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Structuring Value-Based Compensation Plans to Maximize Revenue Under Alternative Payment Models
Written by Anthony Domanico, CVA and Ben Minnis, CVA
The following article was published by the American Association of Provider Compensation Professionals.
In the rapidly evolving landscape of healthcare, traditional fee-for-service (FFS) reimbursement models are being replaced by alternative payment models that focus on value-based care in addition to, or even sometimes fully in replacement of, fee-for-service reimbursement. This shift from volume to value necessitates a strategic rethinking of compensation plans for healthcare providers to align incentives, optimize patient outcomes, and maximize revenue. The implementation of value-based compensation plans requires a deep understanding of the intricacies of different alternative payment models and the development of innovative strategies to ensure financial success while prioritizing quality care.
The Paradigm Shift: Value-Based Care and Alternative Payment Models
A key tenet of value-based care is the focus on delivering high-quality healthcare outcomes to patients while managing costs effectively. Alternative payment models, such as bundled payments, accountable care organizations (ACOs), and capitation, incentivize providers to prioritize preventive care, care coordination, and patient engagement while reducing unnecessary or inappropriate services.
These models differ from traditional fee-for-service, which rewards the quantity of services delivered rather than their outcomes. Under a fee-for-service reimbursement model, the more you do, the more you get. This is the case even if certain types of care or services are not warranted, are considered excessive based on the problem set presented by a particular patient, or do not lead to good patient outcomes.
However, under value-based contracts providers are rewarded not for the volume of services rendered, but for providing high-quality care to a large population of patients while also reducing unnecessary and/or inappropriate services.
The Compensation Shift: Designing Physician Compensation Programs to Maximize Revenue
While all value-based care models pay for value in some respect, the way various payment programs are structured will determine what compensation mechanism(s) will lead to better outcomes for both the physician and the organization.
Consider the following scenarios that are all focused on a hypothetical organization with $100 million of revenue and 200 FTE doctors ($500,000 in revenue per FTE).
Fee For Service + Value
Under a non-capitated value-based model where the organization continues to earn reimbursement under an FFS construct, with additional revenue opportunities through quality incentives, that organization might see $90 million of FFS revenue for the same book of business. In addition, that organization can earn up to an additional $20 million in value-based payments for a total possible range of $90-110 million of revenue.
Under this reimbursement structure, the organization will still be incentivized to have its physicians rewarded for productivity. After all, a sizable portion of the organization’s revenue, and most of the organization’s ability to increase the revenue pool (the $90 million), is through FFS reimbursement. As such, a compensation model under this construct might be a productivity model (with or without a base salary component). Also, it would include an additional incentive opportunity for value-based arrangements based on the metrics included in the organization’s value-based contracts.
Fee For Service + Value + Shared Savings
Another emerging component of value-based contracts is shared savings opportunities. If an insurer typically incurs costs of $10 million for managing a population of patients, and the subject organization can take high-quality care of the same population of patients for $9 million, insurers are increasingly sharing a portion of the cost savings back to the providers/health systems that are helping to achieve these savings.
Designing compensation arrangements to maximize shared savings opportunities is much trickier than under FFS and value models. After all, it is much more challenging to define metrics around achieving cost savings on a targeted population of patients than it is to measure things like hemoglobin A1c scores. As a result, we often see organizations either use shared savings dollars earned from insurers to fund larger quality incentives or pass through a portion of those earned dollars received from insurers to network physicians.
The latter option is complex in that it requires organizations to understand how those cost savings are achieved and to be able to allocate those savings earned down to the individual physician level or develop a proxy formula to estimate these factors for payment. As an example, we may see an organization decide to withhold 50% of funds earned to cover the additional costs incurred by the employer (such as hiring care coordinators to ensure patients with diabetes are getting back to the clinic for follow-up tests, etc.), and distribute the remainder by using a formula based on quality, wRVUs, or some other distribution formula.
Ensuring compensation remains consistent with fair market value under these types of arrangements is challenging. With that in mind, you will want to ensure you are working with counsel and a compensation design/valuation expert to ensure any compensation models remain consistent with fair market value.
At the other end of the volume-to-value spectrum are capitation models which include an organization that receives a fixed payment on a per member per month basis for all members under its care. Under these models, if those 200 FTE physicians manage a panel of 50,000 patients, and the organization is reimbursed $166.67 per patient per month, that organization receives a total annual payment of $100 million.
Under these models, the organization receives a fixed payment regardless of its costs, assuming it has the same number of patients. An organization can only increase top-line revenue through growth in the patient population served, so compensation models tend to be a combination of fixed and variable. Specialists might be paid on a salary-type model (with or without incentives), while primary care providers might be paid on an acuity-adjusted panel size model whereby physicians are incentivized to take on more patients and grow the total capitated revenue of the organization.
These models may also include incentive payments tied to care coordination, quality outcomes, cost controls/reductions of unnecessary or inappropriate services, and the like.
The table below summarizes the options discussed. Note that the compensation models in the right-hand column are the most predominant compensation model structures for a particular reimbursement model. However, other models may be more appropriate depending on the facts and circumstances impacting the subject organization.
In addition to designing compensation models that allow for maximum revenue potential, organizations must enact robust change management processes to ensure their providers are not lost in the transition to a new compensation model. Providers need to understand the rationale behind the new models and how their efforts contribute to both patient care and financial success for the organization and the providers. Regular feedback loops and performance evaluations can help providers track their progress and make necessary adjustments.
Conclusions and Key Takeaways
As healthcare continues to shift toward value-based care, designing an effective compensation plan is becoming increasingly crucial for provider organizations to thrive under these alternative payment models. The suitable model for your organization might vary significantly from the compensation structure observed at the neighboring health system. This is especially true considering both organizations could be positioned at distinct points along the risk continuum.
The key success driver is for organizations to design models that will help them be successful wherever they are on the continuum. By aligning incentives with patient outcomes, leveraging innovative strategies to provide more cost-effective care, and adapting to changing market dynamics, organizations can optimize revenue and physician-earning opportunities while delivering high-quality care to their patients.
Strategic Partnerships in the Inpatient Rehabilitation Industry: Highlights, Opportunities, and Risks
By Sydney Richards, CVA, Patrick Speights, and Christopher Tracanna
Approximately 45.0% of acute care discharges are subsequently admitted to a post-acute setting nationwide, including approximately 4.0% who are admitted to an inpatient rehabilitation facility (IRF). An IRF is a freestanding inpatient facility or specialized unit within an acute care hospital that offers intensive rehabilitation to patients after illness, injury, or surgery. Now more than ever, investment demand for IRFs is strong due to the unique value propositions relative to other healthcare verticals, including strong clinical outcomes at an efficient price to payors, a period of stable regulations, rising patient demand, and a high margin for efficient operators.
In response to this demand and the potential for high returns, acute care operators may consider affiliating their existing inpatient rehabilitation units (IRUs) with platform post-acute operators to drive financial returns while improving patient outcomes. IRUs are operated as distinct departments of acute care hospitals, while IRFs are freestanding facilities. Going forward we will use the generic term IRF when discussing the inpatient rehabilitation industry.
