How should managed care physicians be paid?

Physician Executive, Sept, 1994 by Ruth Pagano

In the 1970s, the prevailing standard fee for a service was from the local Blue Shield reimbursement fee schedule. Often the fee was related to the availability of the specialty in a geographic area and to "profiles" physicians created for themselves by their "usual and customary" charges. Those who performed technical procedures, i.e., subspecialists and surgeons, could demand higher fees for their "technologically advanced" services. Physicians new to practice in an area were reimbursed more for the same service than was the seasoned physician with a lower "profile." As the number and complexity of procedures increased in the 1980s, the CPT procedural codes were established, to which insurance companies would attach a payment fee schedule. Primary care or nonspecialist physicians tried to collect from the patient whatever the local market would bear, while the specialists' services became increasing "totally covered" by third-party payers.

Managed Care Professional Fees

The arrival of managed health care systems began to turn that situation around. Health maintenance organizations would offer many federally mandated health benefits, including outpatient care, and most financed coverage of all visits to a preauthorized provider for a relatively low copayment. Copayments ranged, on average, from $2 to $5.

Most HMO and managed care insurers use capitation (a set fee for each "head" or member signed up) to pay individual physicians, specialists, or group practices. IPAs and PPOs contract for discounted fees for specific services or withhold a portion of the payment for profit sharing or capital reinvestment. But how do these group practices or HMOs choose what to pay each of their physician members?

Many established or larger group practices have already grappled with the issue of how to pay each other. Many group practices pay their physicians' salaries. Employee agreements became commonplace in the 1980s, with negotiated or predetermined salary tables by specialties. Some group practices are partnerships and use the "equal-share" method of paying each other. These latter types are predominantly single-specialty groups, where age, level of experience, and workload of the members are essentially comparable.

Method of Physician

Reimbursement

Individual productivity, specialty type, and seniority became the key elements of how salary was determined by group practices in the 1970s. "Value to the organization" was thrown in if a partner was doing something other than seeing patients, such as administration, research, teaching, or just adding to the prestige of the group. Accounts receivable, collection rates, and profitability, of course, determined the bottom line. A percentage of everyone's expected salary might go down in a "bad" year, or there might be money left over for big bonuses in good years.

By the mid-1980s, group practice salaries, as well as average working hours per week and average patient work load per week, became the subject of surveys as well as journal publication. The American Medical Association and the American Group Practice Association started to compare specialties and group compensation packages. Publications of salaries became commonplace in trade journals. The gap between the salaries of primary physicians and those with subspecialties became evident to many.

The question remains, what should go into the determination of compensation for managed care providers? Should an "FFS-equivalent dollars" method be used? Should physicians receive pay proportional to how ma patients they see? Should physicians be paid by how many visits they can generate, needed or not, from their established patients? What happens when the managed care portion of the practice increases significantly and the collected capitation fees lag behind the projected or promised salaries? What if one physician cares for a panel of patients within budgeted capitation payments, conserves medical service resources, and still gives good quality care, and a partner sends every other patient to a consultant? Should the physician keep the profit he or she produces? What about the group practice that lowers hospital utilization days and receives a substantial incentive payment for efficiency? How should the payment be dispersed among the group? Should dispersement include those who did not hospitalize patients or to those who cared for hospitalized patients?

One Group's Experience

Many physician groups have gone through each of these financial decision points. Over the past 25 years, one large multispecialty group practice has undergone several stages of physician compensation or "income distribution." The customary way of determining salary and bonus in the 1960s and 1970s was to take individual billings minus uncollectibles minus a general business overhead that often approached 40 percent. When a physician signed an employee agreement each year, the next year's annual salary was indicated by the treasurer confidentially. It was usually a reflection of the current year's productivity with a slight increase for anticipated increase in fees plus a "value to the organization" factor. If the paid-up billings for a physician ran much ahead of that physician's anticipated productivity, a midyear bonus would be granted. When fiscal year-end figures were in, perhaps other bonuses were available during the annual salary negotiation session.