Value-based management: Staff compensation planning for value-based models of care

Background

The wave of physician employment in the early 1990s failed in large part due to lack of value-based compensation plans in favor of guaranteed compensation models, coupled with a lack of expertise in physician practice management. During the past decade, the pendulum has swung back to hospital-based employment with more than 40% of physicians now employed directly or in practices owned by hospitals. (Bill Frack and Nurry Hong, Managing Directors, L.E.K. Consulting, Feb. 19, 2014). 

One area that was overlooked in the ‘90s and could also be overlooked in today’s environment is the idea of value-based compensation packages for staff. Most physician practices understand that the office manager and other key staff can make or break organizational success. As I interact with health systems and practices across the country, I hear the call for choosing and retaining high-quality staff. Perhaps the lack of value-based staff compensation plans is driving our inability to gain or retain the high-quality staff that we desire.

Defining value in healthcare can be tricky, and I am not sure we have mastered value from a client/patient point of view. However, practices and health systems only create value when they invest capital and services at returns that exceed the cost of that capital and those services.

Compensation planning  

While pay for performance is an important element of good management, the question is, what kind of pay for what kind of performance? It is easy to forget why we pay people, and in our desire to stay on par with others in the field we lose track of what real value and performance are. Current pay often reflects past performance, not current or expected performance.

Generally speaking, compensation plans are designed to reward both short- and long-term performance, encourage retention, recognize an organization’s unique needs, be based on the achievement of both financial and nonfinancial objectives, and in general create value for patients/clients. 

How can practice leaders set up performance-based compensation for office staff that aligns with the practice’s mission and required outcome measures? The first step is to define, in measurable terms, your organization’s mission, objectives and perceived value outcome measures.

Reasonable incentives are geared toward short-term goals such as process compliance and team contribution while higher incentives focus on long-term goals such as the practice’s transformation to patient-centered medical home status or meeting yearly preventive service measures. 

Five essential management processes collectively govern the adoption of value-based compensation.

1. The practice develops a strategy to maximize value. 
2. Translate this strategy into short- and long-term performance targets defined in terms of key value drivers. Reward employees on a quarterly basis for meeting short-term goals.
3. Develop action plans and budgets to define the steps that the practice will take over the next year or so to achieve these targets. 
4. Put performance measurement and incentive systems in place to monitor performance against targets and encourage all staff to meet their goals.
5. Decide to only reward above-average performance so you can continue to be an above-average practice.
6. Value-based management can best be understood as a union between a value-creation mindset and the management processes and systems that are necessary to translate that mindset into action. Taken alone, either element is insufficient. Taken together, they can have a huge and sustained impact.

Summary

In summary, a well-structured compensation plan communicates your practice’s mission and value objectives to its employees. Often the cause of failure is performance targets that were unclear or not properly aligned with the ultimate goal of creating value.

The focus of value-based compensation should not be on methodology but rather on the why and how of changing your practice culture. Adopting a value-based mindset and identifying value drivers gets you only halfway home. Managers must also establish processes that bring this mindset to life in the practice’s daily activities. All staff must embrace value-based thinking as an improved decision-making strategy if value-based care is going to stick. 

A word of caution as you prepare staff compensation plans: Several assumptions are implicit. There are limits within which pay can elicit improved performance; above a certain amount of incentive, pay does not provide an incentive for or even influence performance. Respect and team cohesiveness are also important outcomes of value-based management and should be included in overall goals. 

If you want better-performing employees and a more successful practice, consider how you are measuring your employees and the practice’s growth. Measure and track the actions that you want to see, and reward people based on these findings, not on an arbitrary formula.

Learn more about the physician compensation services available from MGMA Consulting.