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Aligning Value-Based Reimbursement With Physician Compensation

By Lloyd Arakelian on September, 11 2012
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Lloyd Arakelian

Compensation May Become Dependent on Case Outcome

Authors: Lloyd Arakelian and Shawn Frier

Accountable care

The Patient Protection and Affordable Care Act (PPACA) offers hospitals multiple options for providing care and paying providers, such as forming accountable care organizations (ACOs). CMS will reward ACOs that can reduce costs while still meeting performance standards on quality of care. Provider and patient participation in an ACO is strictly voluntary.

But even if you don’t plan on forming a CMS-inspired ACO, you can still develop a compensation system that works toward improving outcomes and cutting costs. This will probably require new physician performance metrics that put less emphasis on volume and greater focus on quality factors, such as patient satisfaction, efficiency and readmission rates. (Keep in mind that any new compensation plan that involves nonemployee physicians will need to comply with the Stark Law and the antikickback statute requirements regarding commercial reasonableness and fair market value.)

Compensation models

Several value-based compensation models are gaining attention, including:

  • Bundled payments. CMS is running a pilot program for the bundled payment model in several hospitals. It makes a single discounted payment to hospitals and physicians for a defined group of services provided to a patient within a specified episode of care, such as heart bypass surgery. Instead of a surgical procedure generating multiple claims from multiple providers, the entire team is compensated with a bundled payment.
  • Pay-for-service / fee-for-service. In this model, physicians are paid a negotiated amount for each service, with additional incentives based on quality, costs and patient experience.
  • Shared savings. With this model, providers that work together to meet quality standards based on outcomes and care coordination share in the savings they achieve on the targeted costs.

The path to success

Physicians might want to fight change, especially if it involves their compensation. But, by following the steps below, you can smooth out the transition:

  1. Define your hospital’s strategic goals. Start by defining the strategic goals so you can align the incentives to accomplish those goals. If you want to score a certain rating on the Hospital Consumer Assessment of Healthcare Providers and Systems patient experience survey, for example, part of your physicians’ compensation should be based on their individual scores on the physician communication measure.
  2. Get physician buy-in. Physician buy-in is critical to the long-term success of organizational change. Make sure you engage your hospital’s physicians in the process by, for example, giving them representation on the accountable care team that will identify the optimal clinical practices and establish performance metrics.
  3. Offer feedback. Give your physicians feedback on their performance before they see the consequences of any underperformance in a smaller paycheck. Track their performance regularly and offer timely reports in one-on-one meetings. Solicit feedback on any performance hurdles they’re confronting, and provide physicians aggregated reports of clinical data that demonstrate how their efforts are improving quality.

Take care

Although the change to value-based reimbursement seems inevitable, don’t rush into such a dramatic and alarming change. Make sure you take a step-by-step approach, introducing a few new components at a time.

For any questions on value-based reimbursement or any other healthcare concerns, contact us here or give us a call at 716.847.2651.


Third-party and governmental payers are moving rapidly to value-based reimbursement — in effect, leading to a shift from the traditional physician compensation model toward a new focus on quality outcomes. If you haven’t moved in that direction, start thinking about how you should change compensation plans to reflect an environment that emphasizes pay for performance and accountability.

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