Pay-for-performance compensation: moving beyond capitation - capitated health care payment - Cover Story

Healthcare Financial Management, July, 1998 by Lawrence B. Garcia, Scott Safriet, David C. Russell

Many health plans have successfully lowered the costs of providing healthcare services. Key to this success has been the transition from fee-for-service compensation to capitation. Capitation has been instrumental in achieving cost savings by creating direct financial incentives to manage utilization, thereby motivating both providers and health plans to use healthcare resources more effectively.

Nonetheless, many stakeholders are growing increasingly concerned about other changes associated with capitation. In particular, healthcare purchasers and consumers feel that financial incentives to control costs have not been balanced appropriately with incentives to improve the quality of and access to healthcare services. These stakeholders are demanding a renewed focus on "value." While the definition of value varies significantly, stakeholders generally are seeking open, timely, and convenient access to physicians and services coupled with high-quality clinical outcomes.

The current concerns associated with capitation do not necessitate a shift to radically different compensation systems. Pay for performance, a modified capitation method of physician compensation, can provide meaningful incentives that not only reward improved performance, but also encourage an improved administrative infrastructure more able to provide better service. A pay-for-performance program can:

* Balance multiple incentives and motivate desired behaviors for all stakeholders (health plan, medical group, individual physician, and hospital);

* Create consistent, compatible performance targets for all stakeholders;

* Reward superior performance with additional pay;

* Provide measurable, accountable criteria for all stakeholders; and

* Evolve to match the changing preferences and performance expectations of sophisticated purchasers and consumers.

EVALUATING THE COMPENSATION PROCESS

A health plan and its physician partners considering a transition to a pay-for-performance program first should study the compensation process objectively. The compensation outcomes model depicted in Exhibit 1 can be a helpful tool in evaluating the compensation process. The model suggests that there are a number of elements (eg, desired behaviors, motivations) that affect a compensation design and that each of these elements should be taken into consideration when evaluating the overall effectiveness of a compensation design. To best apply the model to a particular situation, the physicians and other interested parties, such as health plans and healthcare organizations, should understand the particular detail that would comprise each "box" in the model and ensure that a developed compensation design is able to provide a "link" to reach the desired outcomes.

The transition to a pay-for-performance mechanism should begin with an understanding of physicians' intrinsic motivations and how they affect physicians' actions and behaviors. Physicians' capabilities and experience with managed care, as well as their associated organizations' administrative infrastructure, also have a significant impact.

Incentives, whether implicit or explicit, are defined by the structure and amount of rewards. These incentives directly influence the motivations, actions, capabilities, and infrastructure that collectively determine performance and outcomes. Up to now, capitation systems have been structured to encourage lower utilization and physician-controlled managed care administrative infrastructure (ie, the delegation of responsibility for medical management and managed care administration to providers), and these goals are exactly what the systems have achieved. Pay-for-performance is designed to encourage the attainment of additional performance outcomes for managed care patients.

A successful pay-for-performance program consists of four basic steps: selecting performance criteria, evaluating the financial impact, developing an effective communication plan, and implementing the plan in stages.

SELECTING PERFORMANCE CRITERIA

Ideally, performance targets should be defined collaboratively by the purchasers, consumers, health plan, and physicians. In reality, however, expectations may differ among the various stakeholders and, therefore, health plans may fail to clearly articulate performance requirements to physicians.

Although it is difficult to define a common set of shared performance standards that all stakeholders accept, it is reasonable to expect health plans and physicians to develop standards that accurately reflect input from consumers and purchasers. The advantage to this approach is that both the health plan and the physicians will be accountable for the performance standards and, therefore, motivated to improve their performance.

In designing the appropriate performance criteria (see Exhibit 2), health plans and physicians should select criteria that, if achieved, will provide the basis for more collaborative health plan-physician relations, as well as improved value for consumers and purchasers. To accomplish this end, health plans and physicians together should assess the criteria that best influence improved patient satisfaction, clinical outcomes, and performance; are specific to each stakeholder; can be most accurately measured and reported to all stakeholders; and preserve the cost-efficiency incentives of traditional capitation. The more concise, objective, and measurable the criteria, the more likely they are to be accepted by all participating stakeholders.