How to apply a value equation in setting compensation for specialty providers

The steadily rising number of hospital-employed physicians in recent years has imposed an increasing financial and operational burden on hospitals.

Hospitals are under pressure to run value-driven, lean operations to retain physicians and remain viable. Setting physician compensation at appropriate levels, acceptable to physicians, is of paramount concern.

Although many compensation models exist, the most frequently used involves compensating physicians based on the number of work relative-value units (wRVUs) they produce. The appeal of this purely production-based model is its simplicity. However, as hospitals are compelled to move toward value-based rather than volume-based payment, this pay-per-wRVU approach will increasingly promote misaligned incentives between physicians and hospitals.

Compensation objectives

The primary objective for a hospital in developing a compensation solution is to pay physicians for the results it wants to achieve. The desired results will differ for different specialties, however.

The goal for primary care physicians and those who manage chronic conditions is to maintain or improve patient and population health. Achieving this goal requires a continuous monitoring and management of the patient’s health condition. The most effective compensation foundation for this first group is arguably a per-member-per-month arrangement.^a

Meanwhile, the goal for specialists, such as surgeons, is to perform effective episodic interventions, aimed at restoring the patient’s functioning. Compensation for this second group should continue to reward productivity, but it also should consider four additional performance factors:

• Service
• Quality
• Financial performance
• Citizenship

As proposed here, such a value-based compensation system can continue to use the pay-per-wRVU approach, but the level of compensation also will vary depending on the physician’s performance in these four factors. Establishing effective performance indicators will require an understanding of the physicians’ role in driving success across the factors. It also is imperative that performance indicators be measurable at the provider level to be effective in driving performance improvement.

Simply put, a physician’s success on these indicators creates a foundation for alignment between the physician and the hospital.

1 Service

To be competitive, hospitals must ensure their delivery system is convenient, responsive, respectful and effective for its patients. Patient satisfaction surveys that obtain feedback on these variables not only are useful in identifying improvement opportunities but also allow for the scoring of performance against industry benchmarks.

2 Quality

CMS’s Merit-based Incentive Payment System (MIPS) for measuring quality and interoperability offers both generic and specialty-specific measures to evaluate physician quality performance. CMS payment models will increasingly adjust their rates based on these metrics. To maintain physician-hospital alignment, hospitals must incorporate these measures in their compensation system. True alignment with the intent of MIPS will be demonstrated when hospitals and physicians move to specialty-specific rather than generic quality indicators.

3 Financial performance

Two areas should be considered when assessing financial performance.

First, the direct margins or deficits generated by a physician’s practice constitute an important performance factor. The cost-to-revenue variable considers volume, contract rates, revenue cycle management, service mix and resource utilization performance. For cost-to-revenue to be an effective element of the compensation model, physicians must understand the role they play in the performance on each of the component functions. The hospital must also demonstrate flawless execution in its role on each of these functions.  For example, on the revenue side, the hospital must have competitive payment rates in its payer contracts as well as a six-sigma level charge submission and follow-through process.  Meanwhile hospitals must establish lean operations and competitive purchasing to effectively manage costs.  In the absence of flawless execution, the hospital must adjust the performance standards to account for its below-optimum financial performance.

The second performance area addresses each physician’s impact on the cost of care for the population of patients served by the health system. The MIPS cost equation addresses this factor with the following three measurements.

Total per capita cost. This value represents the total annual costs for medical care for a hospital’s attributed patients. This cost includes professional fees, inpatient and outpatient hospital fees, medication costs, DME and long-term care costs.

Medicare spending per beneficiary. This measure considers the total cost for each hospital episode. It includes all charges from three days before the admission through the complete hospital stay and 30 days post-discharge. Professional fees also are included.

Procedural and acute episode measures. This measure has two components:

• A procedural component focused on interventional procedures and surgeries, which mirrors the CMS bundled payment program
• A component focused on costs for specific acute episodes of care, such as inpatient care for pneumonia, chronic obstructive pulmonary disease and ST-elevation myocardial infarctions (STEMIs) and cerebral infarctions.

Each of the three MIPS cost measures is given a score potential of 10 points for a total potential score of 30 points. The actual points earned for each measure will be totaled and divided by 30 to determine performance on this indicator.

4 Citizenship

Behavioral indicators should have a tangible impact on organizational performance and allow for clear and objective measurement. For example, start times and wait times are factors that have an impact on an organization’s patient satisfaction. Timely charge submissions and use of operating room block time are examples of financial success factors.

