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:

• Aspects of performance rewarded. Similar proportions of office-based and HMO-based physicians reported incentives indexed to productivity and use of referrals and hospital services. Incentives linked to prescription drugs, quality of care, and patient satisfaction were more likely for physicians in HMOs.

• Extent of risk. Bonuses were based exclusively on individual performance for 15% of these respondents. When physicians reported their income, the midpoint was $130,000, with approximately $10,500 of that amount attributable to bonuses. A subgroup of physicians received more than $40,000 in the form of bonuses.

• Perceived effects on practice. Over half (57%) felt pressure to limit the number of referrals, and 17% believed this pressure compromised the quality of care. A substantial majority (75%) felt pressure to see more patients per day; 24% believed this compromised quality of care. A lesser number (28%) reported pressure to limit what they told patients about treatment options. As compared with solo practitioners, physicians in HMOs felt less pressure to limit referrals or discussion of treatment options in ways they felt compromised care but greater pressure to see more patients.

• Satisfaction. Just under half reported that they were very satisfied with their practices. Incentives based on productivity were associated with lower satisfaction ratings; incentives based on quality or patient satisfaction were associated with higher satisfaction ratings.

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 physician’s 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 plan’s 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 physician’s 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 patients’ perceptions of how their physicians were paid.

Among the lessons learned from these two studies are:

• A small number of physicians receive a large amount of income (more than $40,000) in the form of bonuses. These physicians may be particularly susceptible to the temptation to cut corners. At the very least, managed care organizations should carefully monitor the practice patterns of these highly "incentivized" physicians to ensure that patient care is not being compromised.

• Incentives linked to quality of care and patient satisfaction are associated with higher physician satisfaction. These criteria for reward are also consistent with the goals of health care and should be encouraged. Incentives linked to productivity and referrals stand in need of strong justification given their association with physician dissatisfaction and perceived deficiencies in care.

• Physician incentives are difficult to study. Many policy analysts favor salary as the most neutral method of payment. The finding that patients of salaried physicians report the lowest levels of trust is startling. Of course, an analysis of base method of payment alone does not account for other pay features such as bonuses or equity stakes, let alone non-pay-related contextual factors that may influence physician behavior and patient trust. Also, because the JAMA study was confined to a single insurer operating in the Mid-Atlantic states, it would not have included members of established staff/group model HMOs that tend to use salary, such as Kaiser or Harvard Pilgrim.

12/31/98