Understanding Value-Based Compensation Models

Understanding Value-Based Compensation Models

  • July 16, 2019

Physician compensation models include many components and incentive structures. The industry as a whole is seeing a shift from “volume to value” as evidenced by the advancement of the Medicare Access and CHIP Reauthorization Act (“MACRA”), and participation in other value arrangements are growing. This begs the question, how should physician compensation models evolve with this shift toward value?

The key is to keep compensation incentives proportionate to revenue streams. Most organizations, due to reimbursement structure, still rely on volume as the most important factor. Therefore, non-productivity incentives range from 10-20% of projected total cash compensation (“TCC”) in primary care and 5-10% for specialists.

The MGMA survey definition of total compensation is the amount reported as direct compensation plus all voluntary salary reductions and should include salary, bonus and/or incentive payments, research stipends, honoraria, and distribution of profits1.Therefore, all forms of compensation, including quality incentives, are already reflected in the compensation per wRVU market data and should be carved out of those market-based rates instead of being added on top of those rates.

Consider a top-down approach to pay for non-productivity incentives that encompasses an allocation of value of the compensation per wRVU market rates. Under this approach, the compensation per wRVU market rate is allocated to different incentive categories weighted in proportion to revenue streams. The figure below provides an example.

Example Allocation of Value

If the median rate is $50.00, the wRVU incentive value is $42.50, with the performance incentive value, likely associated with quality, creating a $5.00 per wRVU opportunity. Other incentives in this example are valued up to $2.50 per wRVU. The terms “opportunity” and “up to” per wRVU value are used because the full amounts depicted may not always be paid. It is common to implement a tiered performance rate structure where varying levels of performance reward full and partial credit. Physicians will likely appreciate having such a structure, especially in scenarios where physicians are transitioning to these incentives.

There are many factors to consider when selecting quality metrics, but best practice aligns measures that drive desired physician performance improvement to those that influence reimbursement. Maintain a coordinated strategy for quality metric selection to ensure payer requirements overlap and focus on a low number of measures, to begin with, so as not to grow an unmanageable list to track. The list should be short, especially at first, so that physicians can channel energy into specific initiatives. Be cognizant that diminishing returns may result from having too many measures.

Value-based performance incentives are most often tied to quality measures that are chosen by a collaboratively derived physician committee. Other forms of non-productivity incentives may come from patient satisfaction, adherence to group processes, or ad hoc objectives the organization wants to influence. No matter the metric, establish an objective scoring mechanism and implement a tiered system to award partial and full credit.

Our white paper Compensation Best Practices for Physician Enterprises takes a further look into value-based care and other physician compensation models. Contact Coker Group to see how we can help your organization achieve whatever value-based initiative you encounter.

  1. MGMA Compensation and Production National Survey, 2016.

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