Below, VMG Health experts highlight key industry facts driving up investment. Additionally, our experts detail the potential benefits and risks of common IRF affiliation models, such as joint ventures, joint operating agreements, divestitures, and management agreements.
5-Year High Medicare Margins
As presented in the table in the below, aggregated IRF Medicare margins were at a five-year high in 2021 at 17.0%. One driver of this increase is the Centers for Medicare and Medicaid Services (CMS) COVID-19 waivers that allowed flexibility in admission criteria and therapy requirements to maintain IRF status. Now that the emergency declaration has ended, margins may become more pressured as IRFs return to standard operating criteria. It is also notable that freestanding Medicare margins were 25.8% in 2021 compared to hospital-based margins of 5.8%. Many factors contribute to this difference, including:
- Scale – Hospital-based IRFs typically have a lower bed count than freestanding IRFs.
- Strategic Differences – Hospital-based IRFs typically support the operations of a broader acute care hospital or health system.
Proliferation of Strategic Post-Acute Buyers; Growth in Freestanding IRFs
In 2021, five IRFs closed while 22 new IRFs began operations, resulting in a net gain of 17 IRFs. According to MedPAC, the majority of new IRFs were freestanding and for-profit, and most closures were hospital-based nonprofits. As reflected in the chart on the right the top six freestanding IRF operators control approximately 91.5% of freestanding IRFs in the market.
Large Industry with Growing Patient Demand
In 2021, Medicare spent $8.5 billion on 379,000 fee-for-service (FFS) discharges across 1,180 IRFs nationwide. These FFS Medicare stays accounted for approximately 52.0% of IRF discharges on average.
Despite the proliferation of specialized post-acute IRF operators, the IRF industry remains fragmented with over 70.0% of all IRF locations being hospital-based IRUs. The remainder are freestanding facilities. However, based on their relatively larger size and bed counts, freestanding IRFs accounted for approximately 55.0% of Medicare discharges. Additionally, while for-profit IRFs make up about 37.0% of all IRFs, they account for approximately 60.0% of the total Medicare discharges.
Many of the aforementioned factors turned the IRF industry into an attractive sector for a strategic post-acute investor. For acute care systems, collaborating with a post-acute operator can offer significant benefits, including reducing the length of stay and readmission rates, and providing access to clinical and operational best practices. Collectively, these enhancements improve both patient outcomes and financial returns. We have identified several affiliation models for post-acute and IRF unit operators, as well as advantages and disadvantages to consider for each model.
Joint Operating Agreement
A post-acute care strategy is vital for acute care providers seeking to elevate patient outcomes while maximizing value to their organization. Forming strategic alliances with post-acute operators in inpatient rehabilitation may be one successful approach. Operators have many avenues to consider whether it is through the sale of an existing inpatient rehabilitation unit, joint venturing with a partner to create a de novo freestanding IRF, or employing a post-acute manager to drive performance in an existing IRF. No matter your path forward, VMG Health experts can provide actionable insights into the value of your existing IRF business and assist with a potential IRF partnership in a model that fits your post-acute strategy.
- ATI Advisory. (2023, February 10). National Medicare FFS Hospital Discharges to SNF and HHA Trending Toward Pre-Pandemic Patterns.
- Medpac. (2023). Inpatient rehabilitation facility services. Report to the Congress: Medicare Payment Policy.
- Encompass Health Corporation. (2023). Find a location.
- Ernest Health. (2023). Our hospitals.
- Pam Health. (2023). Inpatient Rehabilitation Hospitals.
- Lifepoint Health. (2023). Locations.
- Select Medical. (2023). Locations.
The Evolution of Telehealth and What’s Next
Written by James Tekippe, CFA and Zach Strauss
For those in the healthcare industry, telemedicine has been viewed as a way to increase access to healthcare, while mitigating the challenges of limited resources of physicians and healthcare providers. Although the use of telehealth has steadily grown over the past two decades, the challenges presented by the COVID-19 pandemic supercharged this growth. As the United States and the world move beyond the worst months and years of the pandemic, telemedicine usage will continue to change within the industry. This article will explore the state of telehealth immediately prior to and during the early years of the pandemic to provide context for the question, “What will be the next stage of telemedicine in the U.S. healthcare system?”
Telemedicine Prior to the Pandemic
Prior to the COVID-19 pandemic, many people in the industry believed telemedicine had the potential to make healthcare more accessible, especially for underserved communities. However, in 2016 only 15% of physicians worked in healthcare practices that used telemedicine in any fashion.1 Part of why utilization was low pertained to reimbursement rates. Physicians who utilized telemedicine were not reimbursed at the same level by Medicare as in-person services, and only a limited amount of visit types provided through telemedicine were reimbursable.2,3 In addition, Medicare outlined certain stipulations that allowed providers to use telemedicine for care, including requiring that the provider had a pre-existing relationship with a patient, limiting a provider to only providing services at the practice where they typically provided in-person services, and necessitating the provider was licensed and physically in the same state as the patient being treated.2,4 Finally, the technology used to provide telemedicine had to meet the requirements of the Health Insurance Portability and Accountability Act (HIPAA), which required providers to invest in compliant technology to be able to offer care using telemedicine.5
Changes Spurred on by the Pandemic
During 2020, the COVID-19 pandemic became a catalyst that rapidly changed the direction of telemedicine in the U.S. From February 2020 to February 2021 telehealth claims volumes increasing 38x year over year.6 As the world, began implementing lockdown orders in February and March 2020 to limit the spread of COVID-19, legislators in the U.S. looked for a solution to assist the public in accessing the healthcare system while mitigating the public’s fear of contracting this virus. Various solutions were enacted as part of the CARES Act, which was passed in March 2020. These solutions were aimed at increasing the use of telemedicine by healthcare providers. Through CARES, many of the barriers that previously made it harder for providers to adopt the usage of telemedicine were relaxed. This created an unprecedented opportunity for providers to explore the capacity of this medium of care.
