By Dorrie Guest, managing director, and Howard Drenth, specialist executive, Deloitte Consulting, LLP

For many US hospitals and health systems, the COVID-19 pandemic exposed deep cracks in the foundation of the fee-for-service (FFS) payment model. In the early months of the pandemic, most non-emergency services were deferred, and revenue streams tied to volume dried up. At the same time, physician groups, hospitals, and health systems that relied more on value-based care (VBC) continued to take in per-member-per-month premiums and were less impacted by the ebbs and flows of the FFS model.

We’ve been talking about VBC for years now. But the penetration of these payment models—as well as delivery capabilities—has been slow to take root in many markets. When we speak with hospital and health system leaders, we try to emphasize that there is much more to VBC than signing new types of contracts with health plans. For example, financial incentives should be aligned to ensure that physicians not only buy into the new payment model, but also change their practice patterns. According to the 2020 Deloitte Survey of US Physicians, nearly all of the 680 physicians who participated said they still rely on FFS reimbursement and are on a salary for their compensation. About one-third of respondents (36%) said some of their income was tied to VBC.

There is no one-size-fits-all physician compensation model

Physician compensation is a complex, but critical lever in the VBC model. For example, innovative VBC models can be used to group certain types of physicians when they share patients. A model that aligns incentives for emergency medicine, hospitalists, and primary care physicians, for example, could help reduce new hospital admissions. This could make it easier for an emergency physician to discharge a patient to a primary care physician, rather than transferring the patient to an inpatient unit where a hospitalist would take over. However, without adjusting the compensation model away from pure productivity, this type of collaboration (for reduced costs and better outcomes) runs counter to historical practice patterns.

Primary care typically drives the quality part of the care equation, while specialists/surgeons tend to drive the cost side. Once VBC begins to make up a substantive percentage of the payer mix, organizations should consider how to incent desired behaviors among clinical staff to align with cost and quality goals.

The type of facility is one factor that should be considered when addressing physician compensation in a VBC model. For example, physicians in a primary-care practice, a surgical practice, and a hospital based practice will all look different. There might also be significant differences among the physicians within the same facility. Case in point: Physicians who work at an academic medical center might be predominantly involved in research and only see patients during clinical trials. Other physicians at that same hospital might be involved in teaching, and only interact with patients while conducting rounds with residents. Still other physicians might meet with patients throughout the day. There are also specialties and sub-specialties to consider. Payment models should also recognize a physician’s experience and tenure. A world-renowned orthopedic surgeon, for example, should earn more than a surgeon who is one year out of residency. 

Ensure that physicians have a voice

FFS can be a purely transactional model. A patient comes to a hospital or medical office, service is provided, the patient and/or insurer is billed, and the facility/medical group receives payment. Under the VBC model, physicians and care teams should have a financial incentive for preventing members from becoming patients in the first place. VBC is in line with physicians’ intrinsic motivation to deliver the best care to their patients. In our experience, refocusing work from productivity to value can bring more meaning to physicians’ work and help reduce burnout. However, getting physicians to embrace a new compensation model can be a challenge, as we noted in our report on physician-alignment strategies for health systems. Although no single compensation plan will work for all physician-employment arrangements, it is important that physician income correspond with clearly defined performance measures. Redesigning a physician-compensation model should include the following strategies: 

• Develop guiding principles: We recommend that any redesign of physician compensation include a set of guiding principles that align to the mission, strategy, and payer mix. The guiding principles should include input from physicians. Most physicians have spent their lives working with data and making decisions after analyzing information. If a percentage of a physician’s compensation is going to be based on quality measures, for example, physicians will likely have questions about the formula. Physicians who feel they share in the financial risk when caring for a population are more likely to accept new payment models. Involving physicians in the VBC design process—for example, as part of a physician compensation committee—could help encourage buy-in.
• Strive for consistency within—and equity across—specialties: Organizations should try to ensure standardization within specialties while recognizing their different contribution to the value equation. For example, primary care physicians (PCPs) might be seen as having more ability to drive quality, while specialists might be seen as having more of an impact on cost. A specialty-based incentive structure might consider panel size, quality, outcomes, productivity, and retention of patients within the defined network. The model should allow for some personal choice and preference at the individual level.
• Share data and tools to help physicians improve performance: Retrospective or population-level analytics could help physicians measure, track, and improve their performance. It’s not enough to just publish the compensation model and provide individual performance dashboards. Physicians should also have tools and support to help them translate data into areas where they can improve performance. Clinical decision-support systems should help ensure that the right treatment choice is also the easy choice for physicians. Care-management resources (e.g., health specialists, dieticians, pharmacists), combined with quality improvement consulting/resources, could help physicians elevate their performance.
• Ensure transparency: Physicians who are included in formulating a new payment structure are more likely to accept it and champion the change. Organizations should transparently disseminate their compensation methodology to the physician community and enlist peer champions with a deep understanding of the methodology to help their colleagues understand the new model.  
• Establish meaningful individual incentives: Physicians should feel financial and non-financial impact from their contribution (or lack thereof). Payouts should occur at a frequency that would make the amounts significant enough to foster changes in behavior. Moreover, a physician who wants to work 80 hours a week to generate more income should be allowed to do so under VBC. Similarly, a physician who wants more of a 9-5 schedule should have that option, too. Some physicians might be willing to give up paid parking for the ability to work fewer hours, for example. 

As hospitals and health systems take on more VBC, they should update their volume-based physician-compensation models to ensure they reflect the organization’s quality and financial goals. Health system leaders should proactively explain the reasons for the change by shedding light on the benefits for both physicians (higher compensation) and patients (better outcomes). But an effective transition to value-based care cannot happen without getting physicians on board. Physicians who are given leadership roles for developing compensation models could help champion the change. 

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