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Provider’s Perspective: Focus On Cost and Quality

Presented by INTEGRATED Healthcare Strategies, as authored by
Tony Kouba, Senior Consultant

There are three main components in healthcare: cost, quality and access.  Quality refers to the relationship between interventions and outcomes; cost refers to the financial burden of care to all parties (e.g., patients, providers, government, employers and insurers); access refers to the availability of care to those who need it.  Generally, two of the components can be “controlled” at any given time, while the third remains “uncontrolled.”

Historically, from a provider perspective (e.g., hospital, physician group), cost tended to be overlooked due to expected increases in reimbursement rates through negotiations with payers.  However, reimbursement rate increases are a “thing of the past.”  Many providers are now focusing on how to survive on Medicare rates—also potentially unsustainable since future Medicare reimbursements are unpredictable. 

The planned Medicare Sustainable Growth Rate (“SGR”) reduction of 27% for physician services has been avoided for 2013 with a planned reduction of 25% to take effect in 2014.  Adding to the uncertainly is the fact that one bill has been introduced and one is expected to be introduced in Congress, both of which are intended to overhaul the Medicare physician payments and move away from the current SGR formula.  These bills aim to replace the SGR formula with temporary increases while replacement methodologies are devised. 

See below for a summary of each bill:

  • Medicare Physician Payment Innovation Act (H.R. 5707) written by Allyson Schwarts’ (D-PA) bill (Introduced):
    • Fee-for-service would be largely discontinued except for a sub-population of physicians that meet quality benchmarks or are near retirement
    • In its place, physicians would be required to adopt one of several models that CMS would test and approve over the next 5 years
      • Physicians that did not adopt a new model would face successive payment cuts
  • Ways and Means Health subcommittee Chairman Kevin Brady’s (R-TX) bill (Expected)
    • Continue wide-scale use of modified fee-for-service system while offering extra payments for efficiency improvements
    • Physician groups would have a larger role in determining the replacement models that CMS would use
      • Requires physician groups to endorse the quality and reporting activities that Medicare would use to determine fee-for-service increases

Regardless of which bill passes (or if other bills are introduced), the general belief is after 2014, Medicare will begin to shift from a fee-for-service methodology to a system that rewards for quality and efficiency in patient care.  Thus, the focus for providers will be on Cost and Quality – with the drivers of the change (i.e., those that directly effect the “levers”) being the physicians.

Physician behavior (for non-medical decision-making) is largely affected by their compensation models.  INTEGRATED has assisted many clients to transitioning from a salary and/or production-based compensation model (or a combination of both) to a market competitive model that incorporates quality and cost containment metrics. 

Many physician compensation models today contain a production component.  Most often, the production incentive is based on a work relative value unit (“wRVU”) metric.  One of the downfalls to a wRVU model is that physician compensation is not directly tied to the financial performance of the practice.  We typically recommend that a portion of a physician’s compensation be tied to controlling costs.  One such metric is allocating a portion of compensation to a pre-determined “operating cost per wRVU” benchmark for the organization/medical group practice. 

For example, assuming a 15.0 full-time equivalent (“FTE”) family practice physician group, the total operating expenses of $5,250,000 would equate to $350,000 per physician FTE, which is positioned around the market median ($358,740).1


Physician FTEs

Operating Costs






At first glance, it would appear that the physician group practice is operating at an appropriate expense level.  However, under a 25th percentile wRVU production basis (57,000 total wRVUs divided by 15 physicians equals 3,800 wRVUs per physician FTE), the group is operating above the market median benchmark ($74.50)2 at $92.11 per wRVU. 

Total Operating




Operating Expense

Per wRVU




It has been our experience that organizations are more frequently implementing this cost containing metric into their physician compensation models.  The benchmark/goal for an organization can be determined based upon the historical expense structure of the group practice and the hospital/health system’s perspective regarding where expenses should be positioned.  For example, a group practice may have an operating expense per wRVU positioned below the market median, therefore, they may set their benchmark at that level (i.e., $65.00 per wRVU) to maintain current operating costs rather than at a market median level (noted as $74.50 above). 

Per the example above, if the benchmark is set at the market median ($74.50 per wRVU) and the physician group achieved a level at $72.00 per wRVU, the reduction in operating expenses would be approximately $1,046,000 (($92.11 - $72.00) X 52,000 wRVUs).  In addition to setting the benchmark, the dollars available would have to be pre-determined.  For example, for achieving the operating expense benchmark of $74.50 per wRVU, the physician would be eligible to receive $20,000 annually (or $300,000 total payments for the 15 physicians).  If the physicians do not achieve a $74.50 per wRVU or lower level, they do not receive incentive compensation.

The operating cost per wRVU cost containing metric has the following benefits:

  • Can be implemented on a group or individual physician basis
  • Incentivizes physicians to increase productivity while managing/reducing operating costs (i.e., ties productivity model to financial performance)
  • Physicians operate as a traditional group practice (e.g., making operating expenses decisions together)
  • Benchmark can be tied to market data or set based on historical levels
  • Metric can be used for all physician specialties based on market-specific data

1Medical Group Management Association (“MGMA”) 2012 Cost Survey; total operating cost benchmark

2MGMA 2012 Cost Survey – median operating expense benchmark ($358,740); MGMA 2012 Physician Compensation & Production Survey – median wRVU benchmark (4,815)   

About the Author

Tony Kouba is a Senior Consultant in the Physician Services practice of INTEGRATED Healthcare Strategies. Mr. Kouba may be contacted by calling 612-339-0919 or emailing

About INTEGRATED Healthcare Strategies

For more than 30 years, INTEGRATED Healthcare Strategies has provided  consultative human-capital services to clients across the healthcare spectrum, including community and children’s hospitals, academic medical centers, health networks, clinics, and other healthcare-related organizations. Our expert consultants and nationally recognized thought-leaders help organizations achieve their business goals by ensuring top talent is attracted, retained, and engaged while measuring and maximizing human and organizational performance. With tailored solutions that extend well beyond single services, INTEGRATED offers the knowledge, guidance, insights, and alignment that organizations need to not only survive the rapidly changing healthcare environment, but to succeed in it. Exclusive to Healthcare, Dedicated to People.(sm)

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