It is critical for merger and acquisition deal makers to consider how current physician compensation models align with future physician compensation and alignment strategies, including alignment with changing reimbursement models and attracting and retaining key talent.
Physician compensation practices are changing in response to forces transforming the healthcare delivery model — from the shift to value-based payments and increased cost pressures, to the need for improved hospital-physician alignment and coordination of care. As the post-healthcare reform world continues to unfold, it brings with it further industry consolidation, resulting in larger, more complex organizations as well as demand for new leadership skills and growth in employment arrangements for physicians. Consequently, it is critical for merger and acquisition deal makers to consider how current physician compensation models align with future physician compensation and alignment strategies, including alignment with changing reimbursement models and attracting and retaining key talent.
The rising demand for physician services is outpacing supply and exerting upward pressure on pay. But value-based reimbursement and alternative payment models provided for in the Patient Protection and Affordable Care Act, such as accountable care organizations and patient-centered medical homes, will make it difficult for organizations that employ physicians to sustain current payment levels. In addition, as their roles expand and shift, physicians increasingly expect additional pay for additional duties, including medical directorships, on-call coverage and supervising advanced-practice clinicians (e.g., nurse practitioners and physician assistants). Moreover, they are also seeking increased flexibility in managing their time on and off the job.
Because the value of physician compensation is often measured in relation to work effort such as productivity (e.g., work relative value units, patient encounters, collections) or time (shifts or hours worked), acquiring organizations need to look beyond physician costs on a financial statement. For example, merging organizations may need to reconcile different definitions of the number of hours that a physician must work to be considered a full-time employee, as well as varying expectations about the number of hours physicians should be available to provide patient care services. The expected number of annual full-time hours varies widely in the market, and a failure to clarify whether a full-time physician is expected to work 2,000 hours or 1,750 hours annually might significantly impact the value of the transaction.
In addition, some organizations allow physicians a certain number of hours each week for administrative time or paperwork. This may reduce the number of hours a physician is actually available for patient care, which also has a significant impact on the real value of both the transaction and the compensation arrangement. To accurately assess the value of physician arrangements during a deal, all physician compensation components must be considered in relation to the associated work effort.
An M&A transaction simply exacerbates the pressure on physician compensation models, given the incentives and potential risks of new reimbursement models. Hospitals are already facing potential withholds and penalties under Medicare's Hospital Inpatient Value-Based Purchasing Program, Readmissions Reduction Program and nonpayment rules for hospital-acquired conditions. Now, Congress proposes to consolidate existing physician incentive programs into a single Value-Based Performance Incentive Program, in which high-performing "eligible professionals"* would earn payment increases. Additionally, beginning in 2018, physicians who receive at least 25 percent of their Medicare revenue from an alternative payment model will receive a 5 percent bonus. The 25 percent threshold increases over time. Conversely, physicians who fail to participate in Medicare's Physician Quality Reporting System will receive a payment penalty beginning in 2015. Commercial insurers are also vigorously rolling out pay-for-performance programs.
These trends are affecting the way hospitals recruit, engage and retain physicians, as well as how they manage the transformation to models that reimburse for care coordination and improved quality and outcomes. While revenue from pay-for-performance and value-based reimbursement models may create potential new streams of pay for physicians, they also pose new risks such as lower reimbursements and pay cuts when quality or outcomes fall short of targets. Many activities that organizations need physicians to perform in order to achieve these new value-based care goals — such as patient management and care coordination — are not compatible with existing models of physician compensation, many of which are still heavily focused on clinical productivity. Because alternative payment models do not reward clinical productivity, organizations may need to forgo some volume-based revenue in the short run in order to build the competencies and infrastructure needed to be successful under alternative payment models in the long run. In the meantime, organizations will need to consider how to provide compensation and other workplace rewards for the behaviors and activities critical to providing value-based care.
On the other hand, since an acquisition or merger brings compensation issues to the fore, it can present an opportunity to move more quickly to adapt to the new environment. With all reward programs under scrutiny in an M&A transaction — from both a cost and effectiveness perspective — and physicians expecting updated, realigned reward programs, organizations can use the deal to bring compensation more closely in line with the new behaviors required for success under the PPACA.
Key to a successful rollout of a new physician compensation strategy is a thoughtful and robust communication plan. A successful transition depends on physicians understanding and accepting the new program’s rationale. Therefore, it is important to clearly define the links between pay and performance, and to communicate the details of the program’s operations and expectations. Organizations need to start building their communication and transition strategy early, articulating their goals and objectives, identifying the affected audiences and their unique information needs, as well as defining key messages and planning media tactics.
*Under the Physician Quality Reporting System, "eligible professionals" are those providing professional services covered under or based on the Medicare Physician Fee Schedule. This includes physicians as well as other practitioners such as physician assistants, nurse practitioners, clinical social workers, clinical psychologists, among others.
Alice King is a senior physician compensation and alignment consultant with Towers Watson. She can be reached at alice.king@towerswatson.com