Pay scales for both healthcare executives and physicians, in particular, are undergoing significant changes stemming from the ebb and flow of market forces, government regulations, and practical considerations in an era of seemingly continuous change.

Where We Are Now

“Healthcare leaders have to address physician compensation, because physicians understand that the third-party payers are now reimbursing not just fee for service, but also for quality and shared savings,” says Jen Johnson, managing director and chief commercial officer with VMG Health, Dallas. “The physicians are typically the ones who drive the clinical outcome and the shared savings, and they want to participate in the incentives that are coming to the health system.”  

Jen-JohnsonThe underlying shift of healthcare payments from a fee-for-service model to payment for performance is affecting healthcare compensation at every level. The impact of this shift is evidenced by the ongoing efforts of many health systems and hospitals to determine how best to compensate physicians to account for their contributions to quality.  

But that proposition frequently is not as straightforward as it first appears.  

“It gets tricky, because most physician payment models that are a year or two old are basically fee-for-service models,” Johnson says. “So you want to move to value-based purchasing, but you've got these old models in place. You're trying to have them work together, which sounds great. But that raises a compliance issue in making sure that you can support your payments to physicians as fair market value.”  

And that task, too, has become more complicated than it used to be. Years ago, employers periodically would look at surveys to establish benchmarks to use in determining fair market value of physician services. But with the evolution of payment plans away from strictly a fee-for-service basis, that no longer works.  

“Although fee-for-service and value-based purchasing are coexisting in many facilities, most salary surveys do not break out, or even reflect, how much is allocated for quality or shared savings payment,” Johnson says. “So with that data no longer readily available, the guidance for determining fair market value is limited.”  

Where We're Going

Given that reform is happening in health care, though, it is important to get physicians aligned with initiatives to get the most out of health system payment reform.  

“That typically means you're going to change how you pay the physicians,” Johnson says. “But if they're already being paid based on a fee-for-service model, you need to think very carefully about how you add on these new payment models. The best first step is to check with your compliance and legal people to make sure the way you're going about it makes sense and that, at the end of the day, total compensation is at fair market value.”  

Steve SullivanIt turns out the shift to pay-for-performance is serving as an incentive not only for physicians, but for the C-suite as well. Compensation for top healthcare leaders is expected to remain at high levels for several reasons. Charged with the triple aim of health care—high-level clinical quality, high-level patient experience, and financial and operational efficiency—those who are leading health systems and hospitals face huge challenges.  

“Balancing those priorities requires executive expertise and acumen that is rare, which is why executive compensation in health care continues to increase,” says Steve Sullivan, a principal with Pearl Meyer’s Houston office.  

Acquiring, and retaining, expert healthcare executives in today’s competitive arena also has its share of new challenges. For example, new tax provisions that took effect at the beginning of 2018 repealed section 162(m) of the tax code, eliminating the write-off that for-profit companies, including hospitals and health systems, could take on compensation over $1 million that was based on performance. At the same time, a 21 percent excise tax was levied on compensation over $1 million being paid by not-for-profit entities, including health care. Because of the tax ramifications, many for profit companies may relax their view on the need for variable compensation, and base salaries may increase as a result. Not-for-profit healthcare organizations, however, will likely continue their growing reliance on short- and long-term variable compensation to properly calibrate performance and pay.  

“Health care has been marching to a new drum beat for several years, and that is a much more leveraged approach to executive pay, meaning greater exposure of their executives to pay at risk,” Sullivan says. “And going forward, there will certainly be a greater prevalence in the use of long-term plans.”  

There can be a real up side to this approach, Sullivan points out, when hospitals and health systems carefully design variable compensation plans so that the measures and metrics align with the board's vision and the future direction of the business. “Then, when hospital leaders earn those incentives, it’s a win-win,” he says.  

There is a growing financial dichotomy between hospitals and health systems that serve primarily populations with commercial insurance and those that form the safety net, serving large numbers of uninsured or underinsured patients. “From a financial management standpoint, those are two completely different worlds,” Sullivan says. “And in the institutions that make up the safety net, the CFOs are scrambling. They're operating in a negative operating margin environment, below breakeven, because of the diminishing Medicare and Medicaid reimbursement levels.” Adding to that, healthcare providers now must prove they measure up to certain levels of clinical quality to avoid further diminishment and penalties.  

As if the confluence of the Affordable Care Act, the decision to reduce Medicare and Medicaid reimbursement, and the establishment of quality thresholds that must be met to maintain reimbursement levels were not enough of a challenge, local competition with other healthcare providers is an additional pain point.  

“What hospitals and health systems in this kind of situation should be doing is forming an alliance and working together, for example by allocating specialty areas of care to certain entities based on how they're set up, and work together as a team,” Sullivan says. “Otherwise, many are likely to go out of business or be acquired.”  

How an organization structures its compensation program is an important key to success. Compensation programs need to be structured wisely to align with the entity’s core values and achieve employee engagement.  

“You can set up compensation programs in terms of eligibility, award opportunity level, and the plan design itself, such that they foster or encourage collaboration,” Sullivan says. “It's one thing to put an incentive plan in place for the C-suite. But you've got to figure out a way to connect with your employees, the rank and file, and understand what they value and try to meet that somehow. Because they're the ones who are going to make or break the change mandates that you put in place.”

And achieving that engagement is where the leadership team earns its pay.

What You Need to Know

  • New compensation models designed to allow physicians to share in the benefits of cost savings must still be compliant and consistent with fair market value.
  • Although fostering and maintaining employee engagement has always been important, it has become a critical component of success with the move toward value-based care.
  • Balancing priorities among operational and financial efficiency, quality of care, and optimal patience experience has never been more important, or more challenging, especially with the continuing reductions in Medicare and Medicaid payments.

Publication Date: Tuesday, May 01, 2018