Abstract
Physician motivation and related incentive compensations plans are central to the design and delivery of safe, high-quality, satisfying medical care as well as advancing physician satisfaction and engagement. The underlying premise of this article is that the interests of physicians and patients as well as the community ought to be better aligned to improve clinical and population health outcomes. The Triangle of Patient Centered Compensation is presented as a model to design or redesign compensation programs that seek to achieve better alignment between physicians, patients and the community. After reading this article, practitioners will be able to adopt and adapt the model to fit with the vision, mission and strategies of their organization and academics will be able to empirically test this model and revise this model.
Physicians and other health care providers should be compensated in a way that benefits the health and well-being of patients and the broader population. According to one physician compensation survey, 1 nearly one in three (27.8%) physicians are considering a career change due to a lack of satisfaction with their income. Of these physicians, almost half (42.5%) view the declines in reimbursement and health-reform changes as the drivers of their lack of satisfaction. The nation cannot afford to lose physicians from the clinical practice of medicine, given the forecasted increase in demand due to an aging population and increasing prevalence of chronic, lifestyle-related diseases, nor can the nation afford to have such a high proportion of physicians dissatisfied with their income.
Physician compensation is critical to containing costs in health care. According to the Center for Medicare and Medicaid Services, 2 physicians only account for 21.2% of the total health care spending, yet the decisions physicians make in the practice of medicine account for the vast majority of health care spending based on ordering and referrals.
Given the importance of physicians, their compensation is far too important to the high performance of health care organizations to be ignored. Yet physician compensation must be designed in a way that not only benefits the financial interests of physicians but also the health status/quality of life of patients.
Agency theory 3 is one of the dominant theoretical models for describing the link between compensation and performance. In essence, there should be an alignment of interests of the organization and those being compensated by the organization. With regard to physician compensation, it will be argued here that this alignment must also extend to the patients of physicians. Employees, their dependents and retirees will at some point all be patients. Many health systems and hospitals are adopting physician engagement and integration strategies that seek to align the interests and motivations of health care organizations and physicians. This is important work. Yet such engagement and integration strategies should factor in compensation into the equation with considerably more deliberation.
As such the aim of this article is to establish the case for compensating physicians based on the alignment of the interests of patients and physicians. Patients are not the only stakeholders, however. The government is a stakeholder given the relatively large percentage of the U.S. population whose coverage is based on Medicare and Medicaid, not to mention the number of people seeking care in government facilities such as the Department of Defense, the Veterans Administration and the federal/state correctional system. Employers are also vested stakeholders given the fact that 44.5% of individuals obtain their health insurance from employers. 4 This article is organized into five sections: a brief history of physician compensation, models of physician compensation, the alignment of patient/physician interests, designing an aligned physician compensation model and recommendations for employers.
Brief History of Physician Compensation
Prior to health insurance, physicians were paid in cash and sometimes by bartering good and services. With the establishment of health insurance, physicians are largely compensated either directly by the insurance company or through their employer, the organization that receives reimbursement from an insurance company for physician services.
Scofea 5 traces the historical development of health insurance in the United States beginning in 1798 when the U.S. Congress appropriated funding to the U.S. Marine Hospital. The first private health insurance plan began in 1929 at Baylor University Hospital although there were accident plans covering medical expenses dating back to the mid-1800s. Ten years later in 1939, the first Blue Shield Plan was founded, the California Physician Services, to compensate physician services. Fast forward to the 21st century and innovations in how physician are compensated continue to challenge health care organizations.
Models of Physician Compensation
Today, there are four basic models of physician compensation: fee-for-service, capitation, hybrid and fee-for-value. The confusing aspect of these four models is that the nomenclature is not standard. As such, varying organizations may refer to these models using slightly different language. Chassin 6 argued that barriers to quality health care fall into three categories: overuse (overutilization), underuse (underutilization) and misuse (inappropriate utilization). Each one of these models is described based on this quality categorization.
Fee-for-Service
Under this model, physicians are compensated for productivity. Productivity is typically measured in both the number of patients per time period and the number of procedures per visit. This model encourages physicians to see more patients and perform more procedures. Overutilization is a risk of this model. This risk is not aligned with safe, high-quality, satisfying care because patients may be exposed to invasive and noninvasive diagnostic and treatment regimens that may result in higher and unnecessary costs. For the patient the costs are payment of additional deductibles and possibly higher co-pays and co-insurance.
Capitation
Under this model, physicians are compensated upfront before performing services, with the payment based on the number of patients in a panel or population. This model encourages physicians to focus on the cost of care during the designated time period and in some cases during each episode of care. Underutilization is a risk of this model. This risk is not aligned with safe, high-quality, satisfying care because patients may not obtain the diagnostic or therapeutic services necessary to prevent the progression of disease, reverse the ill effects of disease or receive treatment necessary to maintain life itself and a high-quality life.
Fee-for-Value
Under this model, physicians are compensated for performing services aligned with specific outcome measures such as quality, cost and patient satisfaction. This model encourages physicians to emphasize factors other than productivity alone. The risk of this model is that physicians may “cherry pick” certain patients to improve specific outcomes. Underutilization is also a risk. The ripple effect experienced by the patient under Fee-for-Value is similar to that explained above in Capitation with regard to underutilization. However, a risk for patients with certain health status and demographic risk factors associated with poor clinical outcomes is that they will not be able to access the health care delivery system out of concern that the physician or the health care organization will get “dinged” when their quality scores or utilization scores are evaluated.
Hybrid
Under this model, physicians are compensated in a mix of ways including but not limited to fee-for-service, capitation and fee-for-value. This model encourages physicians to adjust their practice style and operations depending on each different compensation arrangement as determined by the health plan. Both overutilization and underutilization are risks of this model.
Emerging Models of Physician Compensation
Beyond these four more common models of physician compensation, emerging models include the following: concierge medicine, direct contracting and cash only. This not an inclusive list and does not address bundled payments directly or compensation under an Accountable Care Organization model of care.
Concierge Medicine
Under this model, physicians are compensated both by reimbursement from health plans and direct payments from patients. This model encourages physicians to focus their time, energy and dedication to a fewer number of patients without having to sacrifice income due to lower patient volume and procedures performed. The physicians make up for the volume by setting a retainer for patients to pay each year based on their income goals and the number of patients. The risk of this model is that some patients may “over utilize” access and services. There is also the risk to society that fewer individuals in need of health care will a relationship with a physician.
Direct Contracting
Under this model, physicians are compensated directly by employers who decide to “bypass the middle man,” that is, the health plan. This model encourages physicians to perform according to the contract. Contracts may be established with employers, particