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.
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.
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).
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.
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.
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.
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.
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:
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.
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.
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.
Sources
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?”
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
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
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.
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 [1]. 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.
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) [2]. 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 [3]. 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.
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% [4]. 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.
Physician Alignment
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.
Entrepreneurial Leadership
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.
Economic Sustainability
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.
Physician Contracts
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.
Payor Fragmentation
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.
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.
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.
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.
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.
Healthcare providers across the country are facing significant financial and operational challenges amid several competing trends such as losses in investment income, staffing shortages, increased inflation, increasing wage pressure, and the like. VMG Health’s Strategic Advisory Services Division works with hospitals, health systems, medical groups, and providers to take strategic steps that help move the system in the right direction.
A myriad of 2022/2023 stewardship issues are confronting hospitals and health systems, and physician integration and relationship models are not immune to the underlying financial stress. As these challenges mount, there are alternative physician strategies developing in the market with a subset of physicians seeking greater independence and returning to private practice, dry capital investments from private equity including robust ambulatory assets, and clinical network solutions making a bolder step towards value.
For many hospitals and health systems the value proposition of investing in an integrated delivery system with employed/contracted physicians has not been realized or accounted for in a way that feels economically sustainable. To this end, new platforms and strategies are emerging that health systems need to be aware of in the context of making sound strategic decisions.
VMG Health experts have developed a leading solution set to reposition physician practice alignment that is customized for your unique market and underlying facts and circumstances. A sampling of physician enterprise strategy offerings include:
Healthcare providers across the country are facing significant financial and operational challenges amid several competing trends such as losses in investment income, staffing shortages, increased inflation, increasing wage pressure, and the like. VMG Health’s Strategic Advisory Services Division works with hospitals, health systems, medical groups, and providers to take strategic steps that help move the system in the right direction.
For many health systems 2022 was one of most challenging years in recent memory. Labor costs, stagnant reimbursement, consumer preference, demographics, and increased competition from non-traditional organizations combined to negatively impact profitability and future sustainability.
The factors contributing to a decline in operating performance are not likely to change in the coming years. Labor costs, demographics, and competition are likely to continue trending in ways that challenge performance.
VMG Health does not believe 2022 was an aberration, but rather portends what future clinical and operating performance will look like when absent of change and innovation. Organizations will need to maintain or improve patient access and quality but at a lower cost. How, where, and by whom care is provided will need to be evaluated and reimagined to achieve a sustainable operating platform.
VMG Health’s experts have partnered with health systems across the country to identify opportunities for improvement in clinical and operating performance. The work effort begins with understanding the current state of the organization and its operating environment. VMG Health then works with organization leadership to identify a short list of opportunities the organization can further explore and implement. At the conclusion of the work effort organizations will have a menu of strategies and tactics that can advance the organization towards clinical and financial sustainability when fully implemented.
Healthcare providers across the country are facing significant financial and operational challenges amid several competing trends such as losses in investment income, staffing shortages, increased inflation, increasing wage pressure, and the like. VMG Health’s Strategic Advisory Services Division works with hospitals, health systems, medical groups, and providers to take strategic steps that help move the system in the right direction.
The varying types of physician compensation models being used by health systems today can result in a misalignment of physician and organizational incentives. This can limit the health system’s ability to maximize revenue opportunities as the industry moves towards empanelment and patient outcomes.
With more of a health system’s revenue at risk for quality, panel management, and other non-productivity factors, aligning physician and health system incentives is key. These incentives help get the compensation formula right which is essential to the continued success of the health system.
As organizations continue to enter payor contracts with either partial or full risk (i.e., capitation), one key factor for organizations to understand is panel size and panel management. Accurately measuring and acuity adjusting primary care physician (PCP) panel size and implementing quality metrics tied to how well a PCP and the rest of the care team takes care of the patients on their panel, will drive organizational successes under these value-based reimbursement models.
VMG Health’s experts have helped numerous health systems design physician compensation plans that incentivize physicians to provide high-quality care for a strong panel of patients to ensure alignment of physician and organizational goals.
Through this body of work, VMG Health works with organizations to profile their reimbursement environment so organizations better understand how revenue flows into the system through payor contracts. VMG Health’s experts also help organizations learn which levers need to be pulled in order to maximize revenue under these value-based contracts. Once the reimbursement environment is fully understood by all parties, VMG Health works with organizational leadership to create a compensation model that incentivizes physicians to work in a way that maximizes revenue while providing high-quality care.
A highly successful physician-owned behavioral health organization expressed a need to expand its service offerings to new markets. The leadership’s vision for their existing market had reached maturity and top line growth was projected to slow. The organization understood behavioral health services were in high demand nationally but needed assistance with developing an expansion plan. Leadership recognized there was an incomplete understanding of provider, competitor, payer, and population dynamics outside of their home market. There was a need for outside assistance in identifying growing markets that fit with the organization’s business model to offer the best opportunity for success.
The behavioral health organization retained VMG Health to perform a national market assessment to educate leadership on key trends, to prioritize states and metropolitan statistical areas (MSA) for management review, and to recommend specific communities for expansion. Working with the organization, VMG Health experts developed a framework that identified and weighed factors most conducive to program expansion and tested the potential of individual MSAs.
A critical aspect of the process was understanding the key factors that are essential for a clinically and operationally sustainable behavioral health program. VMG Health performed a series of analytics to determine critical success factors and prioritize new markets. Analytics included a review of patient access, reimbursement trends, provider economics, Medicaid policies, competition, and regulatory requirements.
Interviews and analytics identified numerous factors that are most critical for a sustainable program. One of the major considerations which required in-depth insight on physician alignment strategies was the need for a renewable source of physicians in a high demand specialty. In addition, having a full continuum of behavioral health services easily accessible to patients was highlighted as a critical factor for success. This includes not only convenient access points, but the full spectrum of services from inpatient services to home care, all supported by social programs.
Each of these factors were fully explored followed by VMG Health recommending three priority markets, potential partners and real estate opportunities.
The behavioral health organization selected a preferred market based on VMG Health’s opportunity assessment and signed a definitive agreement to acquire a large behavioral practice in the market. Today the organization is successfully operating in its second state and is leveraging the original market evaluation to guide decisions for the next market expansion.
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:
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.
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?
Not necessarily.
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.
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.
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)...
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