Published August 28, 2018

Physician Quality Performance and Compensation: 3 Questions to Help Your Hospital Assess the Use of Quality Metrics in Physician Contracts

Increasingly, healthcare organizations are incorporating quality performance compensation and pay-for-performance initiatives in contracts between hospitals and physicians.  Offering quality compensation bonuses to physicians has become a common way of aligning physician incentives with organizational goals of improving patient care.  However, doing so in an effective and compliant manner can be more challenging.  This article considers three key questions which, when answered, will assist organizations with the implementation or continued use of quality metrics in physician arrangements.

The Statistics

In the last three years, virtually all (or more than 75%) of the physician compensation valuation assignments we have performed across a myriad of specialties have included some portion of at-risk compensation tied to quality.  Consistent with our experience, multiple compensation surveys illustrate a similar trend.  According to the Sullivan, Cotter and Associates, Inc. (SullivanCotter) 2017 Physician Compensation and Productivity Survey Report (Compensation Survey), 91% of organizations surveyed used quality measures in their compensation plans for at least some employed physicians.  Further, approximately 35% of these organizations reported they anticipate a change in the balance between productivity and non-productivity compensation within the next 12 months to include more quality components.  Additionally, 49% of respondents to the American Medical Group Association’s Medical Group Compensation and Productivity Survey: 2017 Report Based on 2016 Data offered incentive compensation opportunities tied to something other than providers’ direct production performance, such as patient satisfaction.

Three Questions to Consider

While not an all-inclusive list, the questions below can help ensure quality performance metrics have their desired effect.

  1. Is the quality performance compensation “at risk” or “in addition to” the physician’s historical compensation? Quality performance compensation may be at risk (whereby a portion of the physician’s compensation is withheld based upon the achievement of the quality performance metrics), or in addition to a physician’s compensation (whereby the physician will receive additional compensation based upon the achievement of the quality performance metrics).  Both compensation methodologies may be effectively utilized provided total physician compensation is representative of fair market value and is commercially reasonable.  Often, organizations that are beginning the transition from “volume” to “value” may place compensation in addition to their base using quality metrics that help meet, or partially exceed, the current standard of patient care.  Choosing this approach initially ensures that physicians have an incentive in the advancement of quality metrics.  Ultimately, however, it is likely that organizations will place compensation at risk to a physician’s base compensation in order to develop compensation methodologies more entirely focused on the value of the healthcare provided, instead of the volume.  Many physicians are already familiar with at-risk compensation through their participation in the Merit-Based Incentive Payment System (MIPS).  Under MIPS, physicians may lose—or gain—a percentage of Medicare reimbursement based on their performance across a variety of quality and performance improvement measures.
  2. How much of the physician’s salary is at risk? Based upon information reported by several benchmark compensation surveys, the average percentage of compensation at risk based upon quality performance has steadily increased over the last several years, implying organizations are asking physicians to focus greater attention on the quality of care provided to their patient population.  For example, according to the SullivanCotter Compensation Surveys, in 2016, 7.1% of a staff physician’s compensation was at risk for meeting quality metrics, while in 2017, the at-risk ratio rose to 9.1%.  While these numbers represent averages, we have observed a growing trend toward higher physician compensation amounts tied to meeting quality metrics.  Some common themes are:
    • Greater at-risk percentage of physician compensation results in greater incentive for the physician to meet or exceed quality performance metrics.
    • The performance of annual evaluation of quality metrics allows for the opportunity to adjust physician performance.
    • Higher physician quality performance expectations generally result in an increase in the amount of compensation budgeted for physician achievement (i.e., the concept of low risk/low reward vs. high risk/high reward).
  3. Using a basketball metaphor, do the quality performance metrics represent a “lay-up” or “three-point shot?” In basketball, the skill required to make a three-point shot is greater than the skill required to achieve a lay-up, simply due to the distance between the three-point line and the basketball goal.  For this reason, a three-point shot rewards a player with 50% more points than a lay-up.  Quality performance metrics may be evaluated in the same vein—those more challenging, focused more on clinical outcomes, as opposed to clinical processes, should generally be rewarded accordingly.  And, historical performance is often a good starting metric, but national quality metric benchmark data can also be helpful in setting achievement levels.  Finally, periodic evaluation of actual physician performance against target quality metric performance is important in determining whether quality performance metrics should be modified.  For example, even if a physician is continually meeting 100% of a quality achievement level, the quality of patient care may not necessarily be improving, in which case, the quality metric and/or expected quality metric target level may be changed to enhance relevance and to encourage the desired outcome.

Final Thoughts

As the healthcare industry continues to transform from volume to value, hospitals and physicians should collaboratively consider the aforementioned questions, along with others, in the development and maintenance of plans aligning quality performance metrics and physician compensation.  Further, both parties should have a thorough understanding of goals to be accomplished via the use of specific quality performance metrics.  If quality performance metrics are properly planned and implemented, physician incentives may align with hospital goals, and patient care can be improved while objectively and fairly compensating physician participation.  If you have any questions about quality performance metrics and/or their usage in physician compensation structures, contact a PYA executive below at (800) 270-9629.

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