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Physicians need to learn to read between the lines of compensation plans to determine their true value.

Fam Pract Manag. 1999;6(6):53-54

Many organizations that employ family physicians offer compensation packages that include a base salary plus bonuses or other incentive pay. Understanding incentive plans can help you safeguard your financial future, and finding the right compensation package can increase your sense of job security and satisfaction. Here's what to consider as you evaluate various incentive packages.


Incentive plans tend to be structured according to the means (either positive or negative) they use to influence physician behavior and according to whose performance is being judged (that of the individual or the group).

Carrot vs. stick. Most incentive systems have either a positive or a negative structure. A positive structure rewards you if you meet or exceed your goals but doesn't penalize you for not reaching them, whereas a negative structure does.

The withhold is the most common negative incentive. Part of your compensation is withheld until the end of each accounting period. If you achieve your goals, you receive the withheld pay. If not, you may receive only part of the withhold or none at all. The withhold is a negative incentive because physicians generally consider the withheld money 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.

With a bonus, the most common positive incentive, 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's a fine line between negative and positive compensation, and it's all in the way you look at it. For example, if your employer sets productivity goals low enough that you always meet them with no difficulty, then you may begin to regard the associated bonus (a positive incentive) as a potential withhold (a negative incentive). Of course, the pay is the same: $120,000 with a $10,000 withhold is the same as $110,000 with a $10,000 bonus. However, to the physician earning it, it's not the same. The trend today is to use negatively structured incentives less frequently because doctors look more favorably on incentives based on positive reinforcement.

Individual vs. group. Something else to consider when evaluating incentives is whether they're 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. This spreads the risk and lessens the financial impact on the individual physicians in the pool. (Of course, it also means you wouldn't benefit as much from your own superior efforts as you would under a system based on individual performance.) Further, because financial incentives create a direct relationship among clinical decisions, the organization's budget and the physicians' income, physicians in larger pools don't feel the financial impact of, for example, poor clinical decisions or budget cuts as acutely as do physicians whose incentives are tied to individual performance. That's why incentive packages based on group performance are gaining popularity.

The yardsticks

Incentives can be based on almost anything that can be measured; the list is nearly endless. Here are some of the more frequently used measures:

Productivity. Incentives tied to physician productivity are increasingly common. Some of the 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. Patient satisfaction, sometimes captured in scores known as service ratings, is something your employer will care about because accreditation organizations (e.g., the National Committee for Quality Assurance [NCQA]) and patients' employers also care about it. Patient satisfaction measures reflect patients' attitudes and perceptions of the health care they've received. The ratings may be based on waiting times, your accessibility, your patient retention rates, the thoroughness of your exams or your patient education efforts.

Citizenship. Citizenship measures how much time you devote to activities related to organizational goals and objectives (e.g., your 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. The point of rewarding good citizenship is to instill in physicians a commitment to practicing high-quality care within the organization's framework.

Quality of care. There is an increasing emphasis today on promoting quality in health care, and one way to do that is to tie incentive pay to measures of quality. 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; they include, among others, rates of immunization, mammography screening and prenatal care. A good incentive system should be based on a broad variety of quality measures.

Utilization. Service utilization, sometimes called resource management, focuses on appropriate use of services by a particular physician or at a 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. Measures may include formulary compliance, avoidable emergency department use, hospital days, costs of referrals to other specialists and use of ancillary services. A manageable incentive system should probably include only four or five utilization measures and should align with your organization's values.

A good compensation package

What makes a good incentive system? Opinions vary, of course, but here are some characteristics to evaluate:

Alignment. The incentive system must align with the organization's goals and your patients' best interests. 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 goal and the incentive plan compete. 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, if you go anywhere at all.

Fairness. You should perceive the incentive system as fair. Of course, fairness, like beauty, is in the eye of the beholder, which is why the key here is your perception of fairness. For example, in a “fair” incentive system, groups or individuals would be rewarded in a way that's proportionate to their contribution to organizational goals, and the organization's policies wouldn't subvert the explicit incentive guidelines. Note that you may view a system as fair, even if you're not completely satisfied with every aspect of the system.

Physician input. A good incentive system should include physician input. For example, if your incentive pay is based on performance and you participate in setting the performance standards, you're likely to have a sense of ownership of the system. That, in turn, will make it easier for you to support it. Further, your input may also identify other areas that should be targeted for improved performance.

Balanced risks and rewards. To the extent that the system transfers financial risk to you, it should also transfer opportunity to share in any realized rewards. Incentive systems that transfer risk without transferring a proportionate chance for reward lack credibility and gain little sense of physician ownership. Just as higher risk in the financial market yields potentially greater returns on investment, so should the amount of risk you're assuming in your compensation package determine your potential gains.

Simplicity. An incentive system should be simple in concept so it's easy to understand and implement. If goals and other measures of success are kept to a minimum, you'll be better able to understand and focus on what's expected of you. A system that neither you nor your employer can characterize in one or two sentences probably will implode over time.

Control. A good incentive system should be based on factors you can control. For example, while it might make sense for your performance to be based partially on your referrals to other specialists (over which you have some control), it makes little sense to base an incentive on facility administration costs (over which you have no control). Also be sure to evaluate whether you think you can attain the goals set in the incentive system. They should be realistic, and the organization should provide education, feedback and support to help you reach them.

The chances are good that a compensation plan you're offered at some point in your career will include an incentive component. With these guidelines — and our follow-up article on legal and environmental issues that influence incentive plans — you can evaluate them more critically.

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Copyright © 1999 by the American Academy of Family Physicians.

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