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When you evaluate incentives in your compensation plan, it pays to know the big picture.

Fam Pract Manag. 1999;6(7):51-52

Chances are that sometime in your career, if not already, some piece of your compensation will be tied to incentives, such as productivity. Last month, we introduced you to the basics of incentive plans: how they're structured and what they might measure (see “Evaluating Bonuses and Incentives: The Basics,” June 1999). This month, we'll tackle a few of the larger issues, which will better prepare you to evaluate what's on the table.

Why do incentives vary from group to group?

There is no universal formula when it comes to incentives and physician compensation. What goes into a particular incentive plan depends on several factors:

Market trends. The managed care penetration within a market is a major influence on which incentives employers will use. Traditionally, under fee for service, incentive systems rewarded productivity and little else. In other words, the more patients you saw and the more services you performed, the more money you made. Managed care has changed all that. Physicians still need to be productive, but they also need to pay close attention to issues such as utilization, efficiency, quality outcomes and patient satisfaction. As managed care penetration grows, these incentives become more crucial.

Employer characteristics. Incentive plans will also vary depending on the kind of organization you work for. For example, a small group practice is unlikely to have the same incentives as a large multispecialty group practice or a staff-model HMO. Even for similar types of employers, incentives will vary depending on the characteristics of that group or organization. One study has shown that the age of an HMO and the number of physicians it employs significantly influences the structure of the group's incentive system. Other characteristics that can influence incentives include an organization's current and expected payer mix and the level of sophistication of its information systems, medical direction and governance.

Physician characteristics. Finally, to the extent that incentive systems can be tailored to individuals or groups, those characteristics can also influence the structure. For example, are you a “risk taker,” or are you “risk averse?” If you are the former, a substantial incentive system may be more effective for you. Another example is career stage. If you're new to practice, the incentives offered to you may be different from those offered to physicians at the mid-stage or end of their careers. The point is that physicians are not a homogenous group. They have different motivations, different specialties, different needs for security, etc. An effective incentive and bonus system should take these differences into consideration.

Are there limits to what can be incentivized? The old adage “the sky's the limit” doesn't apply to incentive plans. There are some down-to-earth limits that restrict what you can incentivize.

Legal limits. You need to be aware of legal and regulatory limits that govern incentive and bonus plans. For example, with respect to Medicare and Medicaid patients, the federal Anti-Kickback Statute prohibits remuneration “directly or indirectly, overtly or covertly, in cash or in kind to any person to induce such person to refer an individual.” Similarly, the Stark self-referral laws prohibit physicians from making referrals for designated health services to any entity with which they have a financial relationship. So, for example, a productivity formula that incentivizes the volume of patient procedures or referrals may violate anti-kickback or physician self-referral laws (unless the formulas meet one of the myriad exceptions in these laws).

Ethical limits. The traditional ethical obligation of physicians includes a fiduciary responsibility to act in their patients' best interests. Unfortunately, some incentives may compromise this fiduciary responsibility. For example, an incentive plan that encourages physicians to consider costs when making individual treatment decisions may not appear to be in the patients' best interests. This raises the question of whether you can truly divorce financial and treatment decisions in a system that integrates finance and delivery. Regardless, the fiduciary duty to the patient should be paramount.

Practical limits. Beyond the legal and ethical issues, there are also practical limitations on what you can do in the way of incentives and bonuses. For example, the growing use of quality as a basis for incentives raises questions about the ability to identify consistent, objective measures of quality. Some quality measures are really process measures; they measure what or how care is provided, not the quality of the care itself. To evaluate the measures used in an incentive system, consider the “Questions to ask about your incentives.”

Questions to ask about your incentives

Incentive plans are increasingly using measures such as quality and patient satisfaction to reward physicians. To evaluate an incentive plan, answer these questions:

  • Does the system measure what it says it does? For example, is it truly measuring quality or just processes? There should at least be a strong correlation between what is actually measured and what is supposed to be.

  • Do the measures account for outliers? In other words, are the measures adjusted to account for confounding factors, such as patient mix? For example, if your patient mix is largely Medicare, your utilization rates will naturally be higher than a colleague who cares for mostly younger patients.

  • Will the measures be revised as new information becomes available? Measures should not be set in stone but should be changed as needed based on the finding of new clinical research or other data.

  • Is what's being measured within your control? For example, if you're employed by a hospital, it makes little sense for your incentives to be based on facility administration costs, over which you have no control.

  • Are physicians involved in defining the measures? Physician input and buy-in are critical to developing an effective incentive plan because physicians best understand their work and what motivates them.

  • What's the denominator or baseline you're being compared against? For example, is your productivity judged against other members of your group, national data or some arbitrary number?

How much of this should I disclose to patients? You should be prepared to discuss with patients any financial arrangements that could impact their care. As mentioned previously, physicians have a fiduciary responsibility to their patients — one that isn't met by remaining silent until asked. You, as your patient's fiduciary, should be forthcoming with relevant financial information. Further, patients' rights of informed consent and self-determination hold that you should provide any information that is “material” for patients to make informed decisions about their health care. In this respect, an incentive that's “attractive” enough to influence the way a physician cares for a patient can reasonably be considered “material.”

Failure to disclose could carry serious penalties if, for example, a denial of care leads to an unfavorable outcome and then to litigation. Although a malpractice plaintiff ordinarily bears the burden of proving that a physician breached his or her duty of care, that burden is reversed if the physician is a fiduciary who did not disclose a conflict of interest.

There are other compelling reasons for disclosing financial information to your patients. First, describing your incentives in plain English can serve as a moral compass. In other words, if something sounds “bad” or unfair when you try to explain it, then it probably is. Second, by virture of stories in the popular press, most patients are aware that physicians receive financial incentives. Failure or refusal to disclose financial incentives to your patients is tantamount to ignoring the proverbial elephant in the middle of the living room (or, in this case, the exam room).

Finally, the courts and state legislatures are continuing to press for disclosure of physicians' financial arrangements. About 20 states have already passed such legislation. You should be prepared to discuss these issues with patients.

If, at this point, you're thinking it would be easier to stick with fee for service or capitation as your preferred method of compensation, rather than a salary tied to incentives, think again. Commercial payers use bonuses and incentives with fee for service and capitation at the same increasing frequency employers use them with salaries. Consequently, regardless of the form in which you encounter them, you need to know how to assess incentives and bonuses that may be offered to you. Good luck!

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