Updated on: September 10, 2020

New Challenges to Organizations that Compensate Physicians on Productivity

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Original story posted on: September 9, 2020

The Centers for Medicare & Medicaid Services (CMS) recently announced updates to the 2021 Medicare Physician Fee Schedule (MPFS). Among them are unprecedented increases in relative value units (RVUs) associated with office-based evaluation and management (E&M) visits. Under these changes, CMS will reimburse a greater number of RVUs. Then, in order to achieve budget neutrality, they will reduce the payment per RVU (a.k.a. the conversion factor).

With this change, CMS is allocating a larger proportion of its total spending to office-based physicians, at the expense of surgeons and hospital-based physicians. However, there is an unintended and largely undesirable consequence for organizations that utilize RVUs in their physician compensation arrangements: any such organization that continues to pay the same 2020 rates per RVU on the increased number of 2021 RVUs will experience a dramatic decline in operating income.[1]

The most significant change, in relative terms, will occur in primary care –  such practitioners’ (PCPs’) 2021 work RVUs are expected to be about 38 percent higher than they were in 2020 for the same level of activity.[2] Thus, the average PCP with RVU-based compensation stands to receive a pay raise in the range of $80,000 to $90,000. The financial impact to any particular organization making RVU-based payments to physicians will vary based on the particular payment formulas, the mix of specialties and services, and other factors. Regardless, nearly all organizations with RVU compensation will experience a dramatic decline in operating income, absent proactive steps to avert the losses.

What Organizations Are Doing to Manage the Change
There are generally three strategies being employed to avoid losses, each with its own variants:

  • Take no action, and absorb the decrease in net income.
  • Utilize a noncurrent (e.g., 2020) fee schedule for the purposes of calculating paid RVUs.
  • Adjust compensation formulas to achieve neutrality in physician payments.

Each approach, as explained below, presents risks that must be understood and managed.

Take No Action
This approach is the one the most organizations will likely take, either because they underestimate the negative financial impact or because they perceive the nonfinancial consequences of making changes to be relatively worse. Those consequences may include physician discontent, new administrative burdens, and potential litigation risks, among others:

Risks: Compensation could exceed fair-market value. Benchmark rates per RVU are based on RVUs that are applicable to a prior-year fee schedule. However, those benchmarks lack relevance to RVUs calculated on a very different scale. This point was demonstrated in 2007, the last time CMS made such significant changes to RVU values. In the years following the change, benchmark compensation per work RVU immediately adjusted. All the while, total compensation did not materially change. Had the market continued to pay the same rate per RVU on a different number of RVUs, the benchmarks would have told a very different story.

Utilize a Noncurrent Fee Schedule
This approach is widely considered to be the most straightforward method to avert short-term losses, and to avoid the aforementioned mismatch between how RVUs are calculated in the benchmarks and how they are calculated in the current MPFS. However, it is only a temporary fix, because fee schedules can lose relevance as they age, especially when codes are added, deleted, or revised in some important way. Still, it could buy an organization some time to determine a longer-term solution.

Risks: A frequently cited benefit of paying based on RVUs is alignment of incentives. As physicians seek to maximize their compensation, they will simultaneously maximize the (appropriate) reimbursement a health system receives by coding and documenting at the highest level available. However, the 2021 fee schedule includes add-on codes to E&M visits. Excluding these codes from a physician’s paid RVUs could reduce their incentive to code and document at the highest level available. On the other hand, including them in paid RVUs by creating a hybrid fee schedule can be complex, and prone to errors in RVU calculations. Perhaps more importantly, since the add-on codes can represent as much as 12 percent of a physician’s total work RVUs, there remains a potential for payments to exceed fair market value (FMV), albeit to a lesser extent than under full implementation of the 2021 MPFS. Finally, written agreements often include language that requires RVUs to be calculated using whatever MPFS is current. In those instances, contractual barriers could prevent implementation of this approach.

Adjust Compensation Formulas
Organizations could feasibly complete detailed analyses prior to implementation of the 2021 fee schedule. This type of analysis can inform the impact of the new MPFS on each physician’s RVUs and professional revenue under the existing compensation model. With that information, it becomes possible to develop modifications to those formulas that result in economic neutrality for the physicians and the health system.

Risks: Similar to the potential challenge of utilizing a noncurrent fee schedule, there could be contractual barriers to modifying compensation in this manner. However, even when those barriers are not present, other challenges remain. The political hurdles should not be understated. Reduction to payments per RVU could be perceived as a pay cut, even though total compensation is expected to remain stable. Of course, the impact to physicians will vary, even within the same specialty, creating “winners and losers.” Also, changes to payment formulas, even routine ones, often result in payment errors. So changes at this larger scale should be carefully reviewed when implemented.

Programming Note: Listen to Adam Klein report this story live during Monitor Mondays, Sept. 14, 10-10:30 a.m. EST.

[1]   This statement is not intended to be a criticism of CMS. They are likely aware of the broad importance of RVUs in compensation arrangements, but are primarily concerned with the reimbursement mechanisms in their purview, and less so with the manner in which physicians are compensated, as those formulas are not determined by CMS.

[2] Excluding RVUs from the add-on codes, the impact is as much as 30 percent.

Adam J. Klein

Adam is the head of ECG’s Financial Services practice. Since 1997, he has conducted valuations and appraisals of business enterprises, physician and executive compensation arrangements, funds flow arrangements, and capital and intangible assets, as well as economic damages assessments, for taxable and tax-exempt entities. He has conducted industry-leading research on drivers of physician compensation and speaks regularly on a variety of healthcare valuation topics.

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