Thought leadership

Managing the volume to value transition - without breaking the bank

Managing the volume to value transition - without breaking the bank

For hospitals, medical groups, and individual physicians,  the much-heralded move by payers to place less emphasis on “volume” (number of patient encounters, number of procedures, etc.) and more emphasis on “value” (patient outcomes, safety, satisfaction, etc.) is something that will impact your organization—and likely your income. You can’t pick up a health care industry magazine these days without seeing an article about moving away from volume-based reimbursement and towards value-based reimbursement. However, many of us have the impression that there’s a lot more talk about it than there has been real activity.

But regardless of the type of organization you are in, there is general agreement that if you really want to make a transition away from volume and towards payment for value, understanding the ways in which clinicians (both physicians and other practitioners) are compensated is a critical piece of that transition.



Despite the fact that the U.S. spends more per capita on health care than any other nation, we lag significantly in most measures of the health of our citizenry. The volume-driven payment system encourages overuse of services—especially expensive inpatient services—and increases the risk of unintentional harm to patients as a consequence. Too, the complexity of the volume-driven system results in about 30 percent of total health care costs being consumed by administrative functions, far more than in any other developed nation.

There is general consensus that a shift to a value-driven payment system—similar to what Medicare ACOs are intended to accomplish---would improve population health, increase safety, increase efficiency, and lower administrative costs. From the payer’s perspective, all those things translate into higher profit margins for them. For hospitals and physicians, the challenge is to move towards value, but to do so in a way where the resultant savings are fairly distributed to providers, as well as to payers.



Despite the hype to the contrary, most insurers and other payers continue to pay primarily on the number of services provided, most often based on Work RVUs (Relative Value Units) for physicians and Diagnosis Related Groups for hospitals. In some parts of the country, bundled payments, capitation, and specific payments based on such qualitative measures as patient satisfaction scores, or the proportion of diabetics or hypertensives under control, are being used by some insurers.

However, make no mistake—we are still in a health care finance environment where revenues to a hospital, medical practice or other organization are largely driven by the volume of services. Payers that are “paying for value” usually do so by reducing their fee-for-service payments in order to create a pool of funds from which payments may be disbursed on the basis of such value measures as patient care outcomes, readmission rates, and satisfaction scores. Organizations that perform well on these measures may actually see an increase in their revenues—so long as the volume of services they provide does not decline. And organizations that do not perform well on the value measures will likely see a decline in revenues—unless their volume increases. The total amount of money being paid out is usually not increased. If the new incentives for “value” result in a decrease in the volume of services, then any savings will accrue to the payers.

The real dilemma of such payment systems is that the high-value providers usually do see a decline in the volume of services they provide per patient. If they are able to maintain their total volume by increasing the number of patients they serve, then the value-based incentives can be substantial. But it is important to recognize, going in, that scoring well on value measures does not necessarily translate into higher revenues for the hospital, health system or physician practice.



As with most things in life, healthcare organizations and health professionals tend to operate in their economic best interests, so long as those interests do not conflict with what is right for their patients. Accordingly, if an entity wishes to encourage its people to improve the value they deliver to patients, then aligning compensation plans with that goal is essential.

Currently, most physician compensation is based on the volume of services provided by the individual. That is true not only for employed physicians, but also for the owners or partners in independent practices. In preparation for an anticipated move towards a greater emphasis by payers on value, many organizations are beginning to restructure physician compensation to make at least part of any individual’s income based on value measures. We currently see organizations moving away from an exclusive reliance on volume (usually measured by Work RVUs), to one where 5-20 percent of each physician’s income is based on value measures (such as patient outcomes, readmission rates, patient satisfaction scores, etc.) with the remaining 80-95 percent continuing to be driven by Work RVU production. As the market shifts towards a greater emphasis on value, these organizations intend to place a greater percentage of each physician’s income into the “value” bucket, and less into the “volume” bucket. Some organizations are making similar changes in compensation for other employees, but usually with a very small proportion driven by the value measures.



First, and probably most important, don’t let your enthusiasm for improving the health of your patients and your community lead you to make a premature leap from the world of volume to the world of value. As noted earlier, most payers are just beginning to put a toe into the water of the value-driven payment world. Moving totally away from volume before the payer market in your geographic area is ready to make that transition can create economic suicide for your organization. Effectively managing population health, a key element of a value-driven market, may require significant new investments for such things as enhanced data systems, new data analytic tools, case management personnel, etc. Making those investments before your payers are ready to cover your new costs, and ready to reward you for improving your performance, can be an expensive lesson. Your payers may love you for increasing their profit margins, but your organization’s income may well suffer significantly.

But by the same token, don’t wait too long before beginning to measure how you are doing on potential value measures that are relevant to your organization. Physician specialty societies are excellent sources for measures that are relevant, and likely to be used by payers in your market. Gain some experience in using those measures and improving your performance. But do it on a pilot basis, with little direct impact on the compensation you pay to physicians, employees, and other clinicians. And when you are ready to get more deeply involved in value-based payments, consider doing so through a larger entity, such as an independent practice association (IPA) or a physician hospital organization (PHO). The strength in numbers those groups afford can be a major factor in negotiating reasonable terms with your payers. Lastly, keep a close eye on the continuing saga of Medicare’s MACRA (Medicare Access and CHIP Reauthorization Act of 2015) reporting requirements in order to avoid possible penalties, and possibly even qualify for a bonus.

Second, avoid the temptation to use quality measures that you are confident you will do well upon in crafting a value-driven compensation plan for your providers. Remember, the idea should be to choose measures where there is an opportunity for patient care to be improved. You can rest assured that payers will not be looking for measures that are “gimmees.” Rather, they will focus on things where the performance of practices and organizations in their area is suboptimal—hoping that the financial incentives they offer will lead to improvements.

Third, don’t wait for the payers to tell you what they are looking for. The worst-case scenario would be for every payer insuring patients cared for by your organization to want you to submit performance data on different measures. That would add immense new costs, and probably produce little change.

In the alternative, use measures that are important to your providers and the patients your organization serves. Link with other similarly situated physicians (through an IPA or PHO as mentioned earlier) and make the case to all your payers that these are the measures that they should employ in any value-based payment system. Early dialog with payers can help avoid the often adversarial relationships that frequently occur between payers and providers, and offer the potential for doing the right thing for the patients both groups should be serving.

While the pace of change from volume-driven to value-driven care may be slow, now is the time to begin planning for its impact on your organzation—and for its impact on how your organization pays its physicians and staff.

William F. Jessee

William F. Jessee, MD, FACMPE joined Integrated Healthcare Strategies, now a part of the Gallagher Human Resources & Compensation Consulting practice in October, 2011, after serving for more than 12 years as President and Chief Executive Officer of the Medical Group Management Association (MGMA). He also holds an academic appointment as Clinical Professor of Health Systems Management and Policy at the University of Colorado School of Public Health.

Dr. Jessee is one of the nation’s leading ...

Read Full Bio