Why Executive Compensation Drives Value-Based Care Transitions

Darnell Dent

Over the past several years, there have been several initiatives at national and state levels to move healthcare payments away from the traditional volume-based fee-for-service (FFS) reimbursement model toward alternative payment models (APM) that incentivize improved health care outcomes and increased efficiencies. In particular, the CMS has introduced an array of value-based care models, such as the Medicare Shared Savings Program and the accountable care organization (ACO) model.

To continue this forward progress on the payer side of the equation, states have adopted, to varying degree, the establishment of managed care organization (MCO) value-based payment (VBP) targets for their state sponsored benefit programs such as Medicaid. For example, the Texas Health and Human Services Commission (HHSC) set overall risked-based VBP contractual targets based on MCO expenditures on VBP contracts relative to all medical expense.

Beginning in 2018, HHSC established targets of 25% of provider payments in overall VBP and 10% of provider payments in risk-based VBP with targets increasing over four years to 50% overall VBP and 25% risk-based by 2021.

How popular are value-based care models?

While this transition from fee-for-service to pay-for-value is inevitable, it is certainly one of the most challenging feats that the healthcare industry has undertaken.

As with any other formidable challenges, the power of compensation has been the most effective lever organizations have used to drive real change. This has never been more evident than the fact that bonuses and incentive payments for healthcare C-suite executives are on the rise as the industry transitions to value-based care according to the most recent AMGA Medical Group Executive and Leadership Compensation Survey. The survey of 55 participants indicated that median earned bonus to base compensation ratio increased 4.5% for physician chief executive officers between 2016 and 2017. The ratio measures the proportion of compensation driven by performance-based incentives beyond base salary.

Related article: Top 4 Challenges Healthcare Executives Face in 2019

So, the key takeaway is this: MCO boards and their compensation committees need to take note that the pathway to driving effective and sustainable change toward value-based care is to shift more compensation from fixed base pay to incentive-based compensation with clearly defined performance metrics that moves the “value-based care needle.”

According to a recent B.E. Smith Executive Compensation Intelligence Report based on the survey results of 350 surveyed leaders, 10.8% of respondents said that “determining metrics for pay-for-value tasks” and 8.3% said “determining goals for pay-for value tasks” were among some of the top compensation challenges healthcare organizations face led by “balancing quality of care” and financial goals.”

Closing thoughts

The reason I believe effective executive compensation plans are the best levers in driving value-based care and reimbursement models because the continuing escalation of healthcare costs, the pursuit of higher healthcare quality, and the demonstration of better outcomes demand that we make these our top priorities.

Keeping this in mind, MCO boards and compensation committees should:

• Review and modify existing compensation plans for its executives to ensure that incentives are appropriately set to drive desired results.

• Look at the broader healthcare market, not just other MCOs for effective compensation plans and metrics.

• Pay closer attention to what works vs. what the payout of the compensation plan. Every incentive dollar should count toward moving the needle toward effective value-based care.

• Establish a process to evaluate the effective of value-based payment models and the impact of these models on utilization, quality, cost, as well as return on investment.

Darnell Dent is principal of Dent Advisory Services, LLC, a management consulting practice focused on helping leadership improve organizational effectiveness and overall performance. He most recently served as president and chief executive officer for the past seven years of a managed care organization. He is a member of the Managed Healthcare Executive advisory board.