Compensation per wRVU levels

Establishing a basis for compensation per wRVU is a critical step in the negotiation process. In this process, the hospital must find the optimum balance between offering competitive compensation while also maintaining financial viability. The model described here uses the 2018 Medical Group Management Association compensation-per-wRVU benchmarks to address the competitive compensation requirement. (These benchmarks are listed in the sidebar “Application of the surgical specialist compensation methodology,” below) Each organization should evaluate these levels against its own financial circumstances to determine the extent to which they are viable.

The following four levels of compensation per wRVU are established for the service, quality and finance factors.

Base. The base represents the minimum amount that will be paid per wRVU and is the value applied if the physician fails to meet the minimum threshold value on a performance factor. The 25% MGMA benchmark for compensation per wRVU is selected for this level.

Threshold. The threshold value is applied when the physician meets or exceeds minimum expectations but does not hit the target set for the specialty. The midpoint between the MGMA 25% and median benchmarks for compensation per wRVU is selected for this level.

Target. The target value is applied when the physician meets or exceeds the target set for the specialty. The median MGMA Benchmark for compensation per wRVU is selected for this level.

High goal. The high-goal value is applied when the physician performs significantly above the target on a performance factor. The high goals are typically applied to top 10% benchmarked performance. The difference between the threshold and target value is added to the target value to arrive at the high-goal compensation per wRVU value.

The four levels of compensation per wRVU for the citizenship factors differ from the other factors. Because citizenship largely reflects the compliance that is expected for all members of a reliable organization, the high-goal concept does not apply. Meanwhile, a minimum level of compliance is expected in order for any payment to be made. Accordingly, a circuit breaker approach should be applied to the citizenship metric, where a zero compensation per wRVU level is applied for those who are outliers on this performance factor.

Footnote

^a For a discussion of this approach, see Rezen, J.,  “7 steps toward compensating primary care physicians for their true value,”  Financial Sustainability Report, June 16,  2020.

 

Sample: Applying the surgical specialist compensation methodology

The following is a sample application of the specialist compensation methodology for an orthopedic surgeon. It is presented in a format that would be used in a provider’s compensation addendum, and it is accompanied by two examples of the actual compensation calculation.

Compensation plan for Jane Doe, MD

Specialty: Orthopedic Surgery

Hospital shall pay physician on a wRVU-based compensation, which equals the physician’s average monthly wRVU production multiplied by the compensation per wRVU.

1. wRVU production calculation

a. The physician’s average monthly production will equal the average monthly wRVU generated by the physician over the 12 months ending in the previous quarter.
b. The average wRVU will be updated each quarter based on the prior 12 months’ actual wRVU volume.
c. wRVUs are assigned according to expected payments in accordance with CMS payment guidelines.

2. Compensation per wRVU

a.  Compensation will vary based on the physician’s service, quality, financial and citizenship performance.
b. The compensation per wRVU levels are:

i. Zero: $0.00
ii. Base: $63.51 (Basis: MGMA 25% Benchmark)
iii. Threshold: $69.32 (Basis: The midpoint between the MGMA 25% and median benchmarks)
iv. Target: $75.13 (Basis: MGMA median benchmark)
v. High Goal: $80.95 (Basis: Target plus the difference between the Target and the Threshold)

c. The physician’s performance assessment period will be the 12 months ending in the previous quarter.
d. The compensation per wRVU will be updated each quarter based on the prior 12 months’ performance.

3. Performance factors

a. Patient satisfaction (25% impact on the $/wRVU multiplier)

i. Score equal to or above the top 90% ranking = High Goal
ii. Score equal to or above the 75% ranking = Target
iii. Score equal to or above the 50% ranking = Threshold
iv. Scores below the 50% ranking = Base

b.  MIPS Quality and Interoperability Totals (25% impact on the $/wRVU multiplier)

i. Combined scores equal to or above 63 (90%) = High Goal
ii. Combined scores equal to or above 49 (70%) = Target
iii. Combined scores equal to or above 35 (50%) = Threshold
iv. Combined scores below 35 (50%) = Base

c. Cost-to-revenue before provider compensation (15% impact on the $/wRVU multiplier)

