Defining Incentive Distribution
in Support of Network Alignment:
Key Options and Considerations in Developing the Right Model
The shifting healthcare environment continues to bring
The development of
traditionally hospital-centered health systems together
with physicians in new collaborative relationships,
incentive distribution
ranging from more traditional employment models to
joint participation in accountable care organizations
methodology should be
(ACO) and clinically integrated networks (CIN).
Additionally, new consortium model networks are
driven by each network’s
forming to bring together multiple health systems—
typically along with their aligned physicians—joining
overall strategic goals,
forces to explore collaborative endeavors, often with a
primary focus on better positioning for value-based
member composition
reimbursement. As these networks come together and
pursue joint contracts, with shared accountability for
and operating model.
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.
The concept of value-based incentive distribution is still fairly nascent, and there is no
industry standard. Instead, the development of incentive distribution methodology
should be driven by each network’s overall strategic goals, member composition
and operating model. Additionally, there are also stringent legal requirements
and guidelines that must be considered; particularly in the ultimate
distribution at the individual provider level.
Defining Incentive Distribution in Support of Network Alignment
While there is not a one-size-fits-all approach for networks entering into value-based
arrangements, we introduce a starting set of questions that networks can follow to begin to
frame the many points at which minimum requirements and standards will need to be
developed (see figure and associated questions below). The source of funds that flow to the
network will vary based on contract type. But, for the purposes of defining the general
options for distribution models, the framework below is based on a network in a two-sided
shared savings model. It assumes no change to the underlying fee-for-service payment
schedule and the magnitude of upside opportunity or downside risk is based on quality
performance and the difference between the actual medical spend vs. a target benchmark
for the defined population. While these general options can also be adapted for other
contractual arrangements, models with payment mechanisms such as capitation or global
payments will require additional structured guidelines related to payment for care that is
delivered. This framework also works for the flow of funds in a single level clinically
integrated network structure as well as a consortium network structure with a super CIN
and sub-CIN entities.
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Defining Incentive Distribution in Support of Network Alignment
Distribution Step and
Key Questions
1. 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
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.

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.
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.
2. 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?
3a. Distribution of
upside shared savings
between hospitals
and physicians: How
should each local entity

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

Option 1: Distribute a higher
percentage of the incentives to the
hospital (e.g. 70% hospital, 30%
physicians)
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 performancebased distribution in addition to scale.
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
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Defining Incentive Distribution in Support of Network Alignment
develop a methodology
to split dollars between
hospitals and
physicians?
3b. 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?

Option 2: Distribute a higher
percentage of the incentives to the
physicians (e.g. 70% physicians, 30%
hospital)

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)
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 incentive pool is
likely small.
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 valuebased 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.
3c. Distribution of
upside shared savings
between employed
and independent

Option 1: Equivalent distribution
methodology between employed and
independent physicians
Many CINs do not choose to
differentiate in its incentive
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Defining Incentive Distribution in Support of Network Alignment
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?
4. 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?
5. Distribution of
direct care
management dollars:
How should dollars
earmarked specifically
for care management be
distributed?

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
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
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
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 valuebased 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.
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.
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
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Defining Incentive Distribution in Support of Network Alignment


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
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
As networks work through each of these key questions, early lessons learned from the
development of distribution models across the country can be helpful to inform both the
process as well as the ultimate distribution model chosen. Keys to success include:
1. Customize the solution in support of shared and individual goals: The
incentive distribution methodology should align with the overall strategic goals of the
organization as well as the major requirements necessary to advance against these
goals. Early in the process, networks should define a set of guiding principles and
objectives against which options for each distribution point may be evaluated. To be
sure that the ultimate solution is successful at engaging the diverse membership of a
network, involving a representative set of stakeholders in the development of the
model is helpful. This could include a range of physicians (primary care and
specialists, employed and independent), clinical leadership and administrative
leadership in areas such as finance and contracting, information technology and
analytics, and strategy.
2. Define models early – but not prematurely: It is prudent to establish and agree
to the overall approach to incentive distribution model early, before there is actually
a significant amount of dollars available for distribution in the incentive pool—or
downside risk to be shared—in order to remain true to the guiding principles for
distribution and alleviate conflicts at a later point. However, networks should avoid
going too deeply into establishing the specifics of distribution models until there is
clarity around not only the strategic goals of the organization, but also its go-tomarket plan (i.e., what types of payment arrangements is it likely to pursue), its
likely membership, and its operating model and structure. A network should be able
to answer the question of what it is they plan to do together to drive value before
asking “what is in it for me?” Though ultimately both questions are essential to
address in network formation.
3. Anticipate the likely constraints: One frequent limitation is the inability to
establish metrics that appropriately and comprehensively measure performance.
Networks may have to settle for more blunt indicators in the near-term, with a goal
to refine those metrics over time. Another common challenge in many payment
arrangements is that dollars available for distribution are calculated annually and
may not be available for many months following the end of the reporting/tracking
period due to data and insurance claims limitations. Networks may want to consider
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Defining Incentive Distribution in Support of Network Alignment
options for distributing an interim (quarterly or bi-annually), preliminary payment
based on quality metrics in order to keep providers engaged.
4. Set realistic expectations: In the early years of most networks, the dollars
available for distribution or at risk will likely be small given the limited scale of most
initial forays into value-based payment. Networks should be clear with their
members about the expected magnitude of likely distributions and understand that
to a large degree, initial distribution models are more meaningful in their impact on
driving a shared culture of transformation, rather than dramatically driving financial
performance of it organizations and physicians.
5. Keep it simple: The methodology should be kept as simple as possible in order to
effectively track performance, administer payments, and communicate to health
system and physician leaders and members.
6. Expect change: The incentive distribution methodology should not be static; rather,
it should adapt as new types of contracts get signed, more data becomes available to
understand and manage performance and as more physicians or other organizations
join the network. The incentives should also mature as the goals of the organization
evolve.
ABOUT THE AUTHORS
Bowei Hao
Greg Maddrey
Anneliese Gerland
Engagement
Manager
Director and
Accountable Care
Solutions Practice
Leader
952.250.0529
[email protected]
Accountable Care
Solutions Practice
Manager
202.306.2216
[email protected]
626.453.6981
[email protected]
© 2015 The Chartis Group, LLC. All rights reserved. This content draws on the research and experience of Chartis
consultants and other sources. It is for general information purposes only and should not be used as a substitute
for consultation with professional advisors.
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