The Impact of Physician Financial Incentives

By Mary R. Anderlik
Health Law & Policy Institute

Few of the recent changes in the health care system have excited as much passion as the introduction of new methods for compensating physicians. To keep down costs and limit medically inappropriate care, many managed care organizations: (1) use bonuses or withholds from base pay to reward physicians who order fewer services; and (2) change the basic payment method from fee-for-service to salary or capitation (payment of a set dollar amount per patient per unit of time). Several recent studies offer some insight into the effects of these new compensation arrangements.

The November 19, 1998 issue of the New England Journal of Medicine presented the results of a 1996 survey of primary care physicians practicing in California. Three quarters of the respondents were in office-based practices with managed care contracts with the remainder in group or staff model HMOs. Over one-third (38%) of respondents reported that bonuses were part of their compensation packages, and findings concerning this group included:

The study has several limits. Use of physician self-report is problematic given strategic bias, i.e., the incentive respondents have to strategically shape their responses when they believe their responses will influence policy making that may affect them. And, as the authors themselves note, the study does not measure the actual effects of incentive arrangements on patient care and outcomes. Still, they are likely correct in their conclusion that "high-quality care is unlikely to flourish in an environment that leaves physicians demoralized and leads many to believe that the standards of care have been compromised."

The November 18 issue of the Journal of the American Medical Association reports findings from a complementary study. Researchers surveyed adults enrolled in indemnity or managed care plans of a single large insurer, focusing on the relationship between basic payment method and patient trust. Nearly one-third of respondents were incorrect in identifying their physicianís payment method; 37.7% said they did not know the method of payment. Most (84%) completely or mostly trusted their physicians, but trust varied among groups: 94% of patients actually in the fee-for-service indemnity group said they trusted their physician to put their health and well-being above keeping down the health planís cost, versus 85% in fee-for-service managed care, 83% in capitation, and 77% in the salaried-physician group. (However, patients of salaried physicians who correctly identified their physicianís method of payment had higher levels of trust than other patients.) The power of perception is clear. On the other hand, analysis revealed a statistically significant difference in trust between the capitated patients and fee-for-service indemnity patients even after controlling for patientsí perceptions of how their physicians were paid.

Among the lessons learned from these two studies are:

Stepping back, one may question whether the present preoccupation with pay is serving us well. Stanford Business School professor Jeffrey Pfeffer warns that a focus on extrinsic rewards such as money undermines intrinsic motivation, distorts judgment, and may actually diminish performance. Less tinkering with financial incentives and more attention to the fundamentals of health care might be in the interests of physicians, patients, and managed care organizations.