First, Medicare changed reimbursement for telemedicine visits to be the same as in-office visits.3 Additionally, physicians were given the ability to reduce, or even fully waive, the Medicare patient cost-sharing for telehealth services which made telemedicine more attractive to patients.3 The CARES Act also removed location barriers and made it possible for providers to see patients who were in different states from the provider during a visit.2 The CARES Act also allowed healthcare providers to offer more types of visits through telemedicine means, like emergency department visits, remote patient monitoring visits, and check-in visits.2 Additionally, providers who historically were not able to provide care through telemedicine, like occupational therapists and licensed clinical social workers, were able to use telemedicine as an option to treat patients.4 Finally, technology HIPAA requirements were relaxed such to allow more two-way audio-visual options, such as Facetime, Skype, Zoom, and audio-only telephonic services for telemedicine visits. This realty increased the ability for providers to offer this service to their patients.2, 5
Current Legislations Impacting the Future of Telemedicine
As the country moves beyond the public health emergency COVID-19 created, the future of telemedicine will depend on whether = regulations revert back to the pre-COVID state. States across the country, from Washington to New Hampshire to Virginia, are introducing legislation to expand telemedicine beyond the CARES Act.7 Despite different geographical locations and political leanings, states seem to agree about telemedicine’s ability to increase access to healthcare. For example, Oregon has introduced legislation to permanently allow out-of-state physicians and physician assistants to provide specified care to patients in Oregon.7 Texas has proposed legislation that would remove the requirement of being “licensed in this state” from an array of licensing and practice requirements for providers to practice telemedicine in the state.7 Virginia has also proposed legislation that offers a solution for telemedicine service provider groups that employ health care providers licensed by the Commonwealth. The legislations would establish that these groups do not need a service address in the Commonwealth to maintain their eligibility as a Medicaid vendor or provider group.7
At the national level, two active bills, HR 4040 and HR 1110, both contain pro-telemedicine legislation. HR 4040, passed by the House in July of 2022, extended certain Medicare telehealth flexibilities beyond the end of the COVID-19 public health emergency (PHE). The bill would allow for Medicare beneficiaries to continue receiving telehealth services in any location they wish until December 31, 2024, or the end of the PHE, whichever comes later..8 In addition, this legislation would continue to grant other healthcare providers, such as occupational therapists and physical therapists, the freedom to continue practicing telemedicine via the CARES Act.8 Finally, behavioral health services, alongside evaluation/management services, would still be allowed via audio-only technology.8 Within the industry, this bill has seen support, specifically from the American Telemedicine Association and the American Counseling Association.7, 9
HR 1110 is a report commissioned by Congress with the explicit purpose of expanding access to telehealth services to Medicare and Medicaid beneficiaries.10 Under this legislation, Congress would require that two reports be provided, one by the U.S. Department of Health and Human Services, and the second by the Medicaid and CHIP Payment and Access Commission (MACPAC) and the Medicare Payment Advisory Commission (MedPAC).10 In the report led by HHS, Congress would require HHS to provide a comprehensive list of telehealth services available during the PHE. This report would include details about the types of providers that could supply these services, a comprehensive list of actions the secretary of the HHS took to expand access to telehealth services, and the reasons for these actions.10 Additionally, this report would require a quantitative and qualitative analysis of the previously mentioned telehealth services, specifically calling out data regarding use by rural, minority, elderly, and low-income populations.10
Regarding the MedPAC and MACPAC report, Congress would require an assessment of the improvements or barriers in accessing telehealth services during the PHE. And in addition, the information MedPAC and MACPAC know regarding the increased risk of fraudulent activity that could result due to expanding telehealth services.10 To conclude the report, Congress has asked both MedPAC and MACPAC to provide recommendations for improvements to current telehealth services and expansions of these services, as well as potential approaches for addressing fraudulent activity previously outlined in the report.10 Ultimately, these reports would be vital in shaping future policies around telemedicine to increase access to and improve the effectiveness of telehealth.
The last few years there have been major changes in many aspects of life, including the ways healthcare is delivered. The U.S. was able to tap into the large potential telemedicine has to offer during the worst stages of the pandemic. However, as we move into the future, it will be important for local and federal governments to continue improving the regulations that impact telemedicine to help expand access.
- Kane, C., and Gillis, K. (2018). The Use Of Telemedicine By Physicians: Still The Exception Rather Than The Rule. Health affairs (Project Hope) 37(12) (2018): 1923-1930.
- Shaver, J. (2022). The State of Telehealth Before and After the COVID-19 Pandemic. Primary care, 49(4), 517-530.
- Centers for Medicare & Medicaid Services. (2020, March 17). Medicare Telemedicine Health Care Provider Fact Sheet.
- American Medical Association. (2020, April 27). Cares Act: AMA COVID-19 pandemic telehealth fact sheet.
- Weigel, G., Ramaswamy, A., Sobel, L., Salganicoff, A., Cubanski, J., and Freed, M. (2020, May 11). Opportunities and Barriers for Telemedicine in the U.S.. During the COVID-19 Emergency and Beyond. KFF.
- Bestsennyy, O., Gilbert, G., Harris, A., and Rost, J. (2021, July 9). Telehealth: A quarter-trillion-dollar post-COVID-19 reality? McKinsey & Company.
- ATA Action. (2023, January 18). ATA Action 2023 State Legislative Priorities.
- H.R.4040 – 117th Congress (2021-2022): Advancing Telehealth Beyond COVID-19 Act of 2021.
- American Counseling Association. (2022). ACA Government Affairs and Public Policy: 2022 Year End Report.
- H.R.1110 – 118th Congress (2023-2024): KEEP Telehealth Options Act of 2023. (2023, March 3).
Strategic Options to Strengthen Cardiovascular Medical Group Affiliations
Written by Clinton Flume, CVA, Cordell J. Mack, Tim Spadaro, CFA, CPA/ABV, Christopher Tracanna, Colin McDermott, CFA, CPA/ABV
The following article was published by VMG Health’s Physician Practice Affinity Group
Cardiovascular disease ranks as the leading cause of death in the United States, so it should come as no surprise that healthcare executives are placing an increasing emphasis on the stability and growth of cardiovascular services. In addition to the aging U.S. population, management is being forced to take strategic action due to industry factors such as shifting physician employment trends, patient procedures transitioning to lower-cost outpatient care settings, and payor models changing from fee-for-service to value-based care. To ensure continuity of alignment for cardiology providers and stakeholders, executives need to consider the strategic impact of cardiovascular medical group affiliations in their decisions. These decisions include investment in comprehensive cardiac care services, external affiliation models (joint ventures or joint operating agreements), and alignment models with private equity.
According to the Physician Advocacy Institute, as of January 2022 approximately 67.3% of cardiologists were employed by hospitals or health systems, 17.9% were employed by other corporate entities, and the remaining 14.8% were in independent practices. The combined hospital/health system and corporate entity employment (85.2%) was 12.2% higher than the number of cardiologists (73.0%) employed by these entities in January 2019 . Due to the high concentration of employment for cardiology, this specialty has been insulated from the traditional roll-up activity seen in the orthopedic, gastroenterology, and ophthalmology spaces. This suggests the industry is primed for a reversal of employment back to private practice as providers look for ways to diversify from legacy employment models and engage in outside investment opportunities, such as private practices and surgical centers.
Shift to Outpatient
Health systems, payors, providers, and, most importantly, patients are increasingly seeking high-quality and lower-cost options for routine cardiovascular care. Outpatient cardiology services began to see a transition to the outpatient setting in 2016 when the Centers for Medicare and Medicaid Services (CMS) approved pacemaker implants for the ambulatory surgery center (ASC) covered procedure list (CPL) . In the 2019 Final Rule, CMS added 17 cardiac catheterization procedures to the ASC CPL, and in the 2020 Final Rule, CMS allowed physicians to begin performing six additional minimally invasive procedures (percutaneous coronary interventions) in ASCs. Additionally, several states have followed CMS’ lead by removing barriers to accessing cardiovascular care in ASCs . The continued approval of procedures to the CPL and expanded access to care are major catalysts for the shift in cardiology services to the outpatient setting and the desire of providers to engage in external clinical investment opportunities.
