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

This approach allows the stakeholders to determine the levels of compensation to be paid to physicians and to define the relative variance that should exist among the payment tiers (see Exhibit 3). Under the payment schedule in Exhibit 3, the physician groups are categorized into three tiers depending on the percentile ranking of their weighted average scores. Tier 3 providers would receive 110 percent of the base rate, tier 2 providers would receive 105 percent of the base rate, and tier 1 providers would receive 90 percent of the base rate. The relatively large 20-percent differential between tier 3 and tier 1 providers was set to reward superior provider performance. In actual practice, these differentials can be adjusted to reflect market dynamics, desired behaviors, and scope of the physician panel.

The principles of such a compensation program already are being tested. For example, many California group practices pay individual physicians a base salary plus a bonus. The bonus usually is based on the physician's performance as measured against the group's own criteria (eg, productivity, patient satisfaction, and medical management compliance). These first-generation incentive programs could be extended to include additional criteria, which together could be used as a proxy for "value," and holding all stakeholders accountable to a common set of criteria. These actions would have an appreciable impact upon the satisfaction of members who receive their healthcare services under a managed care plan.

EVALUATING THE FINANCIAL IMPACT

Once the performance criteria have been identified and the appropriate measurement and weighting methods defined, the magnitude of the potential financial impact of the proposed incentive payments should be determined. As an initial benchmark, a minimum of 20 percent of a physician's income should be put "at risk."(a) Additionally, a successful pay-for-performance program should ensure that physicians have an opportunity to increase their future compensation, provided they exceed the performance criteria. Conversely, physician organizations that are unable or unwilling to improve performance should receive a reduced level of compensation.

A health plan should be prepared to expend additional compensation to contracted physician providers to effectively motivate change. To determine the payment differential among physicians in each of the different tiers, a health plan should perform a financial analysis by determining the expected performance of its participating physicians (eg, based on previous years' quality or performance scores), ranking the various physicians and physician groups into the identified tiers, and multiplying the various tier rates by current or proposed capitation rates. In this manner, the health plan can identify the top-end and low-end tier rates that are both financially feasible and significant enough to motivate change.

In conjunction with a pay-for-performance program, a health plan might wish to consider implementing a grant program. A grant program involves an alternative payment structure that specifically directs recipient medical groups and/or participating physicians to engage in behaviors and activities that are designed to improve customer service, clinical quality, or other important initiatives. Such a program could use external management resources to gather and organize clinical data into reports that enable underperforming physicians who lack the resources to reach or exceed performance requirements to critically evaluate their clinical performance for all patients.