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

Under a grant program, a health plan would allocate a discretionary amount of funds to a risk pool. Contracted physicians and physician groups then would be encouraged to submit grant proposals outlining their initiatives. A dedicated advisory committee composed of health plan, physician, and purchaser representatives would evaluate each initiative in terms of its ability to effectively improve service levels, educational efforts, or clinical outcomes, and then would allocate the available funds to worthwhile programs. A grant program would be an appropriate complement to a pay-for-performance program in that it would recognize differences in physician capabilities, further improvements in consumer service and desired outcomes, and strengthen the relationship between a health plan and its physician partners.

DEVELOPING A COMMUNICATION PLAN

Regardless of the planning and resources dedicated to a pay-for-performance program, the program's ultimate success will be hindered if the program is not effectively communicated to physician participants. This communication process should cover such areas as program rationale; basis for the development of criteria, such as market changes and consumer response; explanation of the need for mutually agreed-upon criteria; explanation of potential financial impact on physician compensation; and introduction of an ongoing program evaluation process. As soon as a health plan decides to implement a pay-for-performance program, performance criteria and implementation should be discussed with contracted physicians. The likelihood of physician buy-in will increase dramatically if physicians are included in the development process.

IMPLEMENTING THE PLAN IN STAGES

Once a health plan has determined the parameters of a pay-for-performance program, it should consider implementing the program in stages to minimize dramatic payment swings during the early phases of the program. Without a phased implementation plan, some providers may experience an actual decrease in their compensation, because they will be held accountable to performance standards against which they have not been measured in the past and to which they may not be accustomed.

One way to phase in the plan is to establish a payment "floor" for the first year (eg, 95 percent of current base compensation) that would protect physicians who may have a difficult time adapting to the new criteria. This good-faith effort by the health plan also will influence the long-term viability of the pay-for-performance program, as physicians will feel that they had ample opportunity to adjust to changed expectations. A second way to phase in the plan is to stage the actual implementation of the criteria. For example, if four new criteria are developed, two might be adopted in year 1 and two adopted in year 2.

Additionally, the pay-for-performance program and its outcomes should be reviewed every two years or on a schedule commensurate with the term of the contract between the medical group and the health plan. This review should focus on the program's financial impact, a comparison of the program criteria with changing market dynamics, and the need to adjust any program variables to ensure balanced economic incentives.