Bringing value-based compensation to your medical practice

All physicians are familiar with the physician fee schedule (PFS) model of compensation employed by both Medicare and private insurance carriers. Under this model the physician is paid a set fee listed in the schedule for a specific service. This fee-for-service model is essentially compensation based on productivity: The more services the physician provides, the more he/she bills, the more the physician earns.

Over the last several decades, I have reviewed thousands of employment agreements for physicians with private medical practices, all of which base the physician’s compensation on this fee-for-service productivity model. These agreements almost uniformly provide a base salary and then a productivity bonus calculated on the total dollars collected by the practice for the medical services personally performed by the physician. The bonus is generally a percentage of these total productivity dollars which is in excess of a threshold dollar amount. Often times, the bonus provision has a two or three tier schedule of an increased percentage payment to the physician as the total dollars collected, on his/her personal productivity, increases above the threshold amount.

Under this compensation model, there is almost always a base salary, which is paid to the physician regardless of productivity. In reality, the physician’s entire compensation is based on productivity. Admittedly, market forces do effect the base salary that a medical practice must pay to woo a new physician into joining the practice, depending on specialty. Nevertheless, practices set this base salary in large measure on its consideration of the bottom-line of what amount the practice can reasonably expect to collect in fees from this physician’s services.

The problem with this compensation model is that it is somewhat antiquated, given the dynamic changes occurring in how physicians in private practice are being reimbursed for their services with the move, both by Medicare and private insurance carriers, to value-based care (VBC) compensation arrangements. VBC compensation, as compared to FFS, is calculated on the quality of the healthcare services and the costs for them, as measured against a matrix of predetermined quality and efficiency (cost) standards. These include the quality of patient outcomes, the amount of services provided by the practice to achieve these outcomes, and cost savings for these services and outcomes.

The most easily understood example of VBC is increased reimbursement to an internist who, through high quality patient care management, reduces the incidents of prescriptions for high cost pharmaceuticals for patients with diabetes, and who reduces the incidents of hospitalization for diabetic patients due to hyper or hypo glycemic episodes.           

Many physicians may not realize the extent to which both Medicare and private insurers have already implemented VBC compensation models, while still maintaining a significant portion of physician compensation using the traditional PFS model. For physicians whose practices are not participating in an Accountable Care Organization (ACO), the most relevant Medicare VBC program is the value-based modifier. In a nutshell, the value modifier provides for an enhanced payment to a medical practice, above the standard PFS amount for a particular service. This value modifier is calculated on an evaluation-again employing a predetermined matrix of performance/cost standards-of good clinical outcomes provided, as compared to the cost.   

In 2017, Medicare began applying this value modifier to solo physicians and to physicians in groups of two or more. In 2018, Medicare is applying this value modifier to physician assistants, nurse practitioners, and clinical nurse specialists in groups of two or more practitioners. Of course, to be eligible for value modifier payments, Medicare requires that the practice comply with the additional reporting requirements under the Physician Quality Reporting System, which, in itself, may increase administrative overhead thereby reducing efficiency.

Private insurance carriers and Medicare are also rapidly moving toward VBC reimbursement models. For example, twenty major healthcare systems and payees are the members of the Healthcare Transformation Task Force, a nonprofit healthcare industry consortium, pledged in 2015 that by 2020, 75 percent of their business would be converted to value-based payment arrangements. These systems/providers include Boston-based Partners Healthcare, Michigan-based Trinity Health, Aetna, Blue Cross/BlueShield of Massachusetts, and Blue Shield of California. According to Forbes, as of February 2017, United Health, Aetna, and Anthem reported that nearly 50 percent of their payments for healthcare services were through value-based compensation models; and later in 2017 Forbesreported that Anthem was at nearly 60 percent. The Blue Cross/Blue Shield Association, comprised of thirty-seven members throughout the country, reported that in 2015 more than 60 percent of their medical payments were to physicians and hospitals that participate in one of their value-based, patient-centered programs, and that for 2017 its members intended to increase their investments in value-based payment models. For 2018 CMS aimed to spend 50 percent of its Medicare fee for service payments through alternate payment models, and to link 90 percent of these payments to some quality of care measurements.

These statistics are not singing the dirge for productivity based compensation. At a recent Brookings Institute event, entitled “Medicare Physician Fee Schedule and Alternative Payment Models”, the presenters agreed that the PFS model will still be a major Medicare compensation component for a long time to come. They expect this to be true for private insurers as well.  The thought is that, to decrease the cost of healthcare, physician productivity still needs to be encouraged through compensation, while also compensating for quality care, lower costs, and efficiency. So there needs to be a balance between these two compensation models with both existing side-by-side, as with the Medicare value modifier actually being a component of the PFS.  I believe the portion of the physician’s compensation that will be based on each model may vary over time based on market and other forces. Productivity may receive greater emphasis when there is a shortage of physicians, such as the enhanced payments provided by the ACA under Medicaid for primary care physicians due to their shortage.

The problem for medical practices is that all these VBC compensation payments are calculated on an evaluation of the practice as a whole, and not the individual physicians and other licensed providers in the practice. Consequently, the weakest physician in the practice-in terms of the quality/efficiency standards of whatever VBH program(s) the practice is participating in-may prevent or reduce the entire practice’s financial rewards from the program.

ACOs in the Medicare Shared Savings Program (MSSP), which is a VBC compensation program, have developed their own internal quality/efficiency matrixes for determining how the ACO will allocate the bonus payments it has received among the physician practices participating in the ACO, depending on each practice’s comparative rating in this VBC program. 

In my opinion, forward looking medical practices will need to develop similar matrixes and new compensation models for their physicians and other licensed providers which balance a provider’s productivity, quality of care and cost effectiveness, in determining overall compensation for that provider. The real trick will be how to do so while maintaining relative peace within the practice.

Dennis J. Alessi, Esq, is a member and co-chair of Mandelbaum Salsburg’s health care law and employment law practices. He has represented various types of healthcare and related companies, as well as individual professionals.  Dennis also represents employers in all aspects of employment law and human resource management.