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Lessons learned from the introduction of a physician incentive compensation plan [PODCAST]

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In this episode, Dr. Robert Dolan of Lahey Hospital discusses the results of a study he led examining provider compensation packages that drive alignment with value-based payment methodologies.
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Mike: Hi, this is Mike Passanante. Welcome back to the Hospital Finance Podcast.

Today, I’m joined by Dr. Robert Dolan. Dr. Dolan serves as the chair of the Department of Otolaryngology/Head & Neck Surgery and Vice Chair of the division of surgery at Lahey Hospital & Medical Center in Burlington, Massachusetts.

Dr. Dolan is board-certified in otolaryngology and in facial plastic and reconstructive surgery. He is the lead investigator of a study that looked at the application of incentive metrics into provider compensation packages to drive alignment with value-based payment methodologies. And he’s here with us today to talk more about that study.

Dr. Dolan, welcome to the podcast.

Dr. Robert Dolan: Thank you, Mike. Thank you for inviting me.

Mike: The study we’ll be discussing today is entitled Results, Knowledge and Attitudes Regarding an Incentive Compensation Plan in a Hospital-Based, Academic, Employed Physician Multispecialty Group. Can you explain why this study was initiated and what the goals were?

Dr. Robert Dolan:  Sure! It was really an opportunity to critically evaluate how an incentive comp plan would be accepted by a multispecialty closed medical staff model group.

So, we first embarked on developing our incentive plan back in 2011 from scratch because we had no incentive plan prior to that. That was really spurred by our new CEO from Geisinger at the time. He came aboard. He was surprised to see that there was no incentive plan in place. We simply had a base salary.

When we started looking at the literature, as we sat and tried to figure out the plan, we realized that there’s not much available in the literature with regards to developing a new incentive plan. And there was very little to do with any incentive plan with regard to multispecialty groups, but there were some information on academic medical centers, and of course, some of the government plans.

So, we felt it was a good research opportunity.

And it did take some convincing actually to the IRB and to our senior management to send out survey questions because that’s a risk that an institution takes if they ask what the opinion of the staff is on any new plan. So, I think I have to hand it to Lahey Clinic for having the courage to proceed forward with asking those hard questions.

We also felt that the study would actually help others starting a plan (or even in the midst of developing their plan) to look at what our experience was like. And it was sometimes a rough experience, to be perfectly frank with you.

Mike: I look forward to exploring that with you in more depth in just a minute. But to kick us off, can you briefly go over your methods?

Dr. Robert Dolan: Let’s start with who we are. We’re Lahey Medical Center. We’re a non-profit, 341-bed acute care teaching hospital just north of Boston, Massachusetts. We actually have merged into a larger system including Beverly and Winchester Hospitals. But this study particularly was only for the Lahey Medical Center. And again, that’s a 341-bed acute care hospital.

So, we had around 600 employed physicians during the time of the study, 9% of which were primary care docs. We sent three rounds of survey questions by email over the first three years of the plan. So over 200 physicians were randomly selected each year to receive the survey. We were hoping for about a 30% response rate realistically, but we actually got over a 40% response rate each year.

I’m spilling into results a little bit, but let’s go on with the methods.

So, as an additional background, the metrics that were chosen each year came from the Compensation Committee chaired by our CMO. There were 15 members in total including some physician leaders and a hospital lawyer. Of course, there was input from senior administration and by the MEC (the Medical Executive Committee).

The plan consisted of base salary plus incentive comp. And we phased in over the three years the fact that at year three, 15% of our total compensation was at risk in the plan. So if you didn’t make your incentive comp, your total compensation would be essentially reduced 15%. And our total comp was basically the market based salary.

So, the incentive plans, again, were only triggered if the clinic reach the threshold margin.

And we sent out questions—actually, there were 10 questions specific to the plan. I won’t go over each question, but in general, they assess the knowledge of the plan, whether there was perceived individual control over the metrics and the reward. There were some questions on if there was any predictability to future income based on the plan, whether there were specific metrics that were a problem including, specifically, the quality of medical education and peer-reviewed research, and whether the plan payout would actually be achievable, whether it was fair, and whether the plan itself had actually improved the quality of care at Lahey.

Mike: And what were the results of the study?

Dr. Robert Dolan: Our results were interesting. I think it just highlights the difficulty of introducing something, or anything, new to an organization really. But an incentive plan affecting the salaries of your physicians is very tricky.

So, basically, in all three of the years of the study, all the participants received an incentive payment. So, each year, there was a margin set that we had to hit for the organization. And we hit that margin, so all the physicians received the payout.