Reimbursement and Payor Impacts
Cardiologists have long sought refuge from rising costs and downward reimbursement pressure by aligning with larger entities that have more leverage and pricing power. This often materialized through traditional health system employment with many hospital providers looking to operate traditional in-office ancillaries in an adjunct hospital outpatient department. The arbitrage in reimbursement (HOPD versus freestanding) was an offset to the ever-increasing physician compensation inflation. However, challenges continue to mount.
The Medicare Physician Fee Schedule (MPFS) conversion factor has fallen year-over-year since CY 2020. On November 1, 2022, CMS released the 2023 MPFS which continued to lower the conversion factor and resulted in cardiology reimbursement falling an estimated 1.0% . During the same period, many health systems are reporting larger net professional losses per cardiologist as costs continue to rise faster than revenue.
These factors, coupled with bundled pricing initiatives and trends focused on value-based care initiatives, are compelling cardiologists to consider all alternative employment scenarios in response to slowing compensation growth. Whether cardiologists continue to be employed by health systems and corporate entities or they venture into private settings to explore outside investment opportunities, there is no doubt cardiology will continue to face financial pressure from rising operating costs in tandem with reimbursement cuts.
Cardiology employment trends, increasing access to outpatient cardiology services, and changes in payor models are all leading indicators that impact the strategic alignment of cardiology medical groups. The following are key external and internal drivers that serve as signals of the fragmentation of the cardiology market. Healthcare executives should be proactive in their evaluation of these market factors which can dictate how cardiology coverage is delivered and can impact current and future affiliations.
Degree to which cardiology services are provided by independent cardiologists, employed providers, or a group professional services agreement.
High Impact – To determine the top-line revenue impact between two parties’ contracts.
The presence of forward-thinking medical leadership.
High Impact – Visionary leadership required to change the market status quo, and generally visionary leaders see today’s disruption (rate pressure, ambulatory migration, etc.) as opportunity.
Degree to which current employed or contracted cardiology economics remains financially viable.
High Impact – Health system alignment can result in inflated market compensation and greater economic burdens for healthcare organizations. The higher the degree of financial unsustainability, the higher the likelihood of stakeholders (health systems, payors, and providers) are open to alternative structures.
Degree to which physicians are subject to a noncompete or other similar provisions.
Medium Impact – This may delay fragmentation, but ultimately a large cadre of cardiologists seeking an alternative care model will likely prevail.
Depth of managed care and commercial contract consolidation.
Medium Impact – The more consolidated the managed care community is in a market, the stronger the likelihood of evolving lower total-cost care models.
Upon evaluation of the internal and external environment, health systems have strategic options that range from staying the course with minimal change through employment to proactively migrating the cardiology care delivery model in partnership with a private equity-backed platform. Below are strategic opportunities for organizations to consider when developing long-term cardiovascular medical group affiliations.
Investment in a Comprehensive Cardiac Institute
- Service line realization that the tertiary nature of cardiology requires continued hospital/health system investment in integrated and differentiated clinical programs.
- Enhanced service offerings, improved governance (including physician participation), and the development of cardiac operations focused on retaining and attracting community and practicing physicians.
- If successful in the implementation of a cardiovascular institute, the likelihood of third-party competitive investment is diminished.
Joint Venture Management Services Organization (MSO) Model
- Migration of employed physician practice to an alternative, independent practice structure. This could be a health system-endorsed response depending on current practice economics.
- Migration of in-office ancillaries (nuclear, echocardiography, stress testing, etc.) to support primary cardiology services.
- Development of a joint venture MSO model owned by physicians and health systems.
- Separate ASC joint venture syndication with community cardiologists.
Partnership with Private Equity
- Migrate physician practice to private equity and incorporate an income-less expense model for provider compensation.
- Make it optional for health systems or stakeholders to be in the capitalization table of supporting practice MSOs. While most PE sponsors may question a role for health system involvement, a regional sub-MSO could at a minimum create value leveraged by the health system’s competitive position.
- A comprehensive joint venture ASC strategy with three-way ownership (health system, private equity, and cardiologists).
Staying the Course
- The existing environment affords continued incremental strategic investment and limited overall repositioning.
- A high likelihood that self-assessment results in limited exposure to fragmentation.
As healthcare executives evaluate the overall strategic positioning of cardiovascular services, industry factors such as physician employment trends, a shift to lower-cost outpatient care, and changing payor models will continue to change the cardiovascular landscape. Mindful executives with a strong pulse on external and internal factors, such as physician alignment and service line stability, will have an advantage in tactical decision-making. Position opportunities, such as investment in comprehensive cardiac institutes, joint ventures with MSOs, and partnerships with private equity firms, are all potential models for long-term strategic success.
- Physicians Advocacy Institute Research & Avalere Health. (June 2022). Physician Employment and Acquisitions of Physician Practices 2019-2021 Specialties Edition. Physicians Advocacy Institute.
- Toth, M. (September 19, 2019). What Does CMS’ Proposed Addition of PCI in ASCs Mean for Hospitals? Cath Lab Digest.
- Outpatient Surgery Magazine. (2021, March 17). The Building Blocks of an Outpatient Cardiac Program.
- American College of Cardiology. (July 8, 2022). CMS Releases Proposed 2023 Medicare Physician Fee Schedule Rule.
Academic Medical Center Growth & Strategic Opportunities
By: John Meindl, CFA
Academic Medical Centers (AMCs) are facing unique challenges and opportunities in the current environment. With healthcare systems becoming more complex and dynamic, AMCs are adapting their strategies to preserve their inherent strengths and capitalize on evolving industry dynamics. One of the main challenges facing AMCs is the shortage of physicians, which is predicted to become more acute in the coming years. At the same time, revenue from higher-margin care is eroding as new businesses are capturing market share. As AMCs play an outsized role in solving labor shortages, they have also been forced to adapt to the financial pressures. Here we examine some of the major financial and strategic opportunities available to AMCs.
1.) Academic Medical Center Partnerships
Many successful academic medical centers have adopted a hub-and-spoke model where the AMC serves as the hub and partners with community hospitals, medical complexes, for-profit hospitals, and pure-play service providers as the spokes. This model can improve care coordination to the appropriate site of care while expanding the population basis to support the growth or addition of specialty service lines.
AMCs entering new partnerships are doing so from a position of strength. Typical AMCs have a unique ability to effectively deliver highly complex care. Additionally, most AMCs have a strong and trusted brand in the communities they serve. However, access has long been a traditional weakness with patients struggling to access AMC facilities promptly. To address the access issue while capitalizing on strengths, AMCs are rethinking their approach to partnerships to provide easier channels for reaching their patients. Access to a more diverse population improves patient experiences, lowers cost structures, and provides revenue opportunities. Successful AMC partnerships may even end up being site-of-care agnostic, achieving the most optimum clinical outcomes while compensating all parties for their respective contributions.
However, partnering with non-academic medical centers poses some challenges. AMCs need to ensure that their partners provide the same quality of care and adhere to best practices, while also maintaining the AMC’s own high standards.
