How to Structure a Quality Incentive Program for Physicians

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In this episode, host and VMG Health Chief Commercial Officer Jen Johnson sits down with Compensation Arrangements Director Nicole Montanaro and Strategic Advisory Director Anthony Domanico, CVA to discuss designing a quality incentive program for physicians.

Topics covered in this conversation include:

  • How a high-quality incentive program impacts top-line revenue
  • Valuation considerations when looking to pay physicians for better quality outcomes
  • How to start putting a deal together to get physician buy-in
  • Examples of options being proposed to clients on how to structure these deals and what types of dollar amounts are tied to them
  • Which type of metrics carry the most value
  • What to look for when finalizing metric selection
  • Predictions for what is next for compensation design in the value-based care space

Read the full article by Montanaro and Domanico on this topic linked here: Designing & Valuing Quality Incentive Programs for Physicians.

Learn more here about VMG Health's service offerings for Compensation Arrangements and Physician Compensation Design.


Intro: Welcome to the Healthcare Download with VMG Health. We are the leaders in strategy and transaction advisory dedicated to finding solutions for the healthcare industry. In each episode, we will leverage our expertise to provide trends and timely updates about what is happening on the business side of healthcare so you can move your strategy forward. 

Jen Johnson: 00:00:33 In this episode, “How to Structure a Quality Incentive Program for Physicians,” we will pull insight from two of VMG Health’s leaders focused on physician compensation. Nicole Montanaro is a Director in VMG Health’s Compensation Division, and part of her practice includes leading the firm and the valuation of quality payments. Our other guest is Anthony Domanico, who’s a Director in VMG Health’s Strategic Advisory Division where he helps clients design physician compensation models which increasingly need a quality component. And I’m Jen Johnson, VMG Health’s Chief Commercial Officer, and I’m ready to get us started with a dose of some practical insight on the business side of healthcare. So, Anthony and Nicole, welcome. As you know, we would like to provide listeners with some simple takeaways on how to incentivize physicians to help improve quality outcomes. So, now obviously this is becoming a hot topic for healthcare leaders since material dollars are being tied to quality these days. 

You know, as far as background, VMG Health has been working on value-based care deals since 2008, but we are really seeing things pick up in this area, especially with physician compensation. I’m pretty sure what’s happening is more health systems are finally seeing the impact higher quality outcomes are having on reimbursement. So, this is obviously getting healthcare leaders’ attention. So, since you two are the experts in this space, and recently wrote an article, I’d like to hear your thoughts on what’s most important when navigating this space. Specifically, what are you walking your clients through when they’re considering physician alignment using quality payments, and what questions are you asking, et cetera. But first I want to set the stage on the importance of this topic. Anthony, what can you tell us about the true impact here? Can you share some data that shows payers really do care about high quality and this initiative really will impact top line revenue? 

Anthony Domanico: 00:02:19 Yeah, so thank you Jen. So, you know, we have a couple different ways that we try to measure what things are important to payers, right? And you know, there’s a recent MGMA study that showed, you know, the amount of health system revenue that’s tied to value-based care is on the rise right now representing somewhere between 5% and 15% of revenue, depending on the type of specialty that we’re talking about. Right? On average, that value-based revenue represents about $31,000 per physician, which when you multiply that out across 250 to, you know, some groups have 5,000 physicians, that turns into a lot of revenue that’s at risk for performance on some of these value-based contracts. You know, moreover, right? There are other sources that suggest this number may be even higher, right? A survey from Datagen in 2020 found that about 25% of an organization’s revenue is tied up in value-based payments with some of the larger organizations taking on the largest portion of risk, right? This survey also found that most organizations either planned to enter into or expand their existing value-based programs’ participation over the next few years, right? Which is really consistent with what we’re hearing from clients. So bottom line, you know, value-based payment arrangements are already large in size and are really only going to grow over time. It’s clear that payers are increasingly focusing on quality shared savings and other outcomes-based metrics as larger drivers of physician reimbursement. So, health systems, physician groups need to start paying attention to this even more. 

Jen Johnson: 00:03:47 Perfect. Okay. So, obviously now we know this is happening and to compete, healthcare companies are going to need to align with physicians to get that help. Right? Um, I mean, time and time again, talking to clients, I’ve been told, if you want great quality, you need physician buy-in. So, to do this, we’re seeing more and more quality outcomes being tied to actual financial payments to physicians. But most of us know, once you start tying new comp to physicians, you’ve got legal and compliance coming into play as these payments must be consistent with fair market value. So, this is where Nicole comes in. Nicole, what can you tell us about valuation considerations when looking to pay physicians for better quality outcomes and why supporting these payments is more challenging than just pulling compensation data from surveys to make sure you’re in the right ballpark? 

