Health systems that make the strategic decision to pursue value-based structures, where health outcomes are measured against cost, find that closely tying physician compensation to risk is the fastest method of achieving financial success. In doing so, it is important that systems not equate value-based compensation with narrow payment elements (e.g., patient satisfaction bonuses, screening exam payments) that simply “bolt on” to the current framework.

Unfortunately, most physicians across the US are incentivized through activity-based models. According to ECG survey data, 78.0% of physicians are still compensated under production-based incentive plans, and only an average of 7.4% of total compensation is dependent upon quality and patient satisfaction metrics. To find success, health systems must focus on primary care providers and adopt a different approach.

Issues with Applying Value-Based Elements to Physician Compensation

Over the past several years, the healthcare industry’s experiments with value-related concepts have only attached small incremental bonuses (e.g., $5,000, $10,000) to existing volume-based models. These bo-nuses have done little to change physician behavior or drive care management, especially when they are tied to metrics that are not utilization focused, such as small amounts triggered by:

• Flu vaccinations or childhood immunizations.
• Screening for conditions such as breast and colon cancer.
• Wellness or annual checkup visits

Further, many organizations still rely on patient satisfaction as an incentive metric—although this has proven to be a poor measure of quality care. Satisfaction scores are often viewed with skepticism by physicians, and findings indicate that tying physician compensation to patient satisfaction measures may lead to job dissatisfaction and, in some cases, an increase in inappropriate clinical care. Truly adopting a value-based strategy requires direct alignment between the providers and financial risk.

Two key issues are limiting the adoption of effective value-based compensation models:

• The emphasis on unit production has not provided systems with sufficient latitude to reward physicians for adopting different approaches for managing the health of a population—though this is shifting with the introduction of care coordination CPT codes in the past few years.
• Many health systems believe that their portfolios contain insufficient revenue tied to value-based populations. However, while market shifts include the greater adoption of Medicare Advantage and Medicaid managed care products nationally, implementing a value-based model does not require significant revenue from these sources.

Three Effective Value-Based Models

In ECG’s experience with successful organizations, we have found there are three effective ways to introduce value-based elements into physician compensation. These are listed below in the typical order of adoption.

• Panel- or capitation-based compensation that is paired with utilization metrics
• Hybrid compensation plans that isolate the risk-based reimbursement patients from FFS populations
• Risk pool–funded models with upside and downside opportunity for physicians

The key considerations for these three major approaches are outlined below.

Model Name	Model Description	Considerations	Market Condition(s)
Panel or Capitation with Utilization Incentives	Compensate physicians on a population basis. Use specific incentives to monitor activity levels.[1]	This model requires the health system to emphasize value-based concepts despite limited risk reimbursement. Performance bonuses are typically based on a dollar amount per population unit.	The risk reimbursement population is small.
Hybrid Model	Apply value-based concepts to the risk reimbursement population only.	The hybrid model requires maintaining multiple compensation plan elements for physicians.	The risk reimbursement population is significant. Physicians prefer to be incentivized separately.
Risk Pool Model	Tie total physician cash compensation to performance on risk pool surplus levels at the end of the fiscal or calendar year.	The risk pool model requires accurate monitoring of utilization. It also requires agreement on the elements to be included in the risk pool calculation. Performance bonuses are typically based on a share of the pool surplus.	The risk reimburse-ment population is significant. Physicians are seek-ing a single compen-sation structure.

There are variations that can be applied to any of the three models. The most common adjustment is based on patient acuity, which can be applied to the panel or capitation payment or to relevant utilization metrics.

The Benefit of Value-Based Compensation

While the adoption of a value-based compensation model requires significant planning and provider education, a well-executed implementation can deliver a primary care base that is much more engaged and satisfied with its role in the health system, as well as enhanced patient care and improved population health outcomes. Putting a value-based compensation model in place offers risk-based upside to primary care providers and potential compensation levels at double the typical medians under a productivity-based model. A market assessment may indicate that the time is right to implement this model for your group.

Footnotes

1. Activity levels can include an array of metrics, such as out-of-network utilization; ambulatory site-of-service utilization; bed days per 1,000; ED utilization; and the use of generic drugs.