Briefing Paper Physician Compensation Models: A Difficult Era
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Š Tom Ealey 2012
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Author's Bio: Tom Ealey has three decades of health care experience, including work as a CPA (Ohio), management consultant, writer, seminar leader, public policy wonk and medical practice executive. He writes and lectures regularly for national health care organizations, and is a professor of business administration at Alma College in Alma Michigan.
Contact Information: Tom Ealey ealeypublishinging@gmail.com (989) 285-4868 cell (989) 463-7135 office
To download a copy of this paper and other related materials: http://issuu.com/ealeypublishinginc For topical and related materials see: http://healthcarethinktank.blogspot.com/ http://practicemanagementnews.blogspot.com/
Special thanks to: Janelle Dickman Alma College
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INTRODUCTION: This is the decade of dramatic change for physicians! Federal health care reform, economic pressure, demographic pressure and a generalized dissatisfaction with the U.S. health care system have created a “perfect storm” of reform fervor. There is general agreement that the current system is not working for many patients, the current system does not provide outcomes commensurate to the spending, the current system is not working for the economy and the current system is not working for employers. The health care reform act (now largely ratified by the U.S. Supreme court) is the main driving force, with the other pressures coalescing around the Obama reforms (referred to here as “PPACA” or “ ACA”). This article focuses on two physician practice formats and does not discuss academic physician practices or hospitalists. The intent is to have an impact on the majority of physicians and maximize usefulness for practice administrators.
________ The Patient Protection and Affordable Care Act of 2010 [P.L. 111-148 3/23/2010], as supplemented by the Health Care and Education Act of 2010 [P.L. 111-152 3/30/2010]
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CHAOS REIGNS Could this all go away someday? The Clinton-era attempt at health care reform did not become law, but did kick off a substantial wave of reform efforts, including a wave of physician employment in hospital-owned Medical Service Organizations (MSOs). Whether PPACA is wholly successful or not, the tidal wave of reform efforts will not be stopped, and the shape of U.S. physician practice will be dramatically altered. Even if the political winds were to change and PPACA were to be substantially repealed, the operational and financial changes now in process will not evaporate and there will be no return to an earlier era. The era of uncertainty Congress has been patching and procrastinating on the Sustainable Growth Rate (SGR) system for more than a decade with no sensible solution in sight. During the “fiscal cliff” dispute, the SGR was patched again. The PPACA reforms have dropped many more such complex issues onto the to-do lists of Congress and the bureaucrats, and the resolution of those issues is mandatory in the midst of a divisive political environment. Complexity, economics and demographics drives uncertainty; and these factors make compensation modeling and monitoring even more complicated. Practices should be prepared to evaluate compensation programs constantly and to restructure compensation programs as often as every other year.
Customizing for practice group All physicians and all physician practices are not created equal. There are: • • • • •
Single specialty – medicine Single specialty – surgical Multispecialty – medicine only Multispecialty – medicine and surgical Single focus service specialty – E.D., anesthesia, radiology, pathology, etc.
All of these have differing service and revenue models, will feel different impacts from reform and will need differing compensation models.
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Other important factors could be • •
Extensive ancillaries within the practice Ownership or attachment to an ambulatory surgery center or specialty hospital
There is no one solution and not even a standard model for these typical practice types. Compensation models will have to be customized for a number of issues – geography (urban differing from rural for example), integration types and levels, relevant payer changes and reforms, the products in the state health care insurance exchange, and the payer mix of the practice population. Primary care Much of the buzz on reform and compensation focuses on primary care. Primary care will need better reimbursement and related structural changes to meet the desires of the politicians. Creating, staffing and financing a primary care organization will be among the toughest challenges in the health reform era. Some of the demand for services will be met by mid-levels, but we also need more primary care physicians, and this will require improved compensation and quality of life models.
