10 percent above the base threshold.

  • Base compensation is increased by only 10 percent.

The final component of affordability is the increased use of advanced practice providers. Because of their increased prevalence and reliance in the market, we refer to providers as well as physicians. As organizations struggle to recruit physicians, APPs become crucial as well as being a less-expensive alternative to physicians. Increased use of APPs allows more compensation using structures that are consistent with physicians yet are tailored to the nuances of APPs and their respective practices.

Scalability

Critical to the market is the ability to manage provider compensation structures. The growth in the number of employed providers influences the issue, as well as the mounting complexity associated with compensation structures.

Growth in Numbers

The number of physicians employed or affiliated with health systems has increased dramatically during the past decade. In fact, the industry recently reached a tipping point; there now are more employed or affiliated physicians than there are private practice physicians. Adequate structures must be in place to manage the compensation for a large number of providers. Figure 5 illustrates a recommendation for effective management.

Figure 5. Compensation governance and management

Compensation Committee

The compensation committee represents a body of provider and management team members who govern the compensation structures and associated issues. Depending on the size of the organization and the number of employed providers, this committee can take on different forms, but it should be a formal body. Team members will approve new compensation structures, adjust existing structures/variables, approve value-based metrics, address issues that arise, and the like. A key benefit of a compensation committee is that provider compensation becomes partly provider-led. With peers contributing to the decision making, there is less of an us vs. them mentality.

Compensation Policy

The policy speaks to the philosophy and other key details that should drive the decision-making process regarding compensation in the organization. Primarily, it should function as a lens through which the compensation committee makes decisions and how providers expect to see themselves compensated. It also includes other overarching provisions such as approval processes, fair market value review processes, etc.

Compensation Plan

Finally, as organizations grow, standardized compensation approaches are essential. One-off deals for each provider become difficult, if not impossible, to manage; the organization is in a perpetual deal mode, continually renegotiating the arrangement that is up for renewal. Managing in this environment takes substantial manpower and resources, which most entities do not have.

As a result, the organization must move to a compensation plan that applies to all providers. This does not suggest a single model for paying all providers; instead, the number of models is limited. For example, there might be a primary care model, a specialty/surgical care model, and a hospital-based model.

Coupling the growth in numbers with the added complexity of provider compensation structures creates a significant conundrum. These factors add to the risk of error in the compensation calculation process and difficulty in fully understanding the models in play. A lack of understanding leads to a lack of trust. To counter this dilemma, organizations must look for areas of opportunity to simplify their model structures, but they should also seek assistance from technology in the calculation process. New technology platforms, such as Heisenberg, Simpliphy, ProCare Portal, and Ludi, are being developed and are available to automate the compensation calculation process. This market will continue to evolve.

Conclusion

Provider compensation structures are being influenced significantly by the changing healthcare landscape, marked by three key focal points: value-based healthcare, affordability, and scalability. While these factors will continue to play a role in the foreseeable future, additional changes certainly are on the horizon.

References

1. Quality Payment Program. MIPS Overview. https://qpp.cms.gov/mips/overview . Accessed August 20, 2019.

2. Coker Group. Using Market Data to Establish Sustainable Physician Compensation Models. Blog. July 30, 2019. https://cokergroup.com/using-market-data-to-establish-sustainable-physician-compensation-models . Accessed August 19, 2019.