The following article was originally published by the American Association of Provider Compensation Professionals.
As the healthcare industry continues its shift from volume to value, physician compensation models must evolve to reflect this transformation. Historically grounded in fee-for-service (FFS) structures, compensation plans are increasingly incorporating value-based care (VBC) incentives to align physician behavior with quality outcomes, cost efficiency, and patient satisfaction.
This article outlines practical considerations for integrating value-based incentives into physician compensation plans or designing physician alignment models centered around value-based goals, drawing on insights from VMG Health’s extensive work with healthcare organizations across the country.
The Case for Value-Based Physician Alignment
In today’s healthcare environment, with looming financial pressures, rising costs, and regulatory changes, healthcare leaders can’t combat these challenges alone. Additionally, maintaining and building physician engagement in existing relationships is another prominent hurdle for healthcare leaders. Lack of engagement is a complex issue that could stem from multiple factors, including a perception of limited influence, transparency, and/or financial incentives or a sense of disconnect on a shared vision for the future.
It has long been evidenced that physician leadership, involvement in decision-making, and adherence to best practices are key to driving patient care outcomes, reducing the total cost of care, and optimizing financial and operational performance. As such, VMG Health has observed an increasing number of healthcare leaders turning to value-based care models to stay ahead. These models seek to appropriately reward physicians for quality care, patient outcomes, and cost savings as a transformational approach to physician alignment and engagement through collaborative care.
Getting Started: 5 Key Steps
Before implementing a value-based compensation model, the following provides some key considerations.
1. Program Goal, Participants, & Target Population
Clearly define the purpose, scope, and scale of the program:
- Purpose: Are you rewarding clinical quality outcomes, cost savings, or both?
- Scope: Which specialties or providers are eligible? What is the targeted patient population?
- Scale: Will performance be measured at the individual, team, or population level?
2. Program Funding
Funding sources significantly influence program design and compliance risk:
- Internal/Self-Funded: Funded through hospital revenue or shared savings.
- External/Third-Party Funded: Tied to incremental reimbursement or shared savings from payers.
Programs funded by third parties typically offer more flexibility and lower compliance risk. When funding comes from third-party payers, additional considerations include the actual savings generated and the contractual terms governing shared savings distributions while internally funded models require careful structuring to ensure fair market value (FMV) and commercial reasonableness.
3. Defining the Metrics That Will Be Used
Selecting meaningful, evidence-based metrics that can be measured and tracked by the organization is critical. This typically includes focusing on:
- Outcomes over process metrics
- Nationally endorsed benchmarks
- Stretch goals based on top decile performance
- Metrics tailored to patient population needs
- Five to ten well-documented, non-duplicative metrics
Avoid metrics that physicians cannot directly influence, such as administrative or billing-related measures. Involving the physician participants in this process helps ensure alignment on a future vision for the program and shared goals.
Additional best practices related to selecting metrics include:
- Rebase metrics annually to reflect evolving standards and performance levels.
- Avoid metrics tied to referrals or volume, which may raise compliance concerns.
- Ensure reliable tracking and monitoring of performance data.
- Select metrics that consider the organization’s and/or patient population need.
- Implement safeguards to protect patient care quality and safety.
Defining and selecting the performance metrics are important for every program, although consideration of the performance metrics may carry more weight in some arrangements in order to help bolster support for the VBC compensation. Generally, factors such as paying for the achievement of ‘superior’ performance standards and selecting patient clinical quality metrics that are demonstrably impacted by the subject physicians help justify higher VBC compensation payments.
4. Physician Role in Achieving Results
Physicians must have a demonstrable impact on the metrics to justify incentive payments.
As mentioned above, it is critical for physicians to be instrumental to the achievement of the performance metrics (versus the hospital/health system). That said, sometimes achievement of the VBC goals is actually driven by care coordination functions or other services not provided by the physicians, and at the expense of the non-physician entity. As such, non-physician contributions—such as care coordination and IT infrastructure provided by the hospital/health system—should also be considered when allocating shared savings or bonuses, for example. Organizations should assess the relative risk and responsibility of all parties involved. Those assuming greater risk may warrant a larger share of the incentive pool.
5. Don’t Forget About Stacking
If the physician’s professional compensation is at-risk (i.e. billed fee for service, $/work relative value unit model, no fixed/guaranteed salary), which is usually the case with physicians operating as independent contractors, stacking is usually not an issue since it can be assumed the physicians are paid at FMV as they are paid by third-party payers.
That said, before layering VBC incentives onto existing pay structures in employment or professional services agreements, evaluate whether the physician’s professional compensation is:
- Commensurate with productivity
- Consistent with FMV
- Free of overlapping or duplicative incentives
Additionally, assuming survey data was utilized to derive the employed physician’s professional compensation, it may be necessary to make an adjustment in order to ensure no potential overlap or duplication of VBC compensation since survey data can inherently include VBC compensation.
Conclusion
Integrating value-based incentives into physician compensation is both a strategic imperative and a complex undertaking. By thoughtfully designing programs that align with organizational goals and regulatory requirements, healthcare leaders can drive meaningful improvements in care quality, financial and operational performance, and physician engagement.
As the industry continues to evolve, compensation models must keep pace—rewarding not just productivity, but the value physicians bring to their patients and the healthcare system as a whole.
