Matching physician compensation plans to capitation levels

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

* Patient satisfaction survey results; and

* Equal allocation.

Designing a compensation plan to serve this stage of managed care growth may be more difficult than at any other stage. Physicians have incentives to increase productivity and control costs. However, at issue is whether a group can ensure a consistent quality of care while controlling costs. To address this issue, the group could use a productivity-based compensation plan while implementing a strong utilization management program or emphasizing utilization performance in its incentive pool structure. In this instance, only two compensation pools might be used - production and incentive-with capitated revenue allocated through the production pool.

High capitation. High capitation may be characterized as representing more than 30 percent of revenue. Physician compensation in a highly capitated market is can be either salary-based or productivity-based. The salary-based model provides a base compensation for each physician, which constitutes 70 percent to 90 percent of the physician's total compensation. Different methodologies may be used to establish base compensation, including a percentage of industry standards or of the previous year's compensation. The group also may adjust salary levels to direct income to primary care physicians, reward longevity, or recognize physician leadership. Physicians receive additional compensation through the group's incentive plan.

The productivity-based model provides physicians with periodic compensation "draws" based on their projected or their previous year's compensation. These amounts are estimates that are reconciled regularly against a physician's productivity to determine actual compensation. Compensation increases as individual productivity increases (as measured on a relative value scale or by office visits).

The challenge with this type of plan is to ensure that physicians do not perform unnecessary tests or procedures to increase their productivity. Procedures that generated revenue for the group under fee-for-service payment become expenses for which no additional revenue is received under capitation. This type of plan should not be implemented unless the group's culture strongly values and encourages cost-effective medicine. Strong utilization management incentives and controls are essential to a productivity-based compensation plan.

Conclusion

As markets change and managed care penetration intensifies, traditional practice styles may jeopardize medical group success. By carefully considering their objectives, however, medical groups can develop compensation structures that encourage the physician behaviors necessary for a successful adjustment to the new payer and healthcare delivery environment.

Kevin M. Kennedy, MBA, is a manager, ECG Management Consultants, Inc., Seattle, Washington.

Michele P. Buckley, JD, is a senior associate, ECG Management Consultants, Inc., Seattle, Washington.