A Look at Physician Compensation Models

Check out 10 compensation models, and see how they can affect the quality of patient care.

Health care organizations across the United States are reacting to changes in reimbursement by federal and commercial payers. In addition to declining reimbursement, there is increasing accountability to demonstrate improvements in safety, quality and patient satisfaction.

Furthermore, payers are implementing pay-for-performance programs to align financial incentives with the attainment of specific performance criteria. These changes in reimbursement are calling into question the viability, utility and satisfaction of current physician compensation models.

Here’s a look at 10 models of physician compensation, including the incentive structure and how they affect quality of care.

Overuse, Underuse and Misuse of Medical Care

Reimbursement and physician compensation play an important role in the overuse, underuse and misuse of health care. Elise Becher and Mark Chassin1 discuss the underuse, overuse and misuse in medical care and describe its impact on patients.

“Patients suffer harm because of three different types of quality problems. The first occurs when patients do not get beneficial health services. The second happens when patients undergo treatments or procedures from which they will not benefit. The third occurs when patients receive appropriate medical services, exposing patients to added risks of preventable complications.”1

Physician compensation plays a crucial role in preventing the quality-reducing, improper use of medical care. Becher and Chassin1 state that physician compensation is one of the causes of overuse and underuse of medical care.

Table 1 lists the 10 different models of physician compensation. This list is not exhaustive but represents the more common and emerging models. Table 1 compares these different models from three perspectives: a brief description, the underlying incentive structure and the usage-related risks.

A compensation plan may comprise more than one model given that a health organization may have more than one contract with its payers. For instance, an individual may be compensated under Medicaid, Medicare, Medicare Accountable Care Organization (ACO), direct contracting with an employer, or multiple contracts with different private health insurance carriers in his/her jurisdiction. Table 1 compares each model, and this comparison will enable health care organizations to evaluate their current compensation plan, design a new plan or redesign an existing plan.

Fee for service: Fee for service (FFS) compensation plans base pay upon clear measures of productivity. The underlying incentive is to provide more reimbursed services. In this plan, productivity is typically measured by the volume of services performed by the individual, and in many cases, work relative value units (WRVUs) measure volume. This model ties compensation to work performed rather than the number of patients seen, accounting for variations in workload due to different types of patients. This compensation plan focuses on the individual performer; the chief risk is overuse of medical care services.

Fee for value: Fee for value (FFV) compensation centers pay physicians based on defined measures beyond productivity, including but not limited to quality, patient safety, citizenship, population health and patient satisfaction. The main incentive is to align compensation with the measures of importance to different key stakeholders ranging from the Center for Medicare & Medicaid Services (CMS) to commercial health insurance carriers. In this plan, the chief risk is misuse or lack of alignment with key stakeholders. Similar to FFS, compensation is set at the individual level.

Straight salary: The straight salary compensation plan has a distinct payment structure based on the physician’s job description. This model incentivizes the alignment between performance and job expectations as defined by the job description. The two risks associated with this plan are underuse and misuse. Previous studies2,3

have empirically demonstrated a statistically significant relationship between pay levels and productivity. In brief, higher pay levels induce higher productivity.4If the salary is perceived as “unfair,” employees will adjust their levels of effort, performance and productivity, according to equity theory.5

This may lead to the misuse and underuse of health care. Similar to both FFS and FFV, compensation is provided at the individual level.

These compensation models (e.g., FFS, FFV, and straight salary) can and, DO coexist. For instance, new physicians typically receive a guaranteed, fixed base salary for one to three years to ramp up their practice and then convert to a FFS plan. If the base salary is fixed and guaranteed, then the physician experiences no financial risk, unlike the performance-and capitation-based compensation models.

Pay for performance: P4P systems provide pay around two major elements: base salary, plus variable or incentive compensation. This model incentivizes the alignment among the specified performance targets and work effort, performance and productivity. The variable or incentive component is similar to FFV with regard to the drivers of the incentive. The main risks of this plan are overuse and misuse of medical care. Underuse could occur if the specified performance targets are not initially well defined. Steven Kerr outlined the dangers of P4P systems in his study.6 This compensation model is typically set at the individual level. However, some organizations pay variable compensation at the group level if they are unable to determine the performance an individual physician. Furthermore, as team based care models such as Patient Centered Medical Homes (PCMHs) increase, it is likely that P4P programs will incorporate team compensation as well.

Capitation: A reimbursement method that seeks to align physician compensation directly with how the organization is reimbursed. This is often referred to as establishing a “clear line of sight.” In this model, the organization receives money up front to provide services for a defined patient population. The physicians are paid a fixed amount per enrollee, not per service, on a monthly basis. Capitation incentivizes physicians to contain costs and financial risk and provide appropriate care due to the fixed budget. In this method, physicians are also motivated to contain costs by providing preventive care that catches illnesses early (e.g., mammograms), and limits the number of additional office visits that patients need. The underuse of medical care is a leading risk in this model.