2.) Go At It Alone
Well-capitalized AMCs can invest individually in ancillary services to access additional revenue streams and expand their patient base. The right mix of ancillary service lines allow an AMC to expand its footprint, improve clinical offerings, and generate incremental revenue. AMC’s investing in ancillary service lines should consider whether or not to allow the ancillary to use the AMC’s brand name. As outlined below, AMCs typically have a trusted and strong brand name built on a history of excellence. Allowing the ancillary to use the brand can either 1) enhance the volume of ancillary services, 2) dilute the AMC brand name, or 3) a mix of both. Common ancillary services may include ASCs, imaging centers, urgent care, and other retail facilities.
As mentioned above, AMCs often maintain a strong reputation and brand name. This intellectual property reflects valuable consumer trust built on a history of clinical excellence. With the right strategic partner, AMCs can capitalize on their individual brand to become market makers through brand licensing, co-branding agreements, care network subscriptions, or external affiliations.
By building hub and spoke partnerships with community hospitals and medical complexes, academic medical centers can leverage their inherent strengths to maintain their industry reputation for excellence. AMCs that prefer an individualized approach may choose to invest directly in ancillary services or develop branding or affiliation agreements in order to generate additional revenue streams and expand patient access.
Looking to Formalize Your Physician Compensation Strategy? Follow the 1-3-5 Rule
Written by Anthony Domanico, CVA
As a strategy consultant focusing on the physician enterprise, and more specifically on physician compensation design, one question I frequently get asked is how to develop a strategic plan for managing physician and advanced practice provider (APP) compensation. Specifically, organizations look for guidance on how often they should be rebasing and/or recalibrating their compensation plans to ensure their compensation program remains competitive and contemporary.
When answering this question, I often advise clients to follow the “1-3-5 Rule.” Here is a breakdown of the rule and what each component means:
1: Rebase Market Compensation Rates Annually
To ensure your compensation program remains market competitive, it is important to rebase your salary, productivity, and other compensation rates on an annual basis. Many organizations choose to tie their rates to a target market percentile of the physician compensation and productivity surveys. This subjects their physicians to market-based increases typically in the 2-3% range.
There has been high market volatility in 2022 and it is expected in 2023 due to the COVID-19 pandemic, inflationary growth and cost of living challenges, the 2021 Medicare Physician Fee Schedule, and other factors. Because of this many organizations are adjusting their approach to continue to provide reasonable increases to their physician compensation pool. Regardless of the methodology used, rebasing your compensation levels on an annual basis is essential to ensure your providers’ compensation levels keep up with the market and avoid potential retention issues.
3: Consider Compensation Plan “Tweaks” Every Three Years
After going through a compensation plan design process, it may be tempting to just “set it and forget it.” After all, a lot of work went into setting levels of base salary, quality, and productivity incentives in the new compensation program. Also, the compensation rebases annually to ensure the total remuneration remains competitive, and surely that should be enough, right?
Payor contracts tend to come up for renewal every three years or so. As the industry continues to move from volume to value-based reimbursement, more of an organization’s revenue will be tied to quality and other non-productivity-based outcomes the next time a contract comes up for renewal. Those contract renewals could impact what an organization might do in its provider compensation program.
For example, consider an organization with a compensation model that is 90% base salary, 7.5% wRVU-based productivity, and 2.5% quality. Then, consider that organization’s payor contracts shift such that 80% of revenue is driven through fee for service and 20% through quality and shared savings programs. In that case, the organization should consider shifting those percentages to align its compensation program with its payor contracts.
5: Consider a Major Compensation Plan Overhaul Every Five Years
The healthcare industry is changing with an increased focus on providing high-quality, low-cost care to patients. As this trend continues, new types of compensation programs have emerged to shift the focus away from things like wRVUs and toward panel management and outcomes-based payment arrangements. Over time, as more organizations consider and adopt alternative compensation models, these models will become more mainstream and may make legacy models look a bit antiquated. This can create recruitment and retention challenges for an organization.
About every five years, organizations should evaluate their strategic plans relative to the physician enterprise. This should be done to determine if the compensation structure (e.g., the 90% base, 7.5% wRVU, 2.5% quality model) remains contemporary and competitive with modern physician compensation programs.
When considered in totality, the “1-3-5 Rule” can help organizations better manage their physician compensation and alignment models. In turn, this will ensure the organization is always able to best compete in an increasingly competitive marketplace.
Designing & Valuing Quality Incentive Programs for Physicians
By: Anthony Domanico, CVA and Nicole Montanaro
The following article was published by the American Association of Provider Compensation Professionals
While the healthcare industry has been moving from volume to value for the last two decades, the movement toward true value-based care has really taken off within the last few years. This is because the way health systems are paid has been largely based on fee-for-service payments with a relatively small share of a health system’s revenue being driven through “value.”
The 2022 MGMA Practice Operations Survey found that health systems see approximately $31,000 in value-based revenue per FTE physician . While that figure is just a small portion of what organizations bring in for the typical physician, the expectation among leaders in the healthcare provider and the payor industries is this trend of shifting revenue away from fee-for service and towards value-based care is going to grow significantly over the next several years. As the way organizations are reimbursed moves towards quality and other non-productivity-based metrics, how those organizations pay their physicians needs to evolve in similar ways. Many organizations we work with at VMG Health are engaging our firm in the following ways:
- Organizations without a quality program in the current compensation program are looking to operationalize quality. They are looking to do this both in selecting and building meaningful quality metrics within their EMR and in developing a compensation program that rewards physicians for high-quality care, in addition to just a high volume of care.
- Organizations with a quality program are looking to take quality to the next level. They are doing this by organizing the care model into an increased care-team type approach or moving away from just quality metrics in the comp plan for primary care physicians. In moving away from just quality metrics, they are focusing on a more robust panel/population health management system that rewards physicians for things like panel size, patient access, and outcomes-based metrics (vs. process metrics in other areas).
The remainder of this article will focus on common ways organizations are implementing value into their physician compensation plans. It will also include guidance to organizations on how to select meaningful value-based metrics to provide the most value to the organization.
Determining the Magnitude of Compensation
For those organizations just starting on this journey from volume to value, the most important decision is how to start including quality in plans that have previously paid physicians solely based on the volume of their work. Organizations often start by adding a modest amount of compensation tied to value, and typically it is an amount that guarantees a physician’s base salary or rate per wRVU does not need to decrease to make room for the quality incentive while staying within budgetary expectations.
For example, a productivity model at $55 per wRVU with an expected 2.5% budget increase in 2023 might leave the conversion factor at $55 and add a 2.5% quality incentive as a bonus. Over time, that percentage tied to quality can increase as physicians become more familiar with and trusting of value-based metric reports as they are with wRVU reports. However, this process generally starts small and typically tops out somewhere in the 10-20% range for organizations on the value-based side of the volume-to-value continuum.
