New compensation model improves physician productivity

Healthcare Financial Management, July, 1999 by Alexsandra Davis, C. Thompson Hardy

An Ohio system incentive plan rewards physicians for achieving high-quality care, improved productivity, and operations efficiency.

In the mid-1990s, Meridia Health System, a hospital systems in the Cleveland, Ohio, area began acquiring primary care physician practices to form the core of an integrated delivery system to compete with other providers in the area. Unfortunately, the structure of the physician compensation plan for Meridia's new physician employees caused productivity to decline and losses to mount. Meridia appointed a task force that included physicians to develop a new compensation plan that bases pay on the application of a collection rate percentage to each physician's gross fee-for-service billings. While not perfect, the new compensation plan is helping both Meridia and its physicians achieve their mutual goals of high-quality care, reasonable productivity, and operating efficiency.

Hospitals and health systems that have attempted to protect and expand their patient bases by buying physician practices are finding that high overhead costs and declines in physician productivity are making this strategy unprofitable. Numerous surveys have found that hospitals have been incurring annual losses of as much as $100,000 per acquired physician.

Healthcare organizations that are trying to increase the productivity of their employed physicians often find that the physicians lack sufficient financial incentives and managerial skills to meet desired productivity levels. One health system in the Cleveland, Ohio, area, however, has rejuvenated the performance of its physician network by overhauling its physician compensation program and introducing effective incentives.

Forming a Primary Care Network

Since its formation through the merger of four independent hospitals in the 1980s, Meridia Health System has enjoyed a strong market position in Cleveland's eastern suburbs. Competition in the Cleveland healthcare market, however, has gradually intensified as a result of hospital consolidations, the acquisition of independent hospitals by for-profit hospital systems, and the development of integrated delivery systems (IDSs) that incorporate health plans, physician practices, and ancillary services into hospital-owned networks.

In 1992, Meridia decided that to remain competitive it had to develop a primary care physician network to form the core of an IDS. By 1995, through practice acquisitions and expansions, Meridia was operating four primary care practices employing a total of about 40 primary care physicians. An independent company was engaged to provide billing and management services for the network.

All physicians received two- or three-year guaranteed salary and benefit packages. Salaries were based on a review of each physician's existing salary level and years of experience, as well as industry compensation surveys. Benefit packages mirrored those of Meridia's senior executives, though some were modified to fit individual circumstances. Bonuses were available for physicians who met productivity targets. Most of these targets were based on a combination of the historical production level of each individual physician and industry averages.

Disappointing Network Results

Meridia executives had assumed that their physician practices would continue to function as they had before they were acquired. This assumption proved faulty for several reasons.

First, physician productivity declined for a variety of reasons. For example, many physicians spent less time in the office, saw fewer patients, and provided fewer services than they had before their practices were acquired.

Second, the transition to using contracted billing and management services caused disruptions to routine practice operations. These disruptions were compounded by the contracted company's failure to perform collection services adequately or develop management reports and distribute them in a timely fashion.

Third, new physicians recruited into the groups placed increased demands on practice resources and absorbed existing and new patient volume. The latter occurrence limited the opportunities of established physicians within the practices to maintain current productivity levels, let alone increase them.

Fourth, as practice sites were expanded or consolidated into new facilities, practice operations were disrupted. Patient volumes dropped in part due to practice location changes.

Losses from primary care network operations were in excess of $100,000 per physician, per year. In response, Meridia placed a moratorium on physician recruitment and practice acquisitions. A practice management and billing system was acquired and implemented internally. In addition, the practice administrative staff was restructured and augmented, with the hospital system's human resources and accounting departments assuming expanded responsibilities for network operations.

Revamping the Compensation Plan

A prime target of Meridia's loss-reduction effort was physician compensation. The system established a budget-reduction target for physician compensation of approximately $500,000, roughly 14 percent of current compensation levels.