So, nearly all of the physicians also achieved the target threshold for research and education metrics specifically. Now, this metric is interesting because this metric, most of the physicians hit this probably because the departments were allowed to create that metric themselves and also determine what was the threshold target high performance numbers for the metric. So this is totally a little experiment on our part about what would happen to a metric if you allow the departments to create one themselves. The outcome of that was interesting.

So, the survey itself, the response rate for the survey as I mentioned was about 40%. A total of over 250 completed surveys were analyzed in the final analysis. Most respondents had been employed at the clinic for 10 years or more. And the majority self-identified as a physician in specialty care. So, 75% were in specialty care and 10% were primary care physicians.

And the responses each year were fairly consistent actually. We took a look at overall sentiment also regarding the plan by comparing the percentage of favorable responses versus the percentage of unfavorable responses. And unfortunately, the sentiment was remarkably consistent year to year—70% negative or unfavorable, and 30% favorable. So, overall, we found that the plan was not terribly well-accepted or thought of.

The most consistently unfavorable responses related to plan complexity and metric quality.

And there were some questions that significantly changed over the study period, but most were fairly consistent.

Participants felt that their knowledge of the plan and the complexity decreased initially, but then their perception of this question fell again in the last sampling period. There was really a perception overall of poor alignment of the plan with individual effort. This has to do I think mostly with the fact that most of these metrics were organizational or departmental-based, not individual.

And so, the length of service actually had little effect year to year. But the perception of knowledge of the plan and metric quality were rated more unfavorably by those with less than 15 years of service.

That’s some fair detail regarding the survey itself.

Specifically, we took a look at question #5. I’ll just read this question because I think it’s fairly interesting. It brings up a good point that we can talk about later.

So, the question was: “Metrics used in this incentive compensation plan at Lahey will adequately measure my department’s efforts to increase peer-review research.”

Remember, that was the one metric that the departments were allowed to create—whatever they wanted to do, numbers of papers published, whatever they wanted to do. And despite the fact that the participants themselves were allowed to produce their own metric and set the threshold, target and high performance for this question, the question was viewed extremely unfavorably by the majority of the participants.

Then we took a look at the comments. The last couple of years, we allowed the physicians to write comments. We rated those. And 75% were actually unfavorable. Most commonly, the unfavorable comments related to overall plan performance, lack of individual control and metric quality.

And specifically, many of the comments addressed the research and education as being ineffective.

Mike: It seems that physicians in the study were very concerned about the specific metrics used to measure performance. Can you go into more depth about what you found?

Dr. Robert Dolan: We kept the number of metrics over the three years fairly short. I’ll read the metrics because I think that’s interesting.

We had productivity as one of the main metrics in reaching a certain threshold, target or high performance productivity probably gave you the largest payout. I don’t think the physicians had trouble with that metric. We look at work RVU’s, and I think that’s a fairly straightforward metric to understand.

But I think what happened was they took a look at some of these metrics as being uncontrollable by them personally.

And so, the metrics included out-patient satisfaction, in-patient satisfaction. We used a UHC cost measure and a UHC mortality measure and staff engagement (which was a Morehead survey that I refer to in the paper. It was given to the staff co-incidentally, but not part of this research project);

And then, of course, the research and education metrics;

And then, finally, the percentage of new patients in the practice.

So, I think that, from what I gather from the results of the paper, the physicians were quite unhappy with being able to control those specific metrics on their own behalf because, again, all of these were based on departmental or organizational performance.

Mike: In the conclusion of the study, the investigators recommended a mixed of process and outcome-based metrics. Can you explain how an organization might go about selecting and implementing specific metrics?

Dr. Robert Dolan: Sure! So, I think we can start with the research and education metrics as something that an organization should not do.

So, again, despite the fact that the departments created the metric, set the performance standard, and almost all achieved the payout, it was very unpopular. And based on this experience, the participants should really not be allowed to choose their own metrics or performance standards at all.

The metrics should have their genesis from the vision and strategy of the organization. And inevitably, they will often have some financial impact as we continue to transition from volume to value.

The other point I’d like to make… one would think that bringing more quality of care metrics would be useful and would probably enhance physician buy-in. But based on other academic medical centers in the literature and government-sponsored plans, it appears that when you bring a quality of care metric into a plan, it really invites a lot of controversy and potential dissatisfaction.

This is likely due to the lack of risk adjustment and inaccurate data and lack of individual control.

So, I would say that I think it’s a reality that we have to bring quality of care metrics into this plan because they are having a significant financial impact especially on the hospitals. I think that the pure outcome metrics will probably, at this point, have to be broken down into process measures.

I guess I can use an example for re-admissions. Particularly, a process of care metric, it should be really scientifically-based and closely linked to any desirable health outcome. It should be risk-adjusted. And it has to be modifiable based on individual effort—and achievable by most of the participants of the plan especially if part of your market base salary is depending on your performance in that metric.