Structuring the Quality Incentive Program
Once the magnitude of compensation is determined, there are a few main ways organizations typically structure value-based incentives in their physician compensation plans. These structures are typically based on how the organization’s leadership team answers the following question:
Question: “Should quality be the same for everyone, or should there be some variability for factors like productivity, tenure, base salary differences, or other factors?”
Potential Answer 1: “Quality should be the same for everyone.” – The Flat Dollar Approach
These organizations typically pay all physicians the same flat dollar amount, regardless of physician subspecialty area. As an example, every physician, whether a neurosurgeon or a family practitioner, would have the same $20,000 quality opportunity.
Potential Answer 2: “Quality should be the same for everyone within a specialty.”- The % of Median Approach
These organizations typically use a percent of market (usually median) approach that pays everyone within the same specialty the same total dollars for quality. As an example, every family medicine doctor would receive up to $13,500 (~5% of median), and every neurosurgeon would receive $37,500 (~5% of median).
Potential Answer 3: “Quality should be the same for everyone, with some small differences based on the physician’s base salary (typically based on years of experience, tenure, or other factors).” – The % of Base Salary Approach
These organizations typically use a percentage of-base salary approach where the base salary is set according to organizational policies. This might provide a differentiated level of base compensation for factors like tenure, experience, productivity level, or other factors, and each physician can receive 5% of their individualized base salary as a quality bonus. As an example, Family Medicine Physician A with a $230,000 base salary is eligible for an incentive of up to $11,500, and Family Medicine Physician B with a $250,000 base salary can earn up to $12,500.
Potential Answer 4: “Quality should vary with productivity such that my highest producers should have the most at-risk for quality.” – The Rate per wRVU and/or the % of Production Comp Approach
These organizations typically use either a quality rate per wRVU or a percentage of total production-based comp approach. Under a pure productivity-based plan, if the compensation plan targets a compensation per wRVU rate of $50 then$47.50 per wRVU might be earmarked for wRVU productivity, and an additional $2.50 per wRVU is set aside, and paid based on quality performance. This type of incentive provides different (and sometimes significantly different) quality incentive opportunities for physicians with different levels of productivity.
Selecting Meaningful Metrics
Regardless of which of these quality compensation structures is selected, when considering supporting quality bonus payments to physicians a key factor is having a substantive set of quality metrics.
VMG Health collected industry research and identified multiple healthcare articles, publications, and other sources related to quality bonuses paid to physicians. The takeaways about value driver considerations related to the metrics are summarized below. While this list is not exhaustive, it does provide the most common and important factors that support quality bonus payments to physicians.
- Metric Type: Outcomes metrics are more valuable than process metrics.
- Benchmark Endorsement: Nationally endorsed benchmarks are more valuable than internal benchmarks.
- Superior Performance Benchmark: Superior performance targets based on top decile performance are the most valuable targets.
- Difficulty of Metric: Stretch goals are more valuable than minor improvements and/or maintaining performance.
- Selection and Number of Meaningful Metrics: Including a substantial number of meaningful metrics (usually five to 10 metrics).
Generally, factors such as paying for the achievement of “superior” performance standards and selecting patient clinical quality metrics demonstrably impacted by the subject physician(s) help to justify higher-quality bonus payments.
Further, the following chart outlines some best practices to consider for identifying and selecting meaningful metrics, as well as factors to consider before including value-based incentives in a compensation model.
It is important to note the considerations described herein are most pertinent when a party wishes to fund its own value-based compensation program. Alternatively, and subject to certain facts and circumstances, if the funding for a value-based compensation program were to be tied to incremental quality or savings payments from a governmental or commercial payor, other factors may be relevant to consider. Some examples of factors are the incremental revenue/actual savings generated, and the risk and responsibility of the parties.
Non-Productivity Incentives – The Next Evolution
Organizations that are already far along on the value-based care continuum with a robust quality department/program are starting to expand beyond the quality incentive programs outlined above. These groups are starting to include patient access or acuity-adjusted panel size factors to further focus their compensation plans on population health management. Patient access can include incentives for things like open panels, time to third-next-available appointments, or other factors that get layered on top of productivity and quality compensation.
Acuity-adjusted panel size is an alternative productivity metric to wRVUs that attempts to measure how large a panel of patients a particular physician is charged with caring for. Raw panels (actual number of patients) are adjusted for some level of patient acuity factor – an age and sex adjustment factor, hierarchical condition categories (HCCs), or a multitude of other factors to ensure panel comparability. Unfortunately, there is no perfect acuity-adjustment factor, which makes comparing panel sizes to the external market a unique challenge.
Finally, some organizations are using incentives embedded in payor contracts – quality incentives, shared savings, and other payments – as additional incentives in the provider compensation formula. Typically, organizations take some percentage of dollars received from payors to cover costs incurred by the system and to provide some level of additional remuneration to physicians.
As these value-based programs continue to evolve, organizations have many levers to provide competitive levels of compensation to their physicians. These options help move physicians’ focus from being solely on production to providing high-quality care to patients and reducing unnecessary procedures.
With this complexity, however, organizations must be more diligent than ever to ensure their provider compensation programs continue to align with federal fraud and abuse laws. These regulations are also changing and providing additional levels of protection to organizations that ask physicians to take on meaningful downside risk in their compensation plans. Therefore, careful consideration should be taken in establishing a compensation strategy to ensure the compensation levels remain both competitive and compliant.
2022 Not-For-Profit Health System Performance Trends
Written by Quinn Murray and Ed McGrath
Not-for-profit health systems nationwide are experiencing material financial pressures as the industry recovers from the impact of the COVID-19 pandemic. Now providers are faced with the difficult task of adjusting to the new challenges that healthcare systems are experiencing in 2022. The VMG Health Strategic Advisory Services team works primarily with not-for-profit systems, which is one of the reasons we decided to complete this report and the associated analytics. A consistent theme in this study finds that few organizations have been immune to material declines in financial and operational performance in 2022. This performance is not sustainable for the long term.
In addition to the costs associated with labor, supply, purchased services, and other inflation pressures, not-for-profit healthcare systems are also experiencing increased competitive threats. These threats are coming from niche players supported by private equity and other financially backed organizations that are typically focused on more profitable commercial business instead of serving all, which is the historical tradition of not-for-profit healthcare systems.
This report is based on data from publicly available sources and represents a statistical sample size of various organizations across the nation, but with that said, our findings may not be applicable in all markets. However, the organizations reviewed for this report represent a large cross-section of not-for-profit health systems in the country. The composition of these systems is summarized below.
On a combined basis, the 21 systems analyzed as part of this study represent $184 billion in total operating revenue for fiscal year 2021. A significant portion of this total was generated from the systems operating 560+ hospitals with approximately 100,000 beds across 32 states.
Other advisory firms have also noted recent declines in industry performance. The contributing factors identified by other firms are wide-ranging, some of which are consistent with the findings of this report.
For example, KaufmanHall reported in September 2022 that for the first six months of CY 2022, hospital operating margins declined 100% compared to 2019 before the pandemic. In addition, KaufmanHall noted the number of hospitals with negative margins in 2022 is projected to be greater than pre-pandemic levels since hospital margins continue to be consistent with, or worse than, 2020 levels.
