Is Your Physician Compensation Plan Aligned With Cost?

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Before the end of 2016, more than 50% of Medicare payments will include value-based criteria. The movement toward value-based reimbursement is pushing health systems, hospitals, and physician groups to improve quality while lowering costs. To meet this challenge, organizations need to more closely align cost management with physician incentives.

Yet cost metrics have seldom been tied to physician pay, as they are historically challenging to measure, benchmark, and (perceivably) influence at the physician level. Furthermore, administration has traditionally been unwilling to authorize physicians to drive cost savings. Nonetheless, some organizations have effectively incorporated cost metrics into physician payment methodologies. Successful systems find ways to engage physicians and empower them to influence cost management. How? Initially, it is more palatable if only a small portion of compensation is tied to cost components; however, in time, with greater trust among physicians and management, a true dyad can emerge, enabling effective physician leadership and administrative management. This effort is often a process in which providers and administration gain mutual trust in reported practice data and take appropriate actions based on that information.

As organizations’ capabilities mature, portions of operational control are relinquished to engage physicians in cost management. This can be accomplished through the assumption of financial risk for areas such as supply purchasing, staffing ratios, and, ultimately, the total cost of care, for example Table 1 identifies nonproductivity compensation plan components reported by survey participants for the past 3 years in ECG’s Physician Compensation Survey. While the use of nonproductivity measures is not currently widespread, a comparison against previous years reveals that organizations are in fact incorporating cost metrics into their compensation plans.


Evaluating an appropriate and measurable cost metric is crucial to garner support from both physicians and practice management staff. Health systems and physician practices struggle with incorporating cost components into compensation plans due to the difficulty in defining a baseline cost structure to measure performance. Organizations can begin by identifying the cost metrics that most closely align with organizational goals and priorities. If the selected cost metrics are not important to an organization’s priorities, they will likely have little impact on achieving the organization’s overall goals. Some groups may want to develop internal cost baseline metrics to benchmark future performance. For instance, if a health system or large medical group is focusing on cost containment, a metric that measures cost as a percentage of total medical revenue may be the most relevant.

Second, gaining physician buy-in and trust is vital. Unless cost control is a priority for physicians as well, meaningful gains will be difficult to realize. Physicians commonly believe cost control is out of their realm of influence or even responsibility, often discounting the dramatic impact on cost that practice patterns and patient satisfaction can have. Table 2 identifies cost measures that focus on tracking operational expenses and those that pertain to clinically-related activities.

Expense line items that typically reside within physicians’ purview include clinic supplies and practice staffing. As seen throughout the healthcare industry, hospitals and health systems are attempting to hold physicians accountable for these costs; however, the ability to select resources and utilization still remains out of physicians’ span of control. If organizations expect to tether compensation incentive structures to these metrics, physicians need to have a voice in these decisions and be given the opportunity to exercise it.

An additional cost catalyst over which physicians have significant control includes support staffing expenditures. However, before tying staffing-related cost metrics to compensation, the following considerations must be addressed:

  • Do physicians have an incentive to maximize the use of practice support staff? This includes key cost considerations around the number of support staff, as well as the role each plays.
  • Are RNs, LPNs, or MAs used to support physicians? Could lower-cost resources be utilized effectively for some or all tasks?
  • Is it appropriate to include physicians in the decision-making process of selecting and retaining support staff such as patient service representatives and other clinical personnel?
  • If APCs are utilized, does the billing model reflect the care model? If the physician is receiving production credit for APC work, cost accountability for this resource is likely appropriate.

Increasing awareness of these metrics, linking them to organizational goals, and garnering support from physicians to maximize efficiencies are all critical initiatives that must precede incorporating cost metrics into a compensation plan. As physicians realize they have direct control over practice expenditures, changes to the compensation plan will likely be met with less resistance.


For organizations migrating to a compensation plan with cost components, a methodical approach is necessary to ensure more effective execution. The six steps depicted in the figure below demonstrate how to identify cost components to incorporate into a compensation plan. This framework also describes the key sequencing of events, from attaining physician approval to including components that will affect future compensation plans. Executing this methodology helps make sure that the appropriate physician buy-in and definition of cost metrics are vetted prior to plan implementation.


As hospitals and health systems continue to experience decreased margins due to payment reform, organizations must develop a greater sensitivity toward the total cost of care. Because physicians possess the ability to significantly influence cost across the healthcare continuum, greater attention should be paid to incorporating cost metrics into compensation plan design. While this inclusion is a new concept for many physician organizations, research indicates that the number of organizations that factor cost considerations into physician pay is increasing. It is important to remember that cost control efforts will be effective only when all stakeholders trust in and are committed to the cause. For this approach to be successful, great care must be taken to align costs with organizational objectives, engage physicians in plan design, and follow a clearly defined methodological approach.