Many health systems now are making enormous financial investments in population health infrastructure, including IT solutions and care management infrastructure, to succeed under emerging alternative payment models (APMs).  And consolidation continues at a brisk pace, as systems look for cost synergy and capacity to manage risk.

As systems position themselves for value-based contracting with these high-dollar investments and business deals, they risk undermining their efforts by continuing to compensate employed physicians based almost exclusively on productivity.  Under fee-for-service (FFS) reimbursement, such a compensation plan aligns hospital and physician incentives.  Under emerging APMs, however, these productivity-based plans place a health system and its physicians at odds.

Today, most physician compensation plans focus almost exclusively on generating volume: the more services a doctor personally performs, the bigger his or her paycheck.  Some systems now are putting a small percentage of compensation (typically 2-5%) at risk, based on a physician’s scores on specified performance measures.  The impact on physician behavior, however, is limited; physicians may master the measure, but remain focused on volume, not value.

Consider the findings of a recent nationwide survey regarding physicians’ perceptions of the prevalence, causes, and implications of overtreatment.  Respondent physicians represented a variety of specialties and practice environments: primary care providers and specialists, non-profit and for-profit entities, urban and rural, and academic and non-academic.  Collectively, this cross-section of physicians offered reliable, first-hand knowledge of healthcare utilization patterns.

According to the survey, physicians believe 20% of overall medical care is unnecessary.  More than 70% of those surveyed believe physicians are more likely to perform unnecessary procedures when they profit from those services.  And most physicians believe that de-emphasizing the FFS model would drive behavior change and limit overutilization.

If a system desires to deliver the right care at the right place at the right time—the key to success under value-based contracts—it cannot afford to reward physicians for simply delivering more care.  New compensation models should incentivize physicians to improve quality by reducing variation, to coordinate care with other providers, to more actively manage patients with chronic conditions, and to promote healthy lifestyles.

As we’ve heard many times, the most expensive piece of equipment in any hospital is the “physician’s pen.”  Success under value-based contracting also demands a high degree of operational efficiency, and physicians can play a key role in reducing costs.  Thus, in addition to incentivizing high-value care, new compensation plans also should reward physicians for helping lower overhead, such as labor and supply costs.

Of course, physicians are unlikely to embrace changes to a compensation model that has treated them well over the years.  The first step, therefore, is making the case for change by explaining the transition from volume to value and the opportunities it presents for physicians.

Physicians know well the value they can provide, and thus their participation in model design should be solicited and welcomed.  To the fullest extent possible, the process should be transparent, an essential ingredient in building trust.  The new model’s implementation should be phased in over time, with routine re-evaluation to identify and address unintended consequences.

Successfully managing the re-design of a system’s physician compensation plan will be challenging, requiring significant investments of time and effort from senior leadership.  There are few proven models one can simply replicate; each value-based comp model is a custom-build.  However, aligning physicians’ interests with the system’s goals will define the success of your value-based strategy, more than any IT solution, data analytics capabilities, care management infrastructure, or other business deal.