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Three Steps for Keeping Physician Compensation Affordable

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As physician compensation and reimbursement rates continue trending in opposite directions, many health systems are discovering that they’re spending more on their employed physician practices than they can afford. Health system leaders are seeking ways to correlate compensation with market factors and the financial realities of a practice. However, most compensation plans are based on external market data, which often results in remuneration that has no relation to the financial position of a given organization.

Below are three steps that can help health system administrators design a compensation plan that accounts for market benchmarks but remains fine-tuned to the realities of their organization.

Step 1: Determine the level of investment per physician that’s acceptable to your organization.

External benchmarks can serve as a starting point, but organizations must consider their own unique characteristics when deciding how much to invest in their physician enterprise. Factors such as specialty and payor mix, managed care contracts, and accounting practices, among others, need to be evaluated and adjusted for when designing sustainable compensation arrangements. Additionally, this process should be transparent; allowing for physician input can foster trust and ward off an “us vs. them” dynamic between physicians and administrators.

Step 2: Identify improvement opportunities and develop continuous operational improvement initiatives.

The work completed in Step 1 is likely to have uncovered a host of operational factors that inhibit an organization’s financial performance. Administrators and physicians should work collaboratively to identify opportunities for improvement. For example, if it is determined that patient access can be improved by redesigning protocols, administrative leaders and physicians should find the best way to standardize patient appointments based on EHR data. It is critical to employ a structured, participatory approach with defined accountabilities, and ensure that physicians share in the benefits that result from the improvement efforts.

Step 3: Pursue an economic adjustment factor to calibrate physician compensation arrangements.

An economic adjustment factor can shift compensation away from a market-based approach to one that incorporates the characteristics and economics of a discrete organization. Every organization will implement an economic adjustment figure differently. Regardless of the mechanism, the adjustment factor must be flexible enough to recognize improvement (or deterioration) of performance.

Health system leaders require solutions for maintaining competitive physician compensation without threatening their organizations’ solvency. These three steps can position organizations to achieve sustainable compensation arrangements, but each step relies on physician engagement. Involving physicians in the process of aligning incentives with financial performance promotes transparency and trust. Approaching this sensitive issue as a partnership can lay the foundation for economic stability, competitive pay, and the ability to attract high-quality physicians.

This In Brief is adapted from an article published in H&HN Daily. Click here to read the full article.

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