Physicians in private group practice We think private group practices will survive the great upheaval, but group practice compensation models will be subject to major overhauls maybe even radical overhauls. Old norms and models will be seriously obsolete very soon. New models will be required, and new support mechanisms will be a must, New sophistication will be required in these practice management areas: • • • • • • •
Group governance Accounting support Cost management Data manipulation Physician contracting Compliance Payer relations
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The revenue ratchet More than a few government officials and policy wonks believe physicians are seriously overpaid (the highest estimate seen so far was $400 billion a year). Economists have been particularly vociferous in criticizing both the current system and the reimbursement of physicians. Many on the political left believe either a single payer system or a European employment model would be appropriate for U.S. physicians. Health care costs are targeted to be reduced to a more sustainable percentage of Gross Domestic Product (GDP) by both ends of the political spectrum. “Save Medicare” is a constant political cry from many parties. Revenue is going to be ratcheted down via a variety of mechanisms, and the result will be lower take home pay for many physicians. One consistent policy desire is that income should be shifted from specialists to primary care, and this theme will be executed in a variety of ways over an extended period of time. The cost crunch As payers ratchet down reimbursements, regulations and business demands will ratchet up practice management costs. Practices will likely face lower revenues but require more sophisticated (therefore expensive) staffing. Toss in electronic medical records, and the ICD-10 conversion and administrative costs are going up. Physician executives and practice administrators must collaborate to get the most from each dollar and adapt to changing conditions. Physician in practices owned by hospitals and integrated networks There is a mad scramble for hospitals and networks to purchase physician practices and/or to direct hire physicians. Since work as hospitalists is not practical for most physicians, the owner will have to manage and maintain those group practices indefinitely with employed physicians. A caution – during both the 1990s and the current Obamacare acquisition frenzy, the eventual owner of the practice often 1) is paid too much to buy the practice likely to be repeated, at least not as often and 2) gave overly–generous or dysfunctional contracts to physicians. The result was chronic losses and chronic cash drains. A third error: being clueless about operating physician practices. The owner parent may adopt one of these financial models: 8
1) 2) 3) 4) 5)
break even on the physicians controlled loss on the physicians simply lose tons of money charge forward with no clue what the model is customized the model for each group of physicians
The days of deep pocket hospitals are likely over, the days of deep pockets anything is probably over. Better management is a necessity. Physicians in Alternate Employment Models Health care insurance companies are buying primary care practices and building company owned primary care networks. The physicians in these situations will have essentially the same compensation and contracting issues as physicians in hospital/network owned practices. Assuming the insurance company is the primary (but probably not exclusive) payer there is some wiggle room in the revenue model, but even health insurance companies probably cannot afford over paid physicians and practices bleeding cash. As the system evolves, this topic will require further attention. Physician Assistants and Nurse Practitioners (“mid-levels�) There has been, and will be, increased utilization of mid-level providers in the office, in the hospital and in community-based services. Physicians will have supervisory roles and be part of the documentation chain. As primary care is restructured (hopefully enhanced), there will be higher patient volumes in primary care offices and clinics and probably also in internal medicine offices. It is unlikely the demand for primary care services can be met by primary care physicians. In some areas, there may be significant shortages - more significant than we face now (this is a neglected public policy issue). As PAs and NPs take a larger share of the primary care role, we need to develop compensation programs workable for both the mid-level and for the practice. ALIGNMENT: The hottest buzzword this year is alignment. In general, the word refers to the alignment of physician conduct and practice with the interests of other participants 9
and stakeholders; including hospitals, allied and ancillary providers, private payers, government payers, and of course patients. The interests of these parties include quality improvement, cost management, wise utilization of resources and regulatory compliance. “Systemness” This (clumsy) word represents a need and a requirement to think as a member of some system, whether it be as a hospital employee physician, as a physician member of an accountable care organization, as a hospitalist, as a private practice physician engaged in an integration effort or as a physician–executive in one of these settings. Many of the “systems” are just now being formed, will be formed in the future, or most likely will be formed in a long evolutionary process, perhaps lasting until the end of this decade. Whatever the practice format, physicians will need to adjust to new forms of practice and new forms of compensation. P.W.W.O. (playing well with others) “Playing well with others” will be a major alignment factor. In the era of independent physicians with hospital privileges and fee-for-service payment, hospitals would tolerate some less than adult behavior because physicians could potentially move to the hospital down the road and take a volume of patients with them. It was all about the volume and the revenue stream. No more. With the new models of practice and new models of payment, hospitals and networks will have different needs and different incentives and organizations will be less likely to tolerate prima donna behavior. The days of red-faced temper tantrums, tossing surgical instruments across the OR, and disrespecting staff will likely soon be over. Physician-Executives There will be new roles for physician–executives in the new order of business. The selection and development of these new leaders is rapidly becoming a major issue and major management issue. There will be a great deal of work building relationships and trust among and between physician–executives and practicing physicians. Such innovations as the medical home will require improved coordination among providers and less of physician as boss sending orders down a pyramid structure. Physicians will have to coordinate carefully with nursing both in and out of the hospital, ancillary providers and nursing home and home health care providers.