Nicole Montanaro: 00:04:40 Yeah. It’s definitely not as straightforward as just pulling the median quality payment from the survey data. Usually these programs are self-funded, which means that the quality payments are sourced from hospital revenue versus a quality payment that may be coming directly from a third party payer bonus or funded by savings, which tends to create risk and more scrutiny around what could be considered too much or maybe even how to structure the quality payments. So, what we actually do is we actually look at governmental programs and other third-party payer programs in the market for how they would structure and pay for quality. And usually these are structured as a dollar amount or a percentage of compensation. There’s a lot of variety out there, but if we can show that the subject quality payment that we’re analyzing is similar to these market programs, this is a great form of support. 

Jen Johnson: 00:05:28 Perfect. Perfect. That all makes sense. Um, and you know, you and I, we’ve been valuing these quality payments for a long time now. How would you say our market data and even our governmental guidance has changed since we valued our first co-management arrangement back in 2008? 

Nicole Montanaro: 00:05:44 Yeah, well, the guidance has actually been pretty consistent all these years. Back in the early 2000s, there were a lot of key programs that started to show payments for quality, and we got really comfortable attaching quality because the governmental programs were tying additional reimbursement there. And there were a lot of studies that were showing a lot of positive results in terms of financial incentives that were working, showing that really hospital and physician alignment were critical for success. That said, all of these programs were really more quality focused. So, what we’re seeing now is there’s a lot more flexibility in terms of adding cost savings initiatives, or even mixing the two, quality and cost savings programs. So, we’re seeing that blend happening a lot more. And then there’s also just a lot more programs in the market now to draw upon for market resources. But really, they’re showing that paying for improvement and quality are both okay, the baseline’s still important, and if anything, the focus on the metrics is even more important as a lot of these programs have gone from paying for reporting and paying for process to now really being more outcomes focused. 

Jen Johnson: 00:06:48 Okay, perfect. That’s very helpful to understand. We all know knowing what the government’s doing is a really important thing. Because if you’re, I always say if you’re sitting in court and a payment is being challenged as potentially not fair market value, if you can point to the government and say, “Well, you had a similar program, or we’ve seen this many market programs that look like this.” Then that’s, that’s your best source of support. So, really important to hang your hat on the government’s programs and it’s interesting that they’ve been evolving. The other thing is obviously paying for quality really is a different process. I mean, when it comes to valuation, we don’t, to your point, we don’t really have any black and white rules or guidance yet, so it’s a little bit harder to predict how they’re going to look at it. 

We don’t have any cases we can look at yet. We have a few vague OIG opinions, so this is a little interesting area. One other issue I’d like to bring up is that those in legal and compliance world know this, that when you do have innovative models, and maybe you could call them untested ways to compensate physicians, these arrangements tend to be subject to more scrutiny. So, there’s a lot of things to think about on these deals, and seriously not trying to scare everyone, but bottom line, we know we’re going to need to check the box and get a fair market value opinion on these arrangements, and they’re growing. So, let’s turn to putting these deals together and pitching it to the physicians. You know, this isn’t your run of the mill on-call stipend or showing a physician they’re getting compensated fairly per surveys. There’s new things that they need to do and report on. So, turning to you, Anthony, how do you go about starting to put one of these deals together to get physician buy-in? 

Anthony Domanico: 00:08:34 Yeah, so, you know, the good news here, right, is that many organizations already have some value-based care elements in their compensation plans. You know, if you look to surveys, something like 70% of organizations that report say they pay for some way for quality or other value-based metrics, right? So many physicians out there are at least familiar with the idea of being paid for quality or paid for value, and, you know, they’re seeing reports for quality metrics, right? But I’m working with a lot of organizations that don’t have value drivers in their comp formula. You know, physicians have never gotten reports on how they’re doing from a quality metric perspective. Don’t know what a quality metric is, right? So, you know, really when it comes time to implement a quality-based structure, right? You need to engage physicians in the process, both from a metric development and ultimately a compensation model perspective, right? 