So, for example, our institution is moving to more of these metrics more recently. We use the LACE Score for re-admissions. It goes over many of the characteristics of a patient that is at highest risk for re-admission like myocardial infarction, co-morbidities, the length of stay (the longer the stay, the more likely the risk of re-admission).

And so, if you take a look at that, and you say on an incentive plan, “Okay, your department is going to be responsible for reducing re-admissions and you’re talking—our department, otolaryngology, for example, well, that’s kind of ridiculous because we don’t have a lot of say or impact on that because our in-patient volume is much less than say hem/onc or cardiology.

So, the metrics should not be the same for every department necessarily. And they should be broken down into doable steps.

You have a plan, you’re a leader, you’re an architect of what you want to happen with regard to re-admission, then you need to break that down into process measures. And maybe just determining the LACE Score, and then appropriately putting this patient into a team that would be addressing this issue, re-admissions, might be something that you might want to incentivize actually.

And that leads to the fact that, more recently, these incentive plans are focusing on behaviors that add to team management especially as we move to accountable care units that are effective.

Mike: Do you have any final thoughts for our audience on how to go about structuring compensation that aids in the transition from volume to value?

Dr. Robert Dolan:  Yeah, absolutely. I think when you construct an incentive plan to incentivize quality metrics that add to, one, the value of the organization, and value in terms of financial reimbursement, you have to be cognizant of the fact that if you’re just starting a new incentive plan, it’s very possible that you’ll have base salaries that are out of alignment with the market. And this is what we found.

We decided to begin market adjustments—in other words, upward/down salary adjustments—based on the market co-incidentally with our incentive plan. This, certainly in pockets of the organization, caused problems, dissatisfaction.

So, if you want to have an effective incentive plan, the first step I think would be to make sure that your base salaries are in alignment with the market because you want a level playing field to start.

Now, whether to do this co-incidentally with your incentive plan or before, I would recommend that base salary adjustments be started well before any incentive plan is instituted.

There’s going to be some pain in salary adjustments. The loss aversion factor is huge here. So, if one or two physicians have their salary reduced because of market inequities, then that spreads like wildfire. It spreads fear through the medical staff and begins getting people to think about their salary more than you want them to. So you have to be aware of that.

So, some base salary decreases are absolutely justifiable even in the physician’s mind (if there’s some change in productivity or if they move off to doing more administrative work or whatever). But just a change of base salary for market reasons has a significant negative impact.

And also, just using the market to adjust your base salary is, of course, not reasonable because there would be retention issues. And so there are many reasons physicians are being paid what they are. And it’s not all market base.

But in any case, you want to level the playing field going into it before you decide to embark on a significant incentive plan.

So, that would be one of my major recommendations for an institution.

In addition, I think you want to introduce new plans to reward behaviors that have a financial impact. And this adds to plan affordability.

So it’s possible that you can have a plan where the base salary or the salary is market adjusted already. And anything above and beyond the base salary can be considered a bonus and not part of your total compensation. But in order to do that, you want to reward behaviors that, again, have a financial impact because you want them to at least reach threshold in the metric. In fact, I would argue that you should have the best—well, I would say the majority of participants able to reach threshold through behavior modification.

And so given that, if your metrics relate to a financial achievement for the institution, then if everybody meets that threshold achievement, then your reimbursement goes up especially in this value-based reimbursement that we’re in and we’re transitioning to. This will add to the affordability of the plan.

And so the fact that people are able to reach the metrics should have a favorable—and you must make sure that it has a favorable outcome on your margin.

The other thing I would suggest is don’t tie the incentive plan to anything that is really not controlled by the department or the individual. And that includes tying it to an organizational margin. And this is not just what I think or what we found in the study, but this is pretty clear in the literature.

So that’s not a way to make a plan affordable—that’s not a good way anyway. You want to, again, try to keep the metrics controllable at least at the department level.

And I guess the final thought I would have is simplicity is absolutely necessary. Your plan is going to be a work in progress. You’re going to be introducing new metrics and taking metrics away on a continuous basis. It’s really something that you can expect to have a standing committee on.

But you have to be certain that you’re not adding too many metrics. If you do, it’s going to add to the plan complexity and lead to dissatisfaction. And also, each metric is going to have a lower payout because there are more of them.

So, keeping the metrics to an absolute minimum, again, in alignment with your vision and strategy and organization in the financial impact of those metrics is very, very important. If you don’t keep the plan simple, you’re going to have a huge administrative burden. And you’re going to have problems with the participants not understanding what they need to do to earn the incentive which is a disaster.

I would say those would be my major recommendations.

Mike: Dr. Dolan, this was a very informative study. Thank you for sharing the results with us and your perspectives on the future of physician compensation.

Dr. Robert Dolan: I appreciate the opportunity.

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