The Chartis Forum

Briefing

Defining Incentive Distribution in Support of Network Alignment: Key Options and Considerations in Developing the Right Model

The shifting healthcare environment continues to bring traditionally hospital-centered health systems together with physicians in new collaborative relationships, ranging from more traditional employment models to joint participation in accountable care organizations (ACO) and clinically integrated networks (CIN). Additionally, new consortium model networks are forming to bring together multiple health systems— typically along with their aligned physicians—joining forces to explore collaborative endeavors, often with a primary focus on better positioning for value-based reimbursement. As these networks come together and pursue joint contracts, with shared accountability for the delivery of high quality care at a lower cost, achieving alignment across physicians and health systems to more effectively manage care is crucial. One of the most important enabling mechanisms to enhance this alignment is through the thoughtful development of an integrated incentive distribution model, which ties individual organizational and provider goals with the overall goals of the broader network.

Use the interactive graphic below to explore key questions and early lessons learned from the development of distribution models across the country.

This Briefing was also published in the Winter 2016 issue of HFMA’s Strategic Financial Planning. Click here to view the HFMA piece.

Overview of an Incentive Distribution Model Funds Flow

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Distribution Step and Key Questions

Retention of upside shared savings dollars at the central CIN: Should the central CIN retain a portion of the incentive dollars? If so, how much? If not, how will the central costs be covered?

Methodology/Options

Option 1: Retain incentive funds to cover the entire operating costs of the central entity and distribute any surplus funds down to each member system.

Option 2: Retain incentive funds to cover a portion of the operating costs, likely with a ramp up in the percentage covered over time (including recovering the portion of uncovered costs in the initial years). This option requires an alternate funding mechanism to cover central infrastructure and operations in the early years, e.g., through capitalization by member organizations, often with the health systems bearing the majority of these costs.

Considerations and Recommendation

In the early years of a new CIN, the size of the pool available for distribution may be limited, and the startup cost burden high, which can make it a challenge to engage members – and particularly physicians – if there is no distribution of funds. Therefore, if Option 2 is feasible, we recommend trying to pursue this pathway in order to facilitate some early distributions of funds, even if nominal, as a signal to reinforce the engagement of physicians and other participants in the goals of the organization. It should be noted that this does typically represent a larger commitment – and risk – by the health system members that most typically bear the majority of capitalization requirements.

Over time, as the CIN enters into additional contracts and the total size of available funding increases, the CIN should move to cover the entirety of central costs through retention of dollars at the central CIN.

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Distribution Step and Key Questions

Distribution to local entities in consortium model networks with multiple sub-entities: How should the central CIN distribute incentive dollars be allocated to each local entity?

Methodology/Options

Option 1: Size-based distribution model: Distribution based on a size based component such as attributed lives or total attributed medical expense (e.g., if local entity A has 20% of the total lives, then it would receive 20% of the total incentive distribution)

Option 2: Performance-based distribution model: Distribution based on overall performance for quality improvement and cost reduction (e.g., if a joint value based contract yields $100 in incentive payments and local entity A meets 80% of the performance metrics while local entity B meets only 20% of the metrics, then local entity A would receive $80 in incentive distribution while local entity B would only receive $20)

Option 3: Blended model: Distribution based on a mix of size and performance

Considerations and Recommendation

In a Consortium model network, where there are multiple health system participants and sub-entities – i.e., a network of networks – it is critical to reach a distribution that is deemed both fair and representative of the respective participation of local entities, while bringing them together around shared goals.

We recommend that entities pursue a blended model that reflects both the relative size and performance of each local entity. The relative distribution of size and performance should depend on the overall goals and maturity of each organization. For example, as new consortium networks are formed, there may not be sufficient performance-based metrics established, so a heavier weight may initially be put on a size-based distribution. Over time as performance measurement becomes more sophisticated, CINs may be able to incorporate more performance-based distribution in addition to scale.

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Distribution Step and Key Questions

Distribution of upside shared savings between hospitals and physicians: How should each local entity develop a methodology to split dollars between hospitals and physicians?

Methodology/Options

Option 1: Distribute a higher percentage of the incentives to the hospital (e.g. 70% hospital, 30% physicians)

Option 2: Distribute a higher percentage of the incentives to the physicians (e.g. 70% physicians, 30% hospital)

Considerations and Recommendation

There is strategic rationale for both options:

a. Option 1: Hospitals will bear a much higher percentage of the startup capital costs as well as the initial downside risk. Additionally, most of the utilization/cost savings will likely come from decreased utilization of acute care provided in the hospital setting and may significantly reduce the hospital’s financial performance.

b. Option 2: Physicians should be appropriately incented to engage in new approaches to care management, as they are positioned as the day-to-day caregiver and director of the care team. Additionally, since a primary goal of most CINs is to more closely align physicians around shared performance goals, it is critical to recognize physicians’ contributions to these efforts.