It’s important to ensure that as you’re developing these quality metrics for compensation purposes, you know, you need to be able to have the infrastructure ready to support that, right? You need to be able to build out those metrics. They need to be vetted with physicians, both physician leadership, frontline physicians. That infrastructure work needs to be guided by sound clinical judgment, right? The physicians are the clinicians in the room. They know what it means to, to set up good quality metrics, right? They need to be able to vet and validate the metrics and, you know most importantly, perhaps, as they start to focus on how do we provide better care to our patients, they need to be understanding of and supportive of the care model that may need to change in order to support this work, right? So, physician engagement kind of throughout this process and building a value-based program is essential, right? Your physician leaders are going to be the ones that are selling the changes to the frontline physicians. So, engaging them in that process is key to a successful transition. And then finally, you know, I don’t want to lose the point that you just brought up, Jen. You know, anything you do needs to be run through both your legal and compliant structures to make sure it’s compliant with new fraud and abuse regulations, including some of the enhancements, changes we’ve been seeing to kind of value-based enterprises within the 2021 Stark and Anti-Kickback regulations.

Jen Johnson: 00:10:48 Yep. Yep. That’s, a lot of, a lot of folks that have to get involved in these processes. So, as it relates to getting physician buy-in, I mean, we all know we’ve all worked with physician comp for a long time. Everything goes a lot smoother when you’ve got their buy-in, but you know, what they’re going to want to know is they’re going to want to understand the dollar impact, the structure. So when you get, you know, you’re down the path, you’re getting close, what types of actual options are you proposing to your clients on how to structure these and what types of dollar amounts are tied to them? 

Anthony Domanico: 00:11:22 Yeah, so there’s really two issues here that an organization needs to consider as they go down the quality path, right? And that’s magnitude and structure. So, when you’re first implementing quality as a payment within your compensation formula, there are really ways that you can do this that introduce quality as a concept, but increases the chances of success, right? So we, when we’re initially starting out we almost always recommend starting with upside only risk, right? You know, you limit the dollar amount, you know, if you have a 2% to 3% merit increase pool, you know, start there, right? Start to familiarize people with the concept. And then over time, as you increase the focus of the comp plan on quality and other value-based drivers, then you can increase that percentage and start to introduce more kind of upside/downside risk, right? So once you get that magnitude right, the other challenge is really that there’s so many ways to structure them, right? To structure something that works with your organization. It’s important to answer a few key questions about quality, and really the most primary driver is, you know, should quality be the same for everyone or should there be some variability for factors like productivity, tenure panel, or other factors, right? How an organization answers this question and other key questions about their culture is going to determine whether they should take, for example, a flat dollar approach, a percent of median approach, a percent of base salary approach, a percent of production comp approach, right? There’s really so many different ways to structure a compensation formula. It’s really important to do one or to structure these in a way that’s consistent with the culture of your organization. 

Jen Johnson: 00:13:00 Okay, very practical. That makes a lot of sense. I see, you know, obviously there’s a lot of ways to go about these, but you do a good job of making it sound less complicated. And starting with culture of course is key. So, thank you for that. So now let’s turn to some logistics. So once you’re knee-deep and you’re getting one of these models up and running, I know that when you’re restructuring any sort of physician compensation model, there’s a lot of parties involved. I mean, you’ve got compliance, legal, got strategy, HR, of course the physicians. So, there’s a lot of coordinating going along, which, you know, we notice even on our side, you know, we would normally have when we’re involved in one of these deals and Anthony, which we would consider boots on the ground helping with communication and laying the foundation for how this is all going to work. And then we would have someone like Nicole with expertise in valuing quality. So, Nicole, how do you help guide your clients and advisors like Anthony in selecting quality metrics? I mean, the obvious question everyone asks is what type of metrics carry the most value?

Nicole Montanaro: 00:14:07 Yeah, I probably get this question daily from clients. It’s definitely the biggest question out there. So I would say first before anything, you know, it’s really important to just make sure both parties are involved, the physicians as well as the health system, making sure that they’re part of the process, and then making sure that you’re looking at metrics that you can actually measure. So, those are the two kind of precursors before you even get into knowing which metrics are going to be meaningful. But in terms of selecting the meaningful metrics, they need to make sense with kind of what the goal and scope of the program are. So, thinking about what are you trying to achieve? Is it savings? Is it operational efficiencies? Is it patient clinical quality outcomes? Are you looking to do this program on an individual physician basis, on a service line basis, or population health model? 

All of those things are going to impact kind of which metrics are going to be the most meaningful to select and probably which metrics are going to make the most sense for the program. But overall, no matter what, depending on you know, regardless of the scope of the program or the overall goal, there’s four major value drivers that you got to think about that really drive the meaningfulness of the metric. And it’s generally outcomes-based metrics, nationally measured benchmarks, having stretch goals versus maintenance goals, and using top decile or whatever your organization may define as superior level performance. Those kinds of metrics are always going to carry the most value. 