Another example from RevCycleIntelligence from July 2022 cited survey results from over 200 CFOs of health systems and large physician groups. The results indicated that only 8% reported they were on track to exceed 2022 goals. Additionally, RevCycleIntelligence noted hospitals and health systems are experiencing increases in volumes and patient revenues. Research completed for this report is consistent with the findings noted in the RevCycleIntelligence article.
As noted, the factors driving poor financial performance in 2022 are wide-ranging. Discussions with management for purposes of this report have indicated that some of the issues include the following:
- Contract Labor – Many VMG Health clients have been successful in managing contract labor costs due to reductions in hourly rates. Others are reducing clinical capacity, including beds, to minimize travel and agency staff needs.
- Employed Staff Labor Costs – In order to attract and retain staff during increased market pressures and demand, systems are implementing pay raises well above traditional industry norms. Based on our research, this is expected to continue going into 2023. Conversations with the management of various systems included in this report indicate planned salary increases of 4% to 8% in 2023.
- Medical and Other Supplies – Recently, systems have experienced material increases in the cost of goods purchased and services purchased by these systems. The calendar year 2023 expectations from VMG Health clients indicate planned increases of approximately 6% or greater, which would be materially higher than traditional industry norms.
- IT and Other Support Services – Beyond clinical staff, market competition also exists for IT and other support staff who are in short supply. This is another contributing factor driving up the cost for health systems.
- Medical Malpractice – As a result of cases being delayed for the greater parts of 2020 and 2021, clients are beginning to experience increased malpractice activity from cases during this time period. This is leading to increased malpractice costs which are rising to levels that may have not been anticipated.
Key Findings & Conclusions
The findings and forecast based on this report do not necessarily paint a pretty picture for not-for-profit systems. While our research is focused on healthcare systems, VMG Health’s experience with standalone hospitals in 2022 also indicates, in most cases, financial performance is weaker than what is being reported for several other systems.
Of the 21 systems analyzed for this report, in calendar year 2022, 16 are reporting negative operating margins (75+%). The other five are reporting breakeven or very minimal operating margins. Each of these systems reported positive FY 2019 operating margins before the pandemic.
The range of the operating margin declines in 2022 as compared to 2021 and/or pre-pandemic levels approximates from 4.0% to 7.0%. In other words, if the operating margin was a positive 2.0% in 2021, then the 2022 operating margins will likely approximate between -2.0% to -5.0%. Likewise, operating EBIDA for these systems has deteriorated materially to approximately 3.5% of total operating revenue in comparison to 8.0% in 2021 before the pandemic.
Similarly, these systems have experienced a significant decline in days cash, specifically in 2022, approximating -18% from 2021. The systems have also experienced material losses from investment income in 2022. Recognizing this mostly includes unrealized losses, these systems reported investment losses of approximately negative -$22 billion on a combined basis.
Summary Performance Results from FY 2021 to Annualized FY 2022
Negative operating margins in addition to poor investment performance (and other non-operating activity for certain organizations) are driving declining cash balances. 2022 performance indicates systems reporting somewhat material declines in days cash on hand. These 21 systems are reporting a 15% to 25% decline in days cash with an average of an 18% decline from fiscal year-end 2021.
As an additional consequence of the material losses, especially for smaller systems, debt service coverage ratio (DSCR) covenants may not be met. Most of the systems included in this report have the cash reserves necessary to avoid procedural requirements relative to the days cash covenant in their bond agreements, and this includes taking into account the poor 2022 performance.
Organizations in 2023 may be required to develop a financial improvement plan outlining the recovery path to fulfilling the DSCR covenant in a subsequent fiscal year. In many cases when a bond covenant such as DSCR is not met, systems are required to hire management consultants to report on their opinion relative to the likelihood the system can meet the DSCR threshold in the near term.
VMG Health recently completed one of these assignments for a large hospital in the northeast. Based on this assignment and discussions with others, based on 2022 performance it appears other organizations will unfortunately need this type of study completed by experts such as VMG Health.
Areas of Consideration – Initiatives to Address the Impact of 2022 and Beyond
It is clear most organizations will not be able to shrink their way to success, and over time, strategic growth is imperative to long-term success. The following are example actions either undertaken or being contemplated by VMG Health clients to address recent performance:
- Addressing care management issues to better utilize limited clinical care resources.
- Increased focus on APP utilization to the max of their skill levels.
- Enhance utilization of scarce clinical staff resources.
- Digital care to increase patient access at a lower cost.
- Expansion of remote monitoring and other vehicles to reduce more expensive utilization.
- Expansion of hospital-at-home services.
- Assessment of the value proposition of employed/aligned medical groups.
- Identification of how best to maximize the group size, strength, and the system’s investment in the group.
- Contract negotiations with managed care payors.
- Will likely be difficult to obtain increases that will address inflation pressures.
- Strategic assessments of existing operating assets/investments.
- Reevaluation of the continuation of existing service lines.
- Closure and/or sale of hospital assets in non-strategic markets.
- Disposition of unprofitable ventures that are no longer strategically imperative.
- Reassessment of the need for existing real estate and/or MOBs.
- Evaluation of the potential sale of other non-core assets.
- Operational improvements.
- Reducing bed and other capacities to match available non-agency/travel staff.
- Identifying opportunities to improve revenue cycle efficiency.
- Staff modifications, primarily in non-clinical areas.
- Acquisition of organizations that are struggling.
- Based on discussions with VMG Health clients, systems are being more diligent relative to making investments in new facilities.
- Partner/affiliate with other systems for non-clinical services.
- Example areas include IT, revenue cycle, cybersecurity, analytics, and others to improve cost efficiency and reduce potential future investments.
- Price transparency.
Not-for-profit healthcare systems are experiencing extreme challenges in 2022. Based on conversations with many of these organizations and other clients, this is unlikely to improve materially in 2023. Not-for-profit hospitals and systems need to explore other innovative avenues to work smarter and more efficiently so they can be well-positioned for success in the future. VMG Health has a history of experience developing long-term relationships with clients through providing assistance across a variety of areas. These areas primarily consist of financial and strategic related assistance, which has prepared and positioned VMG Health to provide support and insight to not-for-profit hospitals and health systems. As we continue to assess the not-for-profit landscape, VMG Health has the experience to add value and help systems address some of the issues outlined in this report.
The assistance VMG Health’s experts are able to provide can take many forms. Some examples are:
- Medical Group Transformation
- Bond Covenant Repair Reports
- Financial Projections
- Service Line Planning
- Revenue Cycle
- Performance Improvement
- Mergers and Acquisitions
- Muoio, Dave. (August 29, 2022). July’s hospital margins were among the worst of the pandemic, Kaufman Hall says. Fierce Healthcare.
- LaPointe, Jacqueline. (July 7, 2022). Healthcare Revenue Falling Short of 2022 Goals for Many Providers. RevCycleIntelligence.
- Kaufman, Kenneth. (September 21, 2022). The Sobering State of Hospital Finances. KaufmanHall.
