Calculating Performance- Based Compensation

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Performance-based compensation to physicians will continue to gain traction as hospitals seek to improve clinical outcomes and reduce costs.  Payments can come from a variety of methods including:

  • Bundled payments from the government and other insurers
  • Gain-sharing, where non-employed physicians are compensated in part by improvements in outcomes and utilization
  • Variable compensation, where employed physicians are compensated in part by improvements in outcomes and utilization

We recently calculated performance-based compensation at a medical center.  In this particular case, the outcomes of Medicare patients with respiratory disease were examined.  Here is how the process worked, using Verras’ Medical Value Index (MVI)*.

  1. We severity adjusted the patients’ all-payer data going back three years (2009-2011), covering 645 cases.  While our MVI generally covers seven industry-standard metrics, this hospital asked us to focus only on morbidity, mortality and resource utilization.  In the chart below, we show the increasing cost per inpatient over three years culminating at approximately $15,000 in 2011.  As part of this process, we also identified physician best practices that could be used to reduce cost (as well as morbidity and mortality).

Click on the graphic to enlarge

  1. We then used these data to make projections for 2012.  For example, without implementing any best practices, the cost per patient was projected to be approximately $18,000 (the top line) in 2012.  We were also able to provide projections of cost based upon achieving certain levels of efficiency.  For example, in the chart above:
    1. The second line (Target) assumes costs increasing halfway between the projected cost increase and no cost increase
    2. The third line (75th) assumes a cost increase of 25% of the projected cost increase
    3. The fourth line (100th) assumes no cost increase from 2011 to ’12
    4. The bottom line assumes costs actually go down 10% of the expected increase


  2. Conferring with hospital executives and medical staff, we set the target…the second line that assumed costs would increase to about $17,000 per patient.  Not shown here, but that would equate to net direct cost savings (after adjusting for fixed and indirect costs) of $2.5 million.
  1. Based on these levels of quality and cost improvements, it was determined by the stakeholders that the hospital and physicians would share the savings – 78% to the hospital and 22% to the physicians. Greater efficiencies would increase the physicians’ percentage but their salaries would not be at risk.


  2. As the table below shows, in addition to these net-saving bonuses of $546,205, the physicians would also receive $35,679 in additional reimbursements for projected improvements in mortality and morbidity. Divided among 14 physicians, that would result in additional compensation per physician of $41,563.

Click on the graphic to enlarge

  1. Transparent clinical quality and cost efficiency metrics are being  monitored.  These objective data are made available for the physicians’ review so they can make sure they are making appropriate changes in their practice patterns to achieve the desired results.  These reviews also ensure that certain operational system changes are being implemented (i.e. switching to lower cost pharmaceuticals, not running duplicative tests, etc).

Please feel free to comment.

*Verras’ Medical Value Index (MVI) is the means by which hospitals and physicians can quantify their quality and cost efficiency improvements. The MVI uses seven industry-standard measures of clinical quality and cost efficiencies for inpatient care.

Hospitals involved with bundled-payment options or other performance-based compensation systems can use the MVI for the objective and transparent distribution of dollars between the hospital and its physicians.

Verras’ process for allocating performance-based compensation is unique in that it combines both statistically robust analysis of severity adjusted data at a granular level with a collaborative consultative approach to gain consensus between the hospital and physicians on how those payments should be allocated.

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Reducing Variation in Treatment of Respiratory Disease

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In 2011, six respiratory DRGs accounted for more than 75 million discharges (20% of all discharges) for Medicare patients.  So clearly the ability to reduce cost and improve outcomes for these diseases could have a major impact on hospital performance.

We recently severity-adjusted and examined 645 Medicare discharges in eight respiratory DRGs (190-195; 207-208) at a medical center, looking for ways to reduce variation.  These patients were all managed by hospitalists.  Here are a few things we observed.

  • Length of stay was greater than expected for patients with pneumonia with MCC (DRG 193).  There was a difference of 14 days length of stay between the best practice cases and outliers, with the outliers incurring $60,000 in additional charges, much of which was not reimbursable.
  • Length of stay for patients on ventilators – 96 hours plus (DRG 207) was also higher than expected, with the best performing cases averaging 33 days less than the outliers, and with outlier cases generating $120,000 in additional charges.
  • One general problem area was undercoding and underestimating patient severity.
  • On the cost side, the best performing cases all were generating significantly less in charges in all major areas, including lab, radiology, pharma and ER.
  • It was determined that significant savings could be achieved by setting goals of reducing resources by 6% in outlier cases, and reducing resources in best practice cases by 2%.

Incidentally, we did compare these results to the results of patients managed by other physicians, and found even more variation in those physician-managed cases.

The table below shows some of the recommended changes for labs, which would reduce costs without impacting outcomes

Cost Variation Area Considerations Outliers Best Practice Assumption
Lab  Test per patient Test per patient
CBC Decrease unnecessary CBCs  6.5 3.6 Eliminate 2 tests/ pt. in red
Chemistry 7 Decrease unnecessary Chem 7
Eliminate duplication if there is a chem 12 ordered 		4.3 2.5 Eliminate 2 tests/pt in red
Chemistry 12  Chem 7 not needed if chem 12 is ordered. Lab monitors to catch duplication 1.5 1 No change needed
CRP Qualitative Average 1 per patient 3.7 2.5 Eliminate 2 tests/pt in red
C difficile Toxin Average 1 per patient 1.8 1.5 Eliminate 1 test/pt in red



Upon implementation of all recommended action steps, the following resource cost improvements are anticipated:

  • $392 per case for pneumonia patients
  • $296 per case for COPD patients
  • $1,198 per case for ventilator patients

Additionally, document improvement efforts are underway to improve documentation, thus increasing revenues.

Finally, this initiative has allowed the hospital to model how it would allocate bundled payments to the hospitalists, based upon performance improvement.

Please feel free to comment.

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