While the exact percentage split will vary based on the network composition, we recommend that newly formed CINs should initially weigh distribution at least equally and often more heavily towards physicians in order to engage them from the beginning, particularly in the early years when the total

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Distribution Step and Key Questions

Distribution of upside shared savings between primary care and specialists: How should each local entity distribute incentive dollars between primary care physicians (PCPs) and specialists?

Methodology/Options

Option 1: Distribute a higher percentage of the incentives to PCPs (e.g. 70% PCPs, 30% Specialists)

Option 2: Distribute a higher percentage of the incentives to the specialty physicians (e.g. 70% Specialists, 30% PCPs)

Considerations and Recommendation

There is strategic rationale for both options, and the right model for any network should be informed by both the composition and performance goals of the network and its value-based contracts:

a. Option 1: PCPs are often responsible for a majority of the performance metrics and may be better positioned to affect the patient’s total cost of care than are specialists.

b. Option 2: There are often a greater number of specialists and specialty care accounts for a greater percentage of the total cost of care that a patient receives, so it is also critical to engage specialists in achieving performance goals.

While the recommended allocation varies considerably based on the factors above, in general we would recommend an approach that gives closer to an equal portion of funding to each of the two groups – but with the assumption that the per physician distribution would be higher per PCP than per specialist.

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Distribution Step and Key Questions

Distribution of upside shared savings between employed and independent physicians: Should the distribution methodology be different between employed versus independent physicians? If so, what is the rationale? Can incentive distribution models complement existing compensation models or is a change in the compensation structure required to fully align employed physicians around the shared goals of the network?

Methodology/Options

Option 1: Equivalent distribution methodology between employed and independent physicians

Option 2: Preferential treatment in the distribution methodology for employed physicians (e.g. independent physicians receive a percentage less than comparable employed physicians or independent physician is capped at a maximum incentive amount)

Option 3: Preferential treatment in the distribution methodology for independent physicians

Considerations and Recommendation

Many CINs do not choose to differentiate in its incentive distribution methodology between employed and independent physicians and will opt for the same model – which we generally recommend to ensure consistent engagement of both critical stakeholder groups. However, in some cases based on the network’s composition and goals, it may make sense to offer a differentiated approach by group.

It also must be noted that there are significant legal considerations in terms of how these dollars flow – and for employed physicians, how any new incentive dollars relate to existing compensation arrangements to avoid providing excess benefit. In many cases, entering into new value-based arrangements may necessitate a health system to evaluate and restructure its compensation structure for its employed or otherwise economically aligned physicians, e.g., co-management agreements.

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Distribution Step and Key Questions

Distribution of downside risk: How should CINs share downside risk among health system members and with physicians? How much risk should be shared to make sure there is sufficient “skin in the game” for all members? And, how much risk must be shared if the network is contracting jointly on the basis of financial integration?

Methodology/Options

Many new networks opt to pursue upside only arrangements in the early years, and then move to increased downside risk over time. How downside risk is financed is variable, and different contracts have different specifications regarding the required repayment mechanisms which networks must have in place. In most networks with one or more health system member, these organizations are expected to share in downside risk, often by putting some amount of money upfront to establish reserves. However, there is more variance in how physician members of a network are held accountable for downside risk. There are generally two main options:

Option 1: Physicians put a portion of money up front as a withhold for any potential downside losses

Option 2: Any downside loss is recorded and withheld from potential future incentive dollars

Considerations and Recommendation

There is a wide range of legal implications of how a CIN should or should not hold physicians to the downside risk of a shared savings or other value-based arrangement.

However, in most contexts, though physicians typically have to contribute at least a nominal fee to join a network, it may be difficult to sell physicians on putting additional money up front in order to participate in the CIN and its contracts, particularly primary care physicians from small groups which may not have the funds available to make large upfront contributions. The more palatable option is to withhold any losses against future earnings. The withhold strategy can be difficult if physicians withdraw from the CIN, but is still the recommended approach in most cases.

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Distribution Step and Key Questions

Distribution of direct care management dollars: How should dollars earmarked specifically for care management be distributed?

Methodology/Options

While many arrangements do not have care management dollars, it is relatively common that in addition to the potential shared savings pool, payors may provide some additional support (e.g., $3-$5 per member per month) which flows from payors to networks for the support and development of a more robust care management infrastructure and operating model. The funds flow associated with these dollars are typically treated separately from those associated with incentive pools or downside risk, with the following typical options:

Option 1: Pass through of all funds to individual provider organizations

Option 2: Pass through of a portion of funds to individual providers and retain the rest at the CIN level

Option 3: Retain all funds at the CIN

Considerations and Recommendation

The distribution of direct dollars earmarked for care management will vary with the structure of the CIN operating model, particularly based on at which level the network is actually providing the care management services.

a. If the individual provider entity is responsible for the entirety of the care management function and is hiring care managers in its practice or health system, then the dollars should be a pass through down to the individual provider organization level, tied to the number of lives attributed to that organization

b. If the CIN is jointly providing care management resources with the individual provider organizations, then the funds should be split; and

c. If the CIN is providing all of the care management as a centralized function, then all the funds will be retained at the CIN

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