Jen Johnson: 00:15:30 So, perfect. That all makes a lot of sense, Nicole. I mean, you know, the way you explain it, it’s also like very logical. You know, they need to be meaningful. What are you measuring? These are all things people need to walk through. But that said, that’s a lot of steps and you know, I think you laid it out very well. So, now let’s turn to the road bumps, I’ll call them. As with any physician compensation arrangement, there’s always red flags that legal looks out for. So Nicole, what would you tell your clients to watch out for as they finalize their metric selection so legal says this is going to work?

Nicole Montanaro: 00:16:03 Oh yeah, there’s definitely a laundry list here, but I would probably say the top two that I see the most often would be having metrics included in the metrics set that are maybe time-based metrics. So, these are metrics that don’t necessarily measure a patient outcome. It’s more so a metric that’s based on performing a task or attending meetings, anything that a physician would typically be paid under an hourly rate for. This could be common with employment arrangements. And this, sometimes this could be an issue because there could be substantial value assigned to a metric that maybe is not supported by the actual time it takes, or it could overlap with any other kind of hourly based compensation that could already be part of the agreement. So, that’s a big one that we see a lot. And then also metrics that could be considered low hanging fruit, so those may not appear reasonable, such as when you’ve got historical performance that already hits a stretch goal or having tiny improvements earning a really big payout. So, it’s really important to also make sure you’ve got meaningful benchmarks and performance targets in there. 

Jen Johnson: 00:17:10 Perfect, great insight and practical guidance. Thank you, Nicole. I know there’s a lot more, so, but we’ll save that for the article. So, my last points is what we’re seeing now, right? I mean, what you guys laid out is obviously going to evolve in the value-based care space. You know, just like everything in healthcare it seems, one of the reasons why I love the industry. I mean, things just keep changing, but what I’d like to do is kind of look forward and conclude by asking Anthony, what do you think is next for compensation design in the value-based care space? 

Anthony Domanico: 00:17:45 Yeah, it’s a great question and it’s probably where I spend about 90% of my time these days, right? So I think it’s really going to come down to three things. I think we’re going to see more organizations start to implement quality incentives into their comp structure, right? While I said earlier that many do, right? There’s still a 20% to 40% second of the market that hasn’t yet, right? And they’ll start to do so as more and more of those revenue reimbursement dollars get tied up in value-based payments. Second, I’ll think we’ll see more organizations start to adopt empanelment metrics, right? And what I mean by that is panel size, patient access, other kind of population health metrics into their primary care and other compensation models in order to really move the needle towards population health management versus fee for service orientation, right? The biggest challenge here is going to be in some cases really just accurately measuring both raw panel size and adjusting those panels for patient acuity, right? 

We’re seeing a big trend towards panel size and primary care metrics and getting that measurement right can be very difficult, right? And I’ve got an upcoming article on that piece as well. You know, finally I think we’re going to see continued embracing of externally funded incentives, right? Most of the quality incentive programs we see today have been internally funded right through the physician comp plan. And we’re starting to see more organizations ask us questions about, well that’s all well and good, but how do we start to think about directly sharing those quality shared savings and other incentives that they’re receiving directly through payers, right? So, structuring these compliantly is obviously a challenge, right? And it takes skill to kind of get that formula right. But there are ways to do so that are compliant and defensible from a fair market value perspective. And we’re starting to see more organizations embrace this concept, especially those that have moved the needle quite a bit on their internally funded programs, right? Organizations that have 20% or more of their compensation plan tied to quality are starting to explore this concept a bit more. 

Jen Johnson: 00:19:58 Perfect. Yep. I can see it coming already and we get a lot of requests for shared savings, arrangements, and how does that work when you stack it on top of current employment models? So, a lot to look forward to and a lot to muscle through. So, thank you for that.

I’m going to go ahead and do just a little recap of this episode. I mean, you know, to just kind of 1, 2, 3, it, 1.) We are increasingly seeing our clients incorporate and need FMV opinions for quality payments to docs and this is obviously to help maximize reimbursement. 2.) There are many options for structuring these deals, but physician buy-in is key. And 3.) You want to make sure your metrics are worthwhile to pursue from both evaluation and a compliance perspective.

Well, Anthony and Nicole, we appreciate you both for the excellent insight and want to make sure listeners know you have a robust article on this topic, which can be found on the VMG Health website. Lastly, I hope everyone tunes in next month for your dose of the Healthcare Download with VMG Health where I’ll be interviewing leaders from our Physician Practice Affinity Group to hear the latest on this market. Everybody take care.

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