Blog Post

Three Steps for Aligning Cost and Compensation


With Medicare planning to tie more than 50% of payments to value-based care criteria by the end of this year, hospitals and health systems are looking for new ways to lower costs. That’s leading some organizations to pilot an unusual approach – incentivizing physicians to manage costs.

Cost metrics, such as supply purchasing and staffing ratios, have rarely been tied to physician compensation. They’re difficult to measure and benchmark, and traditionally, administration has been reluctant to grant physicians the authority to drive cost savings. Many physicians, meanwhile, believe that cost management is not within their realm of influence – or even their responsibility.

But tight margins call for innovative thinking, and some organizations have already begun effectively incorporating certain cost metrics into physician payment methodologies. Here are three steps for making it work.

Start small – and build trust.

Physicians are likely to be skeptical of any initiative that asks them to take on more risk. But the proposition becomes more palatable if only a small portion of their compensation is tied to cost metrics. This enables providers and administration to gain mutual trust in practice data and take appropriate actions based on that information.

In mature models, an appropriate amount of compensation to be placed at risk ranges from 15% to 20%. Initially though, a range of 5% to 10% can foster physician buy-in and pave the way for a true dyad of physician leadership and administrative management.

Choose metrics that physicians can control.

Many physicians believe they have little or no control over operational or clinical costs. If organizations want to convince them otherwise, then management needs to focus on metrics that physicians can actually control. Clinic supplies and practice staffing are typically within physicians’ purview. Physicians can easily reduce supply expenditures by standardizing vendors, and even some of their most popular products, to take advantage of more competitive pricing. Additionally, clinic staff costs can be more easily controlled if physicians conduct clinics on time and reduce the amount of overtime they impose on staff.

Sample Cost Metrics

Operational Cost Measures

Clinical Cost Measures
Cost Per Provider FTE/WRVU ED Visits Per 1,000 Paneled Patients
Cost as a Percentage of Net Collections Utilization of Generic Prescriptions
Cost Per Paneled Patient 30- Versus 90-Day Refill Rates
Cost Per Square Foot Support Staff Per Provider FTE/WRVU

Engage and empower physicians.

The pressures of payment reform will require health organizations and physicians alike to become more sensitive to the total cost of care. If organizations want to successfully tie compensation incentives to cost measures, they need to give physicians a say in decision making and the opportunity to exercise it. Physicians should be involved in identifying the types of costs that will be measured, determining the calculation process, and developing specific action plans aimed at reducing costs.

Management needs to be willing to relinquish some degree of control in exchange for providers taking on additional risk. As physicians realize they have direct control over practice expenditures, changes to the compensation plan will likely be met with less resistance.

To learn more about aligning costs with incentives, check out the article Is Your Physician Compensation Plan Aligned With Cost?.