Matching physician compensation plans to capitation levels

Healthcare Financial Management, Sept, 1997 by Kevin M. Kennedy, Michele P. Buckley

As managed care penetration increases, physician compensation plans need to reflect the current transition from fee-for-service to capitated payment. In choosing the compensation structure that will be most beneficial to the success of the group practice and secure physician buy-in, practices need to assess their mission, goals, and corporate culture. They also need to assess their percentage of capitation to total revenues and develop, when necessary, new compensation pools that reward physicians for a variety of behaviors, such as increased productivity and utilization control. Compensation plans should be fair, flexible, and simple to understand and administer.

Developing mechanisms for compensation of group practice physicians has been a perennial difficulty. The issue has become more pronounced in the 1990s as group practices attempt to balance quality of care with cost-effectiveness. Group practices and healthcare systems that employ physicians need compensation arrangements that are effective under managed care. Compensation plans in organizations that receive a mix of fee-for-service and capitation payment are especially difficult to develop because the two payment systems reward contrary patient care behavior. To address this complexity, groups should develop compensation plans that adjust funds flow characteristics as managed care penetration increases.

Traditionally, physician compensation plans have been either productivity-based or salary-based. Recently, there has been a trend toward incentive-based arrangements.

Productivity-based compensation is rooted in solo practice management, where income is revenue less expenses. This approach is simple to administer and easy to understand, and it provides incentives to work hard, develop a successful practice, and minimize expenses. Many medical groups today, however, have needed to abandon this approach and embrace models that use a group orientation to revenue and expense.

Salary-based compensation historically has been limited to institution-affiliated practices and large, established medical groups. Salaried physicians are exposed to the least financial risk; therefore, salary-based compensation has been the model of choice for physicians whose practices have been newly acquired and for newly recruited physicians.

The earning limits salaries impose, though, have caused many groups to embrace incentive arrangements and bonuses. Incentive-based compensation arrangements can motivate physicians to adopt behavior that is not necessarily directly related to financial performance but that has value as defined by the group.

Planning Process

The best compensation plan is one that fosters the group's mission, meets its goals, meshes with the corporate culture, and is acceptable to a majority of the group's physicians. The first key element in compensation planning is determining the group's objectives. A compensation plan that does not meet the group's objectives may motivate behavior contradictory to its goals, possibly dooming the plan, and the group, to failure. Examples of a compensation plan's strategic objectives and their impact on a group's financial goals are shown in Exhibit 1.

Another key element in compensation planning is physician involvement. No compensation plan will please every physician, but by educating physicians about the compensation planning process and obtaining their input, a group can develop a plan that physicians will support.

Finally, the compensation plan should include financial modeling to compare compensation levels under existing plans with those projected under the new plan. Sensitivity analysis of key assumptions can project the impact of the compensation structure on group financial performance and forecast the plan's ability to support the group's objectives.

Gaining Physician Support

Gaining physician support for the compensation plan can be achieved by maximizing the plan's fairness, simplicity, and flexibility.

Fairness. Fairness is basic to the success of any compensation plan. Physicians should perceive that compensation is proportionate to the effort expended in patient care and other activities. Compensation does not have to be tied to the number of patient visits or office hours, but group physicians will want their colleagues who perform fewer patient care activities to perform other duties, such as administration, or to accept reduced compensation. If the plan is not perceived as being fair in this respect, physicians may not accept it, and performance may suffer.

Simplicity. The group's compensation plan also should be understandable to someone who is not part of it, such as a physician's spouse or a prospective group member. While it may be possible to design a plan that covers nearly every contingency, it may be so elaborate that it is confusing and difficult to administer. When a compensation plan is revised, limiting complexity should be a consideration.

Flexibility. While a compensation plan should define rules and expectations, it also should be flexible to accommodate group members' needs. Does the plan accommodate the physician who wants to work extra hours to support children in [TABULAR DATA FOR EXHIBIT 1 OMITTED] college or the partner who wants to reduce office hours to three days a week? Plans should have a mechanism for addressing unforeseen circumstances, and should assign authority to a governing body, such as the board or the compensation committee, to modify the plan as needed.