Health systems executing a value-based strategy need a strong foundation of primary care physicians (PCPs) to reach the highest levels of care management, but traditional physician compensation models miss the mark when aligning incentives to achieve success. Fee-for-service (FFS) models are ill-suited because they rely primarily on volume production to pay physicians, while typically ignoring utilization management. Value-based compensation structures that align incentives with successful care management can unlock tremendous value for the system, and PCPs can earn substantially higher compensation than peers operating under FFS models.
Focus on Primary Care
A variety of market forces are driving health systems to become value-based entities, including regulatory changes, such as increased flexibility for value-based compensation in the proposed Stark law rules. There is also a growing incidence of payer incentives for value, such as the Shared Savings Program, ACOs, and the Primary Care First model proposed by CMS for 2021. Given the high-impact role that PCPs play in utilization patterns and operating expenses, health systems have placed a heightened focus on recruiting PCPs to improve patient access and manage the total cost of care. If your organization is following this strategy, adopting a value-based model with capitation plus risk-based elements for your PCPs may be an effective approach. PCPs who are highly successful in driving down overutilization and reducing the specialist medical expenses of a managed population can deliver extraordinary value to the health system and improve the bottom line of risk-based contracts.
Align Physician Compensation
It is important to align physician compensation with the structure of the managed care contracts.
- To improve financial performance, the compensation paid to physicians should incentivize changes in behavior that drive this improvement. For example, a group that holds a full-risk capitation contract while paying the PCPs based on WRVUs has misaligned incentives by compensating the physicians to increase productivity but not to manage the cost of care. Effective compensation models for groups with capitation plus risk bonuses will align compensation with success at managing the total cost of care and building value-based patient panels.
- Aligning physician compensation with the managed care contracts mitigates financial risk by ensuring that significant increases in physician compensation are tied to optimized care utilization under the managed care contracts instead of incentivizing higher utilization through FFS-style compensation.
- Finally, risk arrangements that fall under the Stark law risk exception might not have the same fair market value constraints, potentially availing higher compensation than could be supported under traditional approaches.
Better Alignment Leads to Better Population Health
The results of ECG’s 2019Risk-Based Contracting and Physician Compensation Survey illustrate that organizations with the highest degree of financial alignment with providers also demonstrate the most success in risk population contracts. The survey data indicated that physicians paid under net income models had a significantly lower medical expense ratio, with a median of 63%, while those paid under a model that relied on modest quality bonuses had an average medical clinical expense ratio 22% higher, at 85%. Figure 1 below shows the resulting medical claims expense ratio for three different types of compensation mode.
Through analysis of the market data in the ECG risk survey, ECG has been able to demonstrate that traditional market benchmark compensation values do not accurately reflect compensation paid to physicians in value-based entities.
Larger Risk Means Larger Reward
Typically, prospective capitation payments are made on a per member per month (PMPM) basis. However, there is an array of structures and levels of risk shared across capitation arrangements.
- In a full-risk capitation arrangement, the medical group is responsible for the total cost of care of the capitated population, including all facility, professional, and pharmaceutical claims.
- Partial-risk capitation typically means the medical group is responsible for the professional expenses and is not at risk for the other medical expenses of the capitated population.
- Primary care capitation arrangements typically mean a primary care group is paid a PMPM fee to deliver all primary care services. Primary care capitation may include carve-outs that pay for some services on an FFS rate, and may also include bonuses for achieving financial savings or performance incentives.
Figure 2 shows the level of risk for the cost of care along a continuum of capitation arrangements.
As the level of risk increases, the capitation may be
smaller, but the total potential compensation paid to high-performing
physicians can grow commensurately. An increasing level of risk calls for a
care team model blending physicians, advanced practice practitioners, and other
care professionals that can increase the number of patients being managed and
lower the cost per patient served.
Unlock Value
Aligning compensation and reimbursement funds flow is one of several challenges that medical groups must manage when transitioning to a value-based model. When embarking on an organizational strategy to accept more value-based risk, do not overlook the physician incentive design. The combined challenges presented by the infrastructure, care teams, and operational requirements can present a significant barrier, but they are no worse than misaligning physician compensation and organizational strategy.
Published September 30, 2020