Physician compensation: The carrot vs. the stick
March 1, 2000 6 minutes read
Physician compensation: The carrot vs. the stick
Laying the foundation for a sound program
(This is the first of two articles on developing a sound physician compensation package. The second article will appear in the April issue.)
Private practices and other organizations that employ physicians tend to offer them compensation packages designed around a base salary plus bonuses or other incentives for meeting certain performance criteria.
While the packages’ basic structures may seem similar, the details of these base pay plus incentive plans can be arranged in a variety of ways, says Kent J. Moore, an analyst with the American Academy of Family Physicians in Leawood, KS. Here are some of his insights on what should be taken into account when evaluating various physician incentive packages. Most incentive systems have either a positive or negative structure — a carrot or a stick, Moore says. A positive structure rewards you if you meet or exceed your goals but doesn’t penalize you for not reaching them, as a negative structure does.
"The withhold is the most common negative incentive," he says. Part of physicians’ compensation is withheld until the end of each accounting period. If the physicians achieve the goals, they receive the withheld pay. If not, they may receive only part of the withhold or none at all.
The withhold is a negative incentive because physicians generally consider it as part of their base pay. Thus, "getting your withhold is seen as receiving your due, while getting only part or none of it is seen as a penalty for poor performance," says Moore.
A subtle connotation
With a bonus, however, you receive extra compensation if you meet certain goals. Failure to receive a bonus doesn’t carry the same negative connotation that failure to receive a withhold does because many physicians see it as extra income rather than part of their base pay.
"Of course, there can be a fine line between negative and positive compensation," he points out.
For example, if the practice sets productivity goals low enough so physicians can meet them with no difficulty, then the bonus (intended to be a positive incentive) may start to be regarded as a potential withhold (a negative incentive).
While the net result in terms of money paid out may be the same, the physician earning it doesn’t see it that way. "The trend today is to use negatively structured incentives less frequently because doctors look more favorably on incentives based on positive reinforcement," Moore points out.
Another factor to consider when evaluating incentives is whether they are based on individual or group performance. "The trend is toward systems based on the performance of large pools of physicians rather than on individual or small-group performance," Moore says. That spreads the risk and lessens the financial impact on the individual physicians in the pool. It also means superior producers will not benefit as much from their efforts as under a system based on individual performance.
Here’s a tip: Because of their nature, physicians in larger risk pools usually don’t feel the financial impact of such things as poor clinical decisions or budget cuts as acutely as do physicians whose incentives are tied solely to individual performance. "That’s one reason why incentive packages based on group performance are gaining popularity," Moore explains.
Yardsticks to use
Incentives can be based on almost anything that can be measured. Some of the most frequently used measures include:
• Productivity. Incentives tied to physician productivity are increasingly common. Moore notes. Different ways productivity is measured include charges, relative value units, panel size, hours worked, or patients seen per day. How an employer decides to measure productivity will depend on the nature of the organization and what type of productivity it’s trying to reinforce.
• Patient satisfaction. Although not as easy to measure as productivity, patient satisfaction is an increasingly common basis for incentives. Practices are caring more about patient satisfaction, sometimes captured in scores known as service ratings, because employers and accreditation organizations such as the National Committee for Quality Assurance (NCQA) care about them. Patient satisfaction measures reflect patients’ attitudes and perceptions of the health care they’ve received. The ratings may be based on waiting times, physician accessibility, patient retention rates, the thoroughness of exams, or patient education efforts.
• Citizenship. This measures how much time physicians devote to activities related to organizational goals and objectives such as participation in governance committees and peer review. "Traditionally, time spent on citizenship tasks has been included in a physician’s base pay, but it’s increasingly being rewarded with incentives to get doctors to play stronger leadership roles in their organizations," says Moore.
• Quality of care. With the increased emphasis on promoting quality in health care, more practices are tying incentive payments to quality measures. However, quality is difficult to measure, and indicators such as NCQA’s Health Plan Employer Data and Information Set (HEDIS) tend to focus on processes rather than outcomes. "Despite this, HEDIS indicators are probably the quality measures most commonly used today," he notes. A good incentive system should be based on a broad variety of quality measures such as rates of immunization, mammography screening, and prenatal care.
• Utilization. Service utilization, sometimes called resource management, focuses on appropriate use of services by a particular physician or practice site. Ideally, appropriate utilization should be based on an actuarial analysis of your patient mix using such variables as sex, age, and illness severity.
"The point of using utilization as an incentive is to make you aware that you’re practicing in an environment of finite resources and that your medical decisions should take into account effective use of those resources," Moore stresses. A manageable incentive system probably should include only four or five utilization measures and should align with your organization’s values. Measures may include formulary compliance, avoidable emergency department use, hospital days, costs of referrals to other specialists, and use of ancillary services.
The overall package
Other factors Moore says comprise a good incentive system include:
• Alignment. "The incentive system must align with the organization’s goals and your patients’ best interests," he says. For example, if the organization’s goal is to save money (as opposed to maximizing revenue), but its incentive plan rewards the physicians who bill the most, the practice’s goal and its incentive plan are in conflict. "Aligning incentives is like ensuring that everyone in a boat is rowing in the same direction. If it happens, you get where you want to go. If not, you go in circles," he says.
• Fairness. The incentive system should be perceived as fair. For example, in a fair incentive system, groups or individuals would be rewarded in a way that corresponds to their contribution to the organization’s goals.
• Physician input. A good incentive system should include physician input. For example, if incentive pay is based on performance, and physicians participate in setting the performance standards, they’re likely to have a sense of ownership of the system. That fact makes it easier for physician employees to support it. Plus, their input may be useful in identifying other areas of the practice that can be targeted for improved performance.
• Balanced risks and rewards. "To the extent that the system transfers financial risk to the individual physician, it also should transfer opportunity to share in any realized rewards," says Moore. Incentive systems that transfer risk without transferring a proportionate chance for reward lack credibility and gain little sense of physician ownership, he adds. In turn, just as higher risk in the financial market yields potentially greater returns on investment, so should the amount of risk assumed determine potential gains.
• Simplicity. An incentive system should be simple in concept and easy to implement. Keep goals and other measures of success to a minimum so they can be understood and focused on.
Tip: "Any incentive system that can’t be characterized in one or two sentences will probably implode over time," Moore predicts.
• Control. A good incentive system will focus on factors that can be controlled. For example, while it might make sense for performance to be based partially on referrals to other specialists (over whom you have some control), it makes little sense to base an incentive on facility administration costs (over which you have no control).
• Attainability. The basic goals of any good incentive system should be both realistic and attainable.
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