Global Tax Insights
Analyzing the Pay for Performance Arrangement According to Fair Market ValueMarch 23, 2015
Performance based compensation is a valuable tool in reducing cost and improving quality in the healthcare sector, but it is crucial to consider the fair market value of the deal.
Being rewarded for personally furthering or improving your business is something many executives seek. Physician alignment strategies centered on cost savings and quality enhancement have influenced interest in something called the “pay-for-performance” compensation arrangement. Pay for performance payments must be set in advance at fair market value or FMV which is the likely price which both buyer and seller are willing to settle for when neither party is compelled to buy or sell, when both know the facts of the arrangement, and when both are acting in an open and unrestricted market.
Why FMV matters
Typically, if a program drives referrals they should consider the FMV standard. Successful arrangements between hospitals and physicians depend on explicitly defining FMV. In order to make sure that pay for performance payments are acting in accordance with FMV, hospitals need to consider whether the volume or value of referrals was taken into account when developing the reasoning for incentive compensation. In addition to this, pay for performance payments can be analyzed on the basis of the impact of physicians’ compensation on the company’s finances.
Pay-for-performance compensation models
- Shared savings- Under this arrangement, a hospital shares savings from successful cost saving initiatives with physicians. Distribution of savings should depend on the effort and influence the physician had on savings and should not depend on the value or volume of referrals. Allocating savings to a group of physicians varies among primary care physicians and specialists and what point the program is in (first year, second year, etc.). The FMV should be based on reward for efficiency and quality not simply productivity.
- Quality payments- After considering comparable payments in the market, benchmarking data, and performance history, hospitals can make payments to physicians if they contribute directly to a high quality medical outcome for a patient.
- PCMH- For physicians tending to a defined patient population, the patient-centered medical home (PCMH) model applies. Providers in some medical home models are paid a per member per month (PMPM) fee for their patient care management services, not including prepaid healthcare services.
- Bundled payment- This form of compensation aims to achieve higher quality at a lower cost through “episode-based payment”. For savings acquired directly from the specific episode of care, physicians can be paid a portion of savings from the bundle.
- There are a number of critical factors in FMV assessment of pay-for-performance compensation agreements. Including:
- Data- Pay-for-performance compensation is directly influenced by a physician’s impact on cost and quality, so putting FMV into place directly depends on data that shows the doctor’s impact.
- Risk adjustment- FMV must be adjusted depending on a patient population’s risk (gender, age, etc.) to determine exactly how a physician improves quality and cost.
- Caps- FMV also depends on caps associated with the payment type. Caps are put in place to make sure compensation to a physician is not excessive.
Improving Quality and Reducing Cost
In such a high pressure environment, it is vitally important that physicians are fully engaged in their practices. Incentive tools like the pay-for-performance initiative reward doctors for their time and effort and for their direct influence on patient health.