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Managing successful compensation plans

By Charles A. Peck, M.D., FACP

Virtually every health care organization in the country that has to manage under capitated contracts—medical group practices, integrated health care systems and managed care organizations—is struggling to do so efficiently and cost effectively, while preserving the quality of care. Indeed, many are losing thousands of dollars a month under capitation.

One of the major contributing factors to this situation has been identified by many as an inability to effectively align providers’ compensation and incentives. So, if the problem seems obvious, why are solutions so elusive? Determining a fair wage for a fair day’s work should be relatively straightforward, but for many has become an insurmountable issue.

Capitation is basically a financing system with an ultimate goal of lowering overall costs. But capitation is reshaping health care delivery as well. The challenge is to ensure that health care delivery is reshaped in the right way. How do we maintain quality care at a reasonable cost and create physician incentive plans that reward the right behavior? Forget unit costs. The key to successfully managing under capitation lies in the development of a systematic and comprehensive medical management strategy that includes an incentive plan which empowers physicians.

Developing and Implementing a Medical Management Strategy

Medical management is the process whereby the financing of care and the measurement of clinical outcomes is linked to the delivery of clinical care services in a high quality, cost-effective manner, resulting in both patient and physician satisfaction. The key elements of a medical management strategy and program include the following components:

• An effective provider compensation program with aligned incentives and physician gainsharing.

• Information systems that effectively integrate claims and clinical data to provide timely and comprehensive information to providers for measuring quality, outcomes and efficiency.

• A comprehensive health management program, that includes both inpatient and outpatient care.

• A method for determining and measuring utilization appropriateness.

• Education and involvement of key constituents, including physicians, patients and employers.

Every component of medical management must be in place and functionally integrated or it is impossible to define, measure, monitor and improve quality and thus lower costs of care.

Compensation Design Options and Principles

Incentives drive behavior, and how health care providers are paid will ultimately determine the quality of care and outcomes their patients realize. In redesigning a provider compensation plan, begin with these key questions. Is the compensation plan motivating the right behaviors? Are incentives properly driving high quality patient outcomes? Do the physicians understand the plan and how it may require practice adjustments? And finally, are they satisfied and active supporters of the plan?

An effective incentive compensation plan must motivate physicians to aggressively manage both care and costs. Organizations that have put physicians on straight salary have learned this lesson the hard way. To design a physician compensation program without simultaneously developing and linking it to an effective and comprehensive health management system is an effort doomed to failure. The converse is also true.

Avoid making compensation systems overly complicated. The ideal is to make them as straightforward as possible, yet flexible enough to reward physicians adequately for positive health outcomes on behalf of their patients. But despite the need for simplicity in design, most plans typically incorporate more than one payment mechanism and include innovative programs that align incentives and increase buy-in for development of medical management systems. A compensation and incentive system might include fee-for-service, hard capitation, contact capitation and shadow capitation.

One of the more recent and interesting innovations is “physician gainsharing,” and physicians have been extremely receptive to the concept. Given the myriad of legal issues relating to incentive compensation for physicians, a gainsharing program must be carefully designed and clearly linked to quality outcomes as opposed to financial goals. However, gainsharing can ultimately reduce costs within service lines, be implemented without major structural changes, and quickly create a win/win situation for hospitals and physicians.

Another important consideration in plan design involves the establishing of a formula for base salary and incentive compensation ratios. A plan with a guaranteed 90 percent base salary will not command the attention of physicians. On the other hand, 50 percent will put too much risk—and stress—on physicians. A more realistic and effective split would be 70 to 75 percent base salary and 25 to 30 percent risk-based compensation. And, the potential financial rewards must be significant enough to be commensurate with the risk.

Another key factor in incentive compensation design is the medical loss ratio. A sufficient amount of the premium dollar—at least 75 to 78 percent—must be going to the provision of medical care so that the “pie” and the potential financial rewards are true motivators for behavior change and active health and cost management by physicians. If necessary, a provider organization should negotiate with payors to assume a greater share of risk early in the medical management strategy design stage. As the group becomes more sophisticated and proficient in managing care and costs, it could conceivably take on even more risk and thus enhance reward potential.

Creation of an incentive compensation plans for physicians need not depend upon the level of capitation in the market. Capitation in and of itself is merely a payment mechanism that is usually imposed by a third party payor. Even organizations that are not yet heavily capitated by payors can use these types of payment mechanisms themselves to incent physicians to change behavior and actively focus on quality improvement and cost reduction.

Implementing and Supporting the Compensation Plan

Each payment method must be customized to the utilization patterns, specialty and practice behaviors of individual physicians, and must be supported by accurate and timely information and financial systems.

Having physicians truly integrated and dependent upon one another is also critical to success. If physicians are not already organized as a “group” there are ways to do so for the purposes of creating a compensation plan that will begin to incent group-like behavior. For example, in one situation we worked with a physician-hospital organization in which the doctors were organized into an IPA-network model. An early step in designing a compensation plan for this organization involved establishing a “pod” structure, or virtual group organization. Specialists were grouped into pods by specialty; primary care doctors were organized into pods of six to eight each. Each pod had its own budget and different types of incentive plans, and primary care physicians had a choice of pods based on their comfort level with risk assumption, ranging from a pure fee-for-service pod to capitated pods with varying levels of risk and commensurate potential for financial reward.

Physicians must understand clearly the premise under which they are being paid. They must also realize that excess specialty referral may lead to an attendant increase in utilization and concurrent decrease in budgets for primary care. The pie is not being divided differently as much as it is shrinking. However, carefully structured and aligned compensation arrangements that are linked to medical management can help to overcome some of the traditional problems that arise between primary care physicians and specialists by emphasizing accountability to one another, and in some cases give specialists more freedom in managing certain patients.

In order for professional care services budgets to be adequate, accurate actuarial analysis must be done. More importantly, however, the care that is delivered must be necessary and appropriate for that level of funding. Excess readmission to an acute care bed due to a patient’s inability to access their physician cannot be tolerated. Inadvertent trips to the emergency room for minor illnesses cannot be ignored. Overutilization of unnecessary and costly procedures by specialists must be avoided. This preventive maintenance strategy becomes possible with a well thought-out health management program.

All or some of these payment methodologies can be incorporated into a single compensation plan within any system. However, a critical factor in their effectiveness and success is the sophistication and timeliness of the information systems. Real-time reports must be generated for physicians in order for inappropriate utilization to be rectified before so much time has passed that the point is moot and the capitated budget is exhausted. Systems must be capable of tracking patients by physician, by diagnosis and by payer so that risk intervention and assessment can allow physicians to anticipate and prevent potential health problems and complications within their practices. They are also important in determining risk adjustments for sicker patients to ensure that risks are spread and shared equitably.

Finally, but perhaps most importantly, physicians must be educated about the incentive plan—their by-in is critical to success. Emphasize early and often that the driver and the ultimate goal is improved quality of care, and that if implemented with cooperation and a comprehensive plan for medical management, the financial rewards will follow. Include key medical leadership early in the process and make them the evangelists for other physicians.

Medical directors roles should be considerable in this process and they should be focused not only on bringing the incentive compensation ideas to physicians, but also on assisting, advising and guiding them in making behavioral changes that will be needed to achieve their own goals. Physicians are by nature independent and strong-willed, and traditional styles of medical practice and reimbursement fit just fine with this behavior. The new medical environment and associated compensation systems demand collaboration, teamwork and flexibility, and medical directors must become team leaders and facilitators in promoting the important link between care costs and quality.

Charles A. Peck, M.D., FACP is an internist and director of physician and managed care services for Arthur Andersen LLP’s Healthcare Consulting practice.

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