i. Ratio equal to or below 0.48 = High Goal
ii. Ratio equal to or below 0.52 = Target
iii. Ratio equal to or below 0.56 = Threshold
iv. Ratio above the 0.60 = Base

d. MIPS cost ratio (15% impact on the $/wRVU multiplier)

i. Ratio equal to or below 1.00 = High Goal
ii. Ratio equal to or below 0.90 = Target
iii. Ratio equal to or below 0.80 = Threshold
iv. Ratio equal to or below 0.75 = Base

e. Late clinic starts (10% impact on the $/wRVU multiplier)

i. 12 or fewer late starts over four quarters = Target
ii. 18 or fewer late starts over four quarters = Threshold
iii. 24 or fewer late starts over four quarters = Base
iv. More than 24 late starts over four quarters = Zero

f. Outstanding charges (10% impact on the $/wRVU multiplier)

i. An average of 10 or less outstanding charges at the end of each month over four quarters = Target
ii. An average of 20 or less outstanding charges at the end of each month over four quarters = Threshold
iii. An average of 30 or less outstanding charges at the end of each month over four quarters = Base
iv. An average of more than 30 outstanding charges at the end of each month over four quarters = Zero

 

Specialist physician compensation calculations

Exhibit 1

Performance factor	Column A	Column B	Column C	Column D	Column E
Provider’s performance	Performance ranking	Ranking-based pay-per-wRVU assignment	Factor weight (%)	Pay-per-wRVU contribution (Column C × column D)
Patient satisfaction	98.00	High	$80.94	25%	$20.24
MIPS quality and interoperability	45.00	Threshold	$69.32	25%	$17.33
Cost to revenue	53%	Threshold	$69.32	15%	$10.40
MIPS costs	100%	High	$80.94	15%	$12.14
Late clinic starts	0.00	Target	$75.13	10%	$7.51
Outstanding charges	0.00	Target	$75.13	10%	$7.51
Total pay per wRVU	$75.13
wRVUs	8,476
Compensation	$636,802

Exhibit 2

Performance factor	Column A	Column B	Column C	Column D	Column E
Provider’s performance	Performance ranking	Ranking-based pay-per-wRVU assignment	Factor weight (%)	Pay-per-wRVU contribution (Column C × column D)
Patient satisfaction	93.00	Base	$63.51	25%	$15.88
MIPS quality and interoperability	45.00	Base	$63.51	25%	$15.88
Cost to revenue	55%	Threshold	$69.32	15%	$10.40
MIPS costs	80%	Threshold	$69.32	15%	$10.40
Late clinic starts	0.00	Target	$75.13	10%	$7.51
Outstanding charges	14.00	Threshold	$69.32	10%	$6.93
Total pay per wRVU	$67.00
wRVUs	8,476
Compensation	$567,892

Source: Value Health, 2020

 

Physician governance and leadership are key to compensation policy success

Physician governance and leadership are essential components of a high-performing physician enterprise. Accordingly, the formal establishment of these roles should serve as a foundation for the organization’s success. Like many other policies effecting the enterprise, the physician leaders must vet and approve the compensation policy as well as actively engage in its implementation.

Governance. Physician governance should be established through a physician-led clinical operations leadership committee composed of high-performing physicians who are aligned with the health system’s mission and have accepted a fiduciary responsibility for its success. These physicians should be able to expect full transparency from the health system and be willing to commit to full confidentiality of the information shared. The committee should be charged with setting policies and addressing performance improvement needs within the physician enterprise.

Physician compensation is one of many issues it should address.

Typically, in setting policy, members of the health system’s administration will provide the staff work, establishing financial criteria for success and working with the physician leader to prepare a proposal for the committee’s feedback. Such feedback may address any aspects of the policy, including compensation mechanics, levels and performance criteria. The proposal will be recrafted and resubmitted in an iterative process based on the physicians’ feedback until the committee agrees on the proposal. The number of process iterations in setting policy will depend on multiple factors including the complexity of the topic and the diversity of opinions.

Leadership. Physician leadership begins at the department level as medical directors are assigned to each specialty. With clearly defined roles and responsibilities, each medical director plays a significant part in setting department direction and driving department performance. The medical director, supported by management, leads the implementation of the provider compensation policy by working with department physicians to establish performance metrics and the criteria for success. In a data-driven system, the medical director also should lead the department’s performance improvement effort by reviewing the results with department physicians each month and serving as a mentor to address performance improvement needs within the department.