Physician Compensation: The Hidden Challenge to Healthcare Transformation

Throughout the U.S. healthcare provider landscape, fundamental changes are happening at an accelerated pace. This transformation can be attributed to a number of developments, not the least of which are the ways in which healthcare costs are covered, consolidation, and the level at which physicians are compensated. 

In today’s U.S. healthcare ecosystem, healthcare organization and physician financial incentives are increasingly misaligned. Without addressing these dueling incentives, healthcare provider organizations will struggle to achieve their ambitions when it comes to transforming healthcare. 

Without a more deliberate and strategic approach to physician compensation:

• Healthcare provider organizations risk serious misalignment between physician incentives and organizational value drivers
• Physician compensation can quickly become a serious drag on an organization’s bottom line and its efforts to implement value-based care (VBC), consuming an outsized share of management and organizational bandwidth and leading to poor recruitment, retention and performance

In this Executive Insights, L.E.K. Consulting discusses:

• Six key physician compensation challenges to healthcare transformation trends 
• Guiding principles that healthcare provider organizations can use to navigate these six distinct challenges

Physician compensation-related challenges to healthcare transformation

We have noted the following six challenges related to physician compensation:

1. Physician employment models challenge a long-standing entrepreneurial spirit and a mantra of maximizing volume. Historically, U.S. physicians have operated within a highly fragmented and entrepreneurial landscape. As independent businesses, they took significant financial risk, but had full transparency into, and control over, their financial performance and had full access to the upside that their businesses generated. 

Consolidated healthcare provider organizations have a more complicated agenda, include physicians from a wider set of geographies who joined the organization at different times and under different terms, and offer less financial autonomy and transparency while transferring more financial risk.

While physicians may choose to join a larger provider organization (see Figure 1) to reduce their financial risk and access back-office and other forms of support, the associated loss of financial transparency and upside exposure runs counter to long-standing physician experiences and expectations. Given these dynamics, a poorly designed and/or insufficiently managed physician compensation plan can quickly create significant challenges for a consolidated provider organization such as: 

• Recruiting and retention of clinicians 
• Perceptions of unfairness across specialties/geographies 
• Mistrust, given that ensuring data availability and transparency can quickly become a significant drag on management bandwidth and the organization’s bottom line 

These challenges should be addressed when considering physician employment models.

2. Physician compensation has been long tied to production, and resistance to change is high. Despite growth in value-based contracting, a recent study of health system physician compensation models found that more than 80% of analyzed primary care models and more than 90% of analyzed specialist models included a volume-based incentive payment (see Figure 2). While a similar proportion of primary care compensation plans included some form of quality-based incentive, only ~55% of specialist compensation plans included some form of quality-based payment. 

When included, quality-based incentive payments only comprised 9% of total compensation for primary care physicians, and 5% of total compensation for specialist physicians, representing a significant disconnect between provider organization revenue (now at ~40% paid via upside/downside contract models) and physician payments, a disconnect that is much more difficult to remedy for specialist physicians relative to primary care.

While a shift to value-based physician incentives is picking up speed, it is increasingly challenging to shift away from well-understood volume-based incentive models. Over 70% of provider organizations are actively hiring physicians, and only 45%-70% (depending on specialty) of physicians believe their current compensation is fair. Consequently, the risk (and cost) of losing recruits and existing talent to more predictable or widely understood compensation offers is high.

3. Physician incentives have historically rewarded individual results, not collaboration. Today, fee-for-service (FFS) based physician compensation plans are typically anchored to individual physician activity. However, consolidated provider groups and those participating in VBC programs require significant collaboration to reduce cost of care and improve outcomes (in some studies, primary care coordination reduced costs by ~$300 per member per month for high-risk patients). 

As different specialties and service lines have unique roles and impacts on overall performance and demand and a range of market-competitive compensation levels, setting both compensation structure and levels during this transition is complex. In addition, the emphasis on teamwork makes physicians understandably hesitant to accept compensation mechanisms that prioritize individual responsibility, or reward, for positive patient outcomes and value. In short, physicians worry that since they don’t have control over outcomes individually, that dictates, to some extent, their faith (or lack thereof) that the larger group is able to influence outcomes.

4. Because healthcare transformation is gradual, there is a serious risk of competing incentives. The transition to coordinated, value-based healthcare has been very gradual — despite proclamations to the contrary. In many cases, physicians now face opposing incentives to both increase volume (e.g., number of patient visits) and maximize non-revenue-generative value-driving activities (e.g., time spent tracking patient adherence to care plan). In a recent study, 70% of physician organization leaders noted that increasing the volume of services delivered is the top action that primary care and specialist physicians could take to increase their compensation — a statistic seemingly contradictory to industry tailwinds focused on value.

5. VBC introduces significant time lags between physician actions and ultimate organizational financial outcomes. Under value-based contracting models, financial payments are tied to patient outcomes rather than physician activities, and there is a considerable (multimonth) lag between physician activity and value-based payment. Given that historical physician compensation models pay for volume/physician actions, healthcare provider organizations need to develop incentive structures that balance near-term rewards for activities that are expected to yield value with longer-term incentive payments that tie to VBC results and financial payments the organization receives. 

6. Very few organizations have “closed the loop” on measurement and reporting of VBC performance, and physician trust of outcomes data is low. To compensate physicians based on VBC performance, organizations must develop their data and analytics capabilities, identify and focus on the most impactful metrics, and invest significantly in building physician trust in the data. Most healthcare provider organizations have not yet closed the loop on VBC measurement and reporting. This challenge will only increase as healthcare organizations consolidate and become more complex.

Guiding principles to consider

We believe healthcare provider organizations should consider the following guiding principles in addressing these challenges (see Table 1).

Understanding these principles can be crucial to navigating the six key challenges related to physician compensation – and transforming healthcare provider organizations.