Fair Market Value & Quality Incentives

From a Fair Market Value (FMV) perspective, the process of tying quality metrics into provider compensation involves simultaneously aligning incentives with healthcare quality and outcomes while ensuring the compensation remains competitive and compliant with regulatory standards.

However, before you ever add quality incentives to a compensation plan, begin by asking “Why?”. Do I have a particular concern about my outcomes today? Is there a particular group / specialty that I need assistance from to improve outcomes? Has my hospital been charged penalties for outcomes that I could address / improve by aligning these metrics with compensation plans?

Once you have defined your “Why?” and determined that outcomes measures would add value to your operations, then your organization can approach the inclusion of quality metrics by following the brief outline below:

1. Define Quality Metrics

First, identify the quality metrics that will be used to evaluate provider performance. These metrics should be aligned with industry standards and can include targets related to:

• Patient satisfaction scores
• Clinical outcomes (e.g., readmission rates, complication rates)
• Adherence to clinical guidelines
• Efficiency metrics (e.g., length of stay, cost per case)
• Participation in quality improvement initiatives
• Hospital penalties
• Value-based goals
• Institute for Health Improvement Guidelines
• Specialty protocols (driven by ACOs, Professional Registries, and other outcomes measures)

2. Establish Benchmark Data

Utilize appropriate benchmark data from nationally recognized sources to evaluate and determine FMV provider compensation. Common sources include:

• Medical Group Management Association (MGMA)
• Sullivan Cotter
• American Medical Group Association (AMGA)
• Pinnacle’s FMV Consulting Guide: An Executives Guide to Provider Compensation
• Other national, regional, and specialty specific compensation surveys, as appropriate and reputable

3. Design a Compensation Model

Design a compensation model that incorporates components for both base salary and performance-based incentives. Typical compensation model structures may include:

• Base Salary: This component provides physicians with some level of guaranteed annual compensation and should be both competitive and based on FMV benchmarks.
• Productivity: This component should consider total compensation and the effects of conversion factors, particularly for providers who perform at the top and bottom ends of production benchmarks.
• Quality Incentives: These compensation components are tied to the achievement of specific quality metrics and typically based on a percentage of total compensation. Organizations must ensure the total compensation, including such incentives, remains within FMV.

4. Set Clear, Achievable Targets

Establish clear, achievable targets for each quality metric. These targets should be S.M.A.R.T.:

• Specific
• Measurable
• Achievable
• Relevant
• Time-bound

Beyond the SMART definition, the organization should validate you can reliably and consistently track and report the desired metric. Any quality metric should also include the definition (that outlines both inclusion / exclusion criteria), the source of data (JCAHO, Hospital EMR, Registry, etc.), and the timeframe being measured.

5. Regularly Review and Adjust

Regularly review the quality metrics and compensation structure to ensure they remain aligned with industry standards and organizational goals. Adjust targets and compensation as necessary to reflect changes in benchmarks, healthcare priorities, and operational/clinical improvements. Pinnacle recommends reviewing no less than three months prior to the end of the year, and the performance should be reported no less than quarterly, with annual reviews for establishing targeted metrics. We also recommend including your providers in these discussions to establish appropriate goals. Additionally, establishment of baselines and tracking performance prior to implementation will ensure that targets have been set appropriately and that metrics are understood by the provider community.

6. Ensure Compliance

Ensure that the compensation model complies with regulatory requirements, including:

• Stark Law
• Anti-Kickback Statute
• Internal Revenue Service (IRS) guidelines

Example Compensation Model:

1. Base Salary Example: $200,000 annually (based on FMV benchmarks for the specialty and region)
2. Quality Incentive Example: Up to 20% of base salary ($40,000) based on the following metrics:
   • Patient satisfaction scores: 5% of base salary ($10,000)
   • Clinical outcomes: 10% of base salary ($20,000)
   • Efficiency metrics: 5% of base salary ($10,000)

7. Documentation and Transparency

Maintain thorough documentation of the methodology used to determine FMV and the rationale for the compensation structure. Ensure transparency with providers about how their performance is measured and how it impacts their compensation.

8. Engage Physicians and Advanced Practice Providers

Engage physicians and APPs in the development and refinement of the compensation model understanding that there will be differences of opinion, and different goals depending on where a provider is in their career. The selected compensation plan should be consistent across the medical staff, with potential variances between primary care, specialty care, and hospital-based groups. This step to incorporate providers’ perspectives helps to ensure buy-in and enhances motivation to meet quality targets.

Implementation Steps

1. Consult with Legal, Compliance, and Compensation Valuation Experts: Ensure the compensation plan adheres to legal requirements.
2. Communicate the Plan: Clearly communicate the details of the compensation plan to all providers.
3. Monitor Performance: Track provider performance against quality metrics regularly.
4. Adjust as Needed: Modify the compensation model as necessary based on performance data and changes in FMV benchmarks.

Conclusion

By carefully integrating quality metrics into provider compensation models and ensuring alignment with FMV, healthcare organizations can incentivize high-quality care while maintaining regulatory compliance and fairness in provider remuneration.

If you have questions about Fair Market Value, provider and executive compensation planning, or about other Pinnacle resources, please contact John P. Carter at JCarter@AskPHC.com or Allison Carty at ACarty@AskPHC.com.