Top Three Strategic Issues in Behavioral Healthcare
By: Scott Ackman
The following article was published by Becker’s Hospital Review
Behavioral health is a highly fragmented market. With an increased demand for providers as well as the recent supply shortage, this sector requires innovative partnerships and strategic thinking.
Here are the top three strategic issues in behavioral healthcare to consider currently.
1. Provider Availability
Most health systems and provider groups struggle to recruit and retain enough psychiatrists to meet community needs. In many cases, a lack of provider resources limits the growth of existing services or prevents clients from offering a behavioral health program at all. Residency programs or other less formal relationships with medical schools have proven to be effective recruitment tools.
2. Fee-For-Service Economics
From a contribution margin and net income perspective, behavioral health services are well below average for many health systems. This is largely due to some combination of the following:
- Payer mix: For example, disproportionate share of Medicare, uninsured, etc.
- Reimbursement rates.
- State policy and community resources: Health systems are often required to use upwards of 25% of their capacity to board behavioral health patients due to a lack of community post-acute options. Patients no longer meet the criteria for inpatient reimbursement.
Organizations assuming higher levels of financial risk generally favor the economics of behavioral health due to the service line’s impact on the total cost of care. This phenomenon has resulted in increased interest and investment in behavioral health for many clients. VMG Health’s advisory clients have recently identified behavioral health as one of the most important service lines moving forward.
3. Care Model
The care model needed to provide behavioral health continues to be an area of interest for many organizations. Clients are increasing investment in pre-inpatient and post-admission services and community resources to improve program performance.
How to Assess Medical Group Performance
By: Cordell Mack and Scott Ackman
The following article was published by the American Association of Provider Compensation Professionals.
Organizations are revisiting medical group strategy and physician alignment in the face of private equity investment, growing medical group losses, and a decline in overall performance. Approaches on how to address medical group performance vary but can broadly be categorized as performance optimization (i.e., enhancing the current alignment vehicle) or pursuing a structure change to an existing model that improves sustainability. In lieu of performance-focused optimization, organizations are increasingly considering whether there are alignment models that are more sustainable and functional than traditional employment given the price transparency and site neutrality trends. The following article explores the evaluation of current medical group performance.
More health systems are taking a multi-faceted approach to maximize medical group performance. The exponential growth in physician and advanced practice provider employment and the growth in reimbursement tied to cost, quality, and access have heightened the importance of medical group strategy. However, many organizations continue to experience underperformance across several domains (cost, growth, access, etc.), and attempts to improve performance have stalled or been met with significant resistance. In most cases, the definition of performance is too narrow to identify the actionable strategies necessary for improvement.
Measurement of medical group performance and provider efficiency has historically been based on investment or operating loss per physician. In VMG Health’s experience, questions pertaining to a medical group optimization are complicated and require consideration of several indicators. Commonly used measures like investment per physician and provider FTE are helpful but can be misconstrued without proper context due to a myriad of factors. Some of these factors include but are not limited to medical group provider composition (e.g., primary care, hospital-based, pediatric subspecialties, etc.), medical group structure, care model, payor contracting strategy, overhead allocation, and payor mix.
To truly understand medical group performance, performance should be evaluated across a series of clinical, financial, operating, and community domains to ensure the group’s value is fully realized and understood. Focusing on only one or two aspects of medical group activity can result in an overly narrow and often inaccurate assessment of medical group value. The approach to assessing the economic sustainability/affordability of a medical group should be based on a complete picture of the medical group’s impact on health system financial performance and should not be limited to a simple financial review of practice operations.
It is critically important to consider how the medical group functions, performs, and contributes to the health system in several areas including: 1) growth trajectory and overall affordability, 2) engagement of the provider group, 3) data availability and reporting, 4) provider care model and compensation, and 5) provider governance. Strong performance across one or two domains is not indicative of sustainability and category weighting is required to acknowledge the relative importance of each.
Each of the domains can be evaluated and indexed across several factors to essentially score the medical group’s overall health and determine whether financial, strategic, and clinical alignment requires modification for sustainability.
The affordability domain evaluates the extent to which the magnitude of the hospital or health system’s investment in the medical group is appropriate given the size, operating performance, structure, and breadth. The domain also considers whether the investment is financially sustainable for the organization when tested against the parent organization’s size, operating performance, and market conditions.
VMG uses a wide array of metrics to measure affordability, including but not limited to metrics that measure the enterprise-wide impact of employing physicians. Depending on organizational compliance and internal firewalls related to information sharing, our preference is to develop management models that combine enterprise-wide economic contribution to the underlying net investment in the professional practice.
Without a common understating of enterprise-wide performance, medical groups are all too often in the position of defending their status in a health system. Further, our experience suggests there is increased dissatisfaction among providers and operators.
The degree to which medical group infrastructure and policies support physician-to-physician and physician to group accountability. The engagement domain evaluates whether policies support the individual or the collective, and to what extent the governance structures create peer accountability and a set of medical group values that align with health system goals and objectives.
The ability of the health system and the medical group to track, report (internally and externally), and act on data is essential. Supportive data systems, with actionable dashboards and reports for providers, are deployed to maximize the utility of the group practice. Medical groups lacking effective data tracking, reporting, and management capabilities are extremely limited.
Exponential growth exists in patient care delivery in non-traditional settings and by care teams versus individual providers. What policies, procedures, and models have been developed and implemented that support care innovation, efficiency, and patient access? How well developed are virtual protocols and how mature is the medical group’s thinking about advanced practice provider utilization and deployment? Does this translate into aligned remunerations systems for providers?
The governance domain assesses how decisions pertaining to medical group management and operations are made as well as who is making the decision. There is not a one size fits all approach to organizational structure and decision making. What structures and policies support provider-led management and decision-making? To what degree are service line management and medical group operations integrated to assure efficient and effective operations.
Completing an internal assessment across these domains will benefit the medical group and the broader health system clinical enterprise. Completing this type of assessment generally assumes arrangements are fair market value and commercially reasonable, however, there is some inherent connectedness between affordability and internal compliance standards. Since the inception of the Stark Law in the late 1980s, there have been concerns about the commercial reasonableness of physician practices that lose money. While most operators could rationalize why practice in a health system model may lose money, there have been decades of discomfort with the strict interpretation of the Stark Law. In the most recent changes to Stark, there has been a clarification noting that the determination of an arrangement’s commercial reasonableness does not turn on whether the arrangement is profitable. Under the statute, there are several examples of community need, EMTALA, charity care, and quality that may support underlying commercial reasonableness despite practice losses. Nevertheless, assuring internal compliance policies and oversight are contemporary with the current law is paramount.
In VMG Health’s experience, questioning medical group sustainability is both essential and complicated. Many organizations struggle with assessing current performance in a way that provides a comprehensive view and provides actionable strategies for improvement. It is critical this work effort is organized in the right way since a simple benchmark exercise is largely ineffective in driving change.
How to Measure Acuity-Adjusted Panel Size for Contemporary Provider Compensation Plans
By Anthony Domanico, CVA, and Ben Minnis VMG Health was published in the American Association of Provider Compensation Professionals (AAPCP)...Learn More