Understanding Value-Based Compensation Models

How should physician compensation models evolve with the shift toward value?

Physician compensation models include many components and incentive structures. Our industry has been experiencing a shift from volume to value since the passage of the Affordable Care Act (ACA) in 2010, with Alternative Payment Models (APMs) and other value-based reimbursement mechanisms gaining traction in recent years. As of 2018, APMs made up approximately 36% of total U.S. Healthcare payments compared to just 25% in 2015. Additionally, almost 2/3 of Medicare beneficiaries were enrolled in Medicare managed care plans or assigned to an accountable care organization (ACO) in 2020.

These statistics beg the question, how should physician compensation models evolve with the shift toward value?

The key is to keep compensation incentives proportionate to revenue streams. Due to reimbursement structure, most organizations still rely on volume as an essential factor. Therefore, value-based non-productivity incentives range from 10-20% of projected total cash compensation (TCC) in primary care and 5-10% for specialists.

According to the 2020 MGMA Compensation and Production National Survey, total compensation is “the amount reported as direct compensation plus all voluntary salary reductions and should include salary, bonus and/or incentive payments, research stipends, honoraria, and distribution of profits.”

If we follow the definition, the compensation per wRVU market data reflects all forms of compensation, including value-based non-productivity incentives. Thus, all other types of compensation should be carved out of those market-based rates instead of added on top.

Consider a top-down approach to pay for non-productivity incentives that encompass an allocation of the value of the compensation per wRVU market rates. The compensation per wRVU market rate is allocated to different incentive categories weighted in proportion to revenue streams using this approach.

Allocation of Value Example

If the median rate is $50.00, the wRVU incentive value is $40.00, with the value-based performance incentive value likely associated with quality, creating up to a $10.00 per wRVU opportunity. We use the terms “opportunity” and “up to” because the total amounts depicted may not always be paid.

It is common to implement a tiered performance rate structure where varying levels of performance reward full and partial credit. Physicians will likely appreciate having such a structure, especially in scenarios where physicians are transitioning to these incentives.

There are many factors to consider when selecting value-based metrics. Best practice aligns measures that drive desired physician performance improvement to those that influence reimbursement. Maintain a coordinated strategy for value-based metric selection to ensure payer requirements overlap and focus on a low number of measures. The list should be short, especially at first, so that physicians can channel energy into specific initiatives, and the list is not unmanageable to track. Be mindful that diminishing returns may result from having too many measures.

Value-based performance incentives are most often tied to quality measures that a collaboratively derived physician committee chooses. Other forms of non-productivity incentives may come from panel size, patient satisfaction, adherence to group processes, or ad hoc objectives the organization wants to influence. No matter the metric, establish an objective scoring mechanism and implement a tiered system to award partial and full credit.

Next Steps

Originally published July 16, 2019. Last update September 7, 2021.

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