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Compliance Compliance programs will play a major role in the new provider models and provider systems. If some physicians have not taken compliance seriously in the past, the new era will require a commitment to institutional and group practice compliance programs. With the potential revenue losses, penalties and bad publicity compliance will be a major emphasis. In an era dominated by data collection, data analysis, a constant emphasis on specific metrics and an increased audit effort by payers, compliance will not be a back-of-mind activity. PPACA (Obamacare) is moving compliance from the “recommended” era to the “mandatory” era (details pending). The federal government is ramping up auditing and enforcement efforts (RAC audits for example). Consider the laws and regulations creating compliance program needs • • •
Anti-kickback False claims Stark (I, II, III)
For not-for-profit entities employing physicians, accounting and legal counsel should be consulted and kept close at hand to advise on private inurement issues.
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CHANGING TIMES Goodbye fee-for-service Since the days when country physicians took baskets of vegetables and live chickens as payment, payment for services has been focused on fee-per-service (FFS) model. Over the years, FFS has evolved into a complex system made operational through thousands of CPT and ICD-9 codes and billed via complex IT systems. FFS has also evolved into a game of payment for volume, revenue is higher when more work is done and more work is good even if the necessity of the service is questionable, or the quality of the service is not acceptable. FFS is not going away anytime soon, but FFS will steadily fade away as new models develop and evolve. Productivity per se is not going to fade away; population pressures will put pressure on physicians to see more patients. Where and when they see the patients and how they treat the patient will change steadily. Bundling Bundling is the favorite fad remedy of Medicare officials, a near “sure thing� to control costs without harming access or quality - the silver bullet in the brave new world of health care. Beware of miracle cures! Bundling (aka episodic payment or payment-per-episode) involves the payment of a single fee per episode of care (for example, a femur fracture) with the fee split among all providers (the hospital being the most likely controlling entity; although that is not an automatic, some physician groups could become bundlers). The theory goes like this – all of the providers pre-negotiate a fee structure so each provider is paid and each provider has plenty of incentives to deliver highquality cost-effective care with an emphasis on the cost-effective. Medicare enthusiasm is based on very few limited pilot projects; a major trial run has not occurred so far. The Rand Corporation, with a longer record of research on bundling arrangements, is much less convinced of the viability of bundling arrangements. IF, repeat IF, this becomes a common model as Medicare expects(and hopes), physician compensation will be under intense pressure. Is bundling the payment mechanism capable of destroying private practice? Time will tell. 12
Data, data, data The new compensation models, driven by the new payment and reimbursement models, will require massive, sophisticated data processing systems at the practice, hospital, system, insurer and government levels. Memberships in ACOs will require a capability to review and audit information summaries from the ACO, particularly when compensation is dependent on ACO data sets. Norming Physician compensation and evaluation systems will be directed at norming, which is looking for outliers on either the good end or the bad end of the distribution. Someday physicians may well be fired and/or removed from hospital privileges for being outliers on productivity, quality and/or cost.
Selecting metrics and balancing measurement factors Physicians will hear the word “metrics� until their ears bleed. Practice administrators will need to develop sophisticated new systems to track data and dollars. Consider some of the possible measurement factors: Productivity Productivity measurement will be with us and will be familiar to us for some time because fee for service will be with us for some time to come. Gradually there will be less of an emphasis on fee-for-service as volume of care becomes less important than quality of times. Quality outcomes Quality replaces quantity as the key indicator - a needed but radical shift in measuring medical practice. The federal government is obsessed with improving outcome measures commensurate with the rest of the 1st world countries. 13
Cost control The days of defensive “order everything just in case” will soon end if not already. Cost effective quality outcomes will be important. Trauma call The staffing of hospital trauma call continues in importance but the staffing model will likely be different, and the mode of payment will change (hospital-employed surgeons likely are already in the rotation as part of the contract). How trauma call will play out for private group physicians is still in flux. As the percentage of physicians in private practice diminishes, new models are likely. Specialty specific issues Some specialties, especially those performing large volumes of service for Medicare, will be targeted for more intense changes, for example cardiology and orthopedics. Compliance (coding, chart completion, etc.) In an era or mandatory compliance programs, coupled with more intense auditing and investigations, the compliance efforts of physicians will be critical. With more physicians working in larger and more bureaucratic organizations, physicians will find compliance to be a “shall do” rather than a “should do” function. Physician compensation may be targeted with a carrot-and-stick compensation system. Administration The complexity of PPACA-inspired organizations will require tremendous administrative efforts, both from full-time physician-executives and from many physicians within the practice in part-time and support roles. Compensation models should consider this administrative effort and attempt to reward the work, particularly if the efforts are not balanced within the group. 14
MODELS:
Complicating factors Practices will be required to make projections into an uncertain future with multiple relationships and variables difficult to predict. Not only will projections and resulting models have to track moving targets, but are the equivalent of hitting moving targets in the dark. Entering “the Matrix” As simple compensation models are replaced by multi-faceted compensation plans, we will need to develop appropriate matrix or rubric forms to make the necessary calculations. The shift away from productivity and cash produced will require better data, better modeling, better quality measurements and better evaluation techniques. Reward / Risk / Reward-risk Those physicians on the leading edge of innovation (ACOs, bundling, etc.) are soon going to learn about reward and/or risk sharing models. We do not know if these new financing and operating models will work, how the models might work, or if the models might crash-and-burn. We do know fee-for-service is going the way of the dodo bird, and something or things will replace FFS. Modeling the model Each group will need to “model the model” before contracting and implementing the model. This will be of interest both on the group level and as individual physicians look at future compensation (sophisticated spreadsheet design will become a part of the administrative routine). The model must start with accurate historical data (dollars and statistics), and the historical data must be used to make projections of future activity. This may not be easy; the pace of change may make projections squishy at best. Reasonable projections are, however, better than no projections at all.