Bundled payment: A reimbursement model that determines physician compensation in a direct alignment with how the organization is reimbursed. Under this reimbursement model, the organization receives money based upon an episode of care, such as a hip or knee replacement, which typically involves more than one physician, more than one service, and in some cases, more than one part of the organization. The underlying incentive is to focus the physician’s attention on the entire episode of care rather than a single unit of service as defined by a common procedural terminology (CPT) code. The foremost risk in this model is underuse of medical care. A challenge under this compensation model is establishing an organization that supports the sharing of clinical and financial risk, and coordinates care across providers both within the same and in different organizations. The ACO is emerging as an organizational model designed to accommodate bundled payments better than traditional organizational forms such as medical groups and hospitals.

Accountable care organization: An ACO is an organizational model popularized by the Affordable Care Act (ACA) that tries to base reimbursement upon the Triple Aim. The three outcomes of the Triple Aim are experience of care, health of population and per capita cost. These three outcomes function as the incentives for physician compensation. Moreover, if the ACO achieves the articulated goals, then the savings accrue to the payer and the organization. In some organizations, the shared savings may trickle, DOwn to individual physicians and teams consisting of physicians and other caregivers. This resembles a gainsharing compensation model. Given the unique nature of a given population, the compensation model’s potential for success must be locally determined.

Concierge: Concierge medicine is an organizational and financing health care model in which the physician directly contracts with patients who pay the physician an annual retainer. The physician also bills the insurance company for medical services. In exchange for the annual retainer, the patient typically receives greater access, availability and other amenities. This is a form of the direct pay compensation model. In its purest form, such compensation models bypass government and commercial health insurance.

In a hybrid concierge model, the physician accepts both the annual retainer and the insurance. Concierge compensation models encourage lower costs of care by ensuring appropriate utilization of services, given the financial risk assumed by the physician upon obtaining the retainer. In fact, this model is similar to a capitation model and faces the same risks of underuse and misuse. However, these risks may be counterbalanced in a hybrid model because of the opportunity to generate additional revenue based upon services rendered.

Direct pay contracting: Direct pay contracting was the, Dominant payment method for medical services before the introduction of health insurance in the late 1920s. This model has two variants: a business-to-consumer (B2C) model and a business-to-business (B2B) model. In the B2C model, the patient directly pays the physician while, in the B2B model, the employer directly pays the physician. Both models are contractual models and motivate physicians to contain the costs of care, improve patient experience, especially satisfaction, and collaborate with the payee to improve services based upon mutually agreed upon criteria. The risks of this model are primarily underuse and misuse of medical care. Moral hazard theory describes the risks under this compensation model, stating that, if an individual has a benefit, then they are likely to use that benefit even if there is no need to, DO so. Cagatay Koç7 found evidence of the relationship between moral hazard theory and health insurance.

Volunteering: Volunteering is typically not seen as a physician compensation model. However, it has been established in the literature regarding compensation that volunteers are paid but not financially. They are compensated in ways related to meaning, fulfillment, sense of purpose and giving to others. Furthermore, volunteering also provides health benefits to the volunteer.8 Lynn VanderWielen and Yasar Ozcan discuss the role of free clinics in providing care to people without adequate health insurance coverage and access to medical services.9

Demographers predict that aging baby boomers in all occupations will be within the retirement zone in the next decade. The average age for physicians with an active license to practice was 51 years in 2012, up from 50 years in 2010. Furthermore, it is estimated that more than one out of four (26 percent) actively licensed physicians in the U.S. are 60 or older, signaling a statistical need for increasing the supply of physicians, as older physicians retire from practice or die.10 The key will be engaging physicians who are contemplating retirement or actively retired to stay involved in medicine as volunteers.

CONCLUSION

It is true that most physicians and other health care leaders lack control of reimbursement for services from the federal and state government as well as private commercial payers. Yet, it is true that the design or redesign of physician compensation programs falls under the control of health care organizations and that the way in which physicians are paid has an impact, positive or negative, on patient outcomes as well as human resources management outcomes impacting physicians and other caregivers.

William “Marty” Martin, MA, MS, MPH, PsyD, CHES, is associate professor in the Department of Management at the College of Commerce at DePaul University in Chicago, Illinois.

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13. Jenkinson CE, et al. Is volunteering a public health intervention? A systematic review and meta-analysis of the health and survival of volunteers. BMC Public Health. 2013; 13(1), 1-10.

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