Three Questions to Consider Before Distributing Value-Based Payments to Physicians

By Jen Johnson, CFA Published in partnership with the American Association of Provider Compensation Professionals (AAPCP). With the growth in value-based care, many payor contracts now tie a portion of reimbursement to savings and quality outcomes. In addition, full risk contracts are becoming extremely prevalent in primary care, while bundled payments continue to evolve within orthopedic surgery.  Plus, there are various forms of integrated healthcare delivery networks, including Clinically Integrated Networks (CINs), which often have risk-based contracts. As a result, healthcare leaders are thinking through this major question, how can I maximize reimbursement from value-based care contracts? Not surprising, the answer has something to do with physician alignment. Physicians have a significant impact on value-based care reimbursement and have proven to drive both savings and quality. Where it gets tricky is deciding how much of this value-based compensation can be allocated to the physicians for their contribution in earning those extra dollars. When a payor is able to tag reimbursement to incremental savings or quality, it is common for the contracting entity to allocate a percentage to physicians for their part in earning those dollars. The percentage often hovers around 50% in the market, although, it has been observed to be as low as 0% and as high as 100% based on historical Accountable Care Organizations (ACOs) payment data to providers. The appropriate percentage should consider factors related to the value added by the physicians, as well as expenses incurred by the contracting entity. Since physicians must be paid consistent with Fair Market Value, it is important to understand these factors. The following three questions and commentary can help you navigate what should be considered when determining how much can be allocated to the physicians for their contribution in maximizing your value-based care reimbursement, while being mindful of the Fair Market Value requirement.

1. To what extent are the savings and/or quality payments driven by the physicians?

When payments are tied to quality and savings it is often clear that the physicians have helped create those funds. That said, sometimes payments are actually tied to care coordination functions or other services not provided by the physicians, and at the expense of the contracting entity. Therefore, it is important to understand what exactly is driving the additional reimbursement that is to be shared, as well as the physicians’ impact, before determining the value-based distribution percentage.

2. What part does the contracting entity play in generating the savings and/or quality payments?

It is typical for a health system, hospital, or other entity to hold the value-based payor contract, as well as provide certain services such as care coordination and IT infrastructure. The contracting entity serves a similar role to an ACO or CIN in that they negotiate with the payor and provide support services for the value-based care. As a result, it is important to understand both services and costs incurred by this entity prior to determining the value-based distribution percentage to the physicians.

3. Is it appropriate to allocate value-based dollars onto an existing compensation model with a contracted physician?

To answer this, one needs to understand the terms and valuation of the existing contract with the physician, whether it be an employment agreement or PSA. If the underlying contract is consistent with Fair Market Value and based on productivity, there will likely be more flexibility to provide the additional value-based payments to the physicians.  That said, depending on how close you are to the upper limit of Fair Market Value, it may be prudent to make a value-based care deduction to any relied upon survey data that was used to develop the underlying compensation model to ensure no duplicate payments for value initiatives. In a different example, if the underlying contract is based on a guaranteed fixed amount for a low producing physician, allocating value-based distributions to the physician may not make sense from a Fair Market Value perspective. Bottom line, all compensation and services should be considered to make sure there are no duplicative payments and total compensation makes sense.

Final Note

Since there is no survey data that can answer the questions listed above, it is important to understand the full picture before creating a value-based distribution plan for your physicians. Being able to demonstrate the physicians have a demonstrable impact on generating the funds is a key basis for sharing these dollars. It is also important to ensure that the funds distributed consider the role of the contracting entity, and any other payments the physician is receiving, to help establish Fair Market Value.