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Explaining and selling the model In the private group, consensus- building will be critical and perhaps not easily achieved. (In hospital owned settings, consensus will be important but somewhat different and will be more critical in competitive markets and for retaining high achievers and “name” physicians.) The physician-executive charged with explaining and selling the program must be thoroughly prepared and must have anticipated questions and must be prepared for unpleasant feedback. Anyone who has to sit down a large group of physicians to discuss a difficult topic will have some justified trepidation at commencing this conversation. A little fear can create focus and force preparation, forcing a little optimism. Contracting the model Here the group needs lawyers well versed in health care regulation and law and well versed in physician contracting. Great precision must be used in laying out the model and the supporting number crunching; anything less is an invitation to eventual litigation with some unhappy physician (never assume lawyers, even very good lawyers, are number geeks or use the correct economic and reimbursement terminology). Beyond the standard contract language, there must be some additional language: • • • • •
Changing the model mid-contract (group wide or at the individual level) Updating the model for payer and/or regulatory changes Changing the model if some payment scheme or another fails Changing the model if the model is inherently flawed See the “other issues” section below for additional matters
Reviewing the model When a model is established, the evaluation and feedback mechanism must be put into place. Unlikely the relatively simple models of the past, such as the “which doc is grumpy” feedback loop, are no longer adequate. The feedback loop will eventually need to accept and evaluate diverse data such as ACO reports, hospital quality and outcome reports, bundling payment data, and 16
perhaps others yet to be designed. The feedback loop must be thorough, quick and accurate’ - perhaps not an easy task.
Updating the model At a minimum, we see models (and probably contracts) updated every two years and perhaps every year (and your contracts should allow for event-based adjustments anytime). Expect to ride this roller coaster for at least 5 – 10 years. Other modeling and contracting Issues: There are many other operational and contractual issues to iron out before new models are implemented and during the new era of physician practice. Terminations This has never been easy or litigation-free and is likely to get worse. Some physicians will not be happy with their work lives, and others will be unable to adjust to a new work and reimbursement model. Contractual language must be clear, both for the process and the financial settlement. The practice should always function as though litigation is forthcoming, particularly in data collection, summarization, analysis and reporting. Retirement and phase outs Current contractual language and financial settlements at retirement may need to be changed in upcoming contracts. Hospital-employed physicians should look to contract language and be very clear about the notice and timing requirements. Disability Processes to approve and fund short and long-term disability will likely be 17
changing. Maternity / family leave As the percentage of female physicians has grown (new grads about 50%), medicine has improved in many ways, and maternity leaves are a much larger concern. (And don’t forget many dads may wish some family leave time as well a decided change.) Gender cannot be considered in hiring decisions, but it is difficult to not consider gender and age when assembling a physician group. Multiple maternity leaves in a compressed time span can put a practice in difficult circumstances.
Part-time physicians Among the younger, and especially the female, physicians, life choices may weigh just as heavily as work and compensation. Part-time physicians can be beneficial in some practices, a major headache in others (especially surgical practices). This issue is not going away, so practice should have a thorough discussion and develop consensus before.
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SUMMARY: A new era is beginning, an era of complexity and chaos and probably the proverbial three-steps-forward-two-steps-back type of progress. Physicians and practice executives must collaborate on new systems, new methods and new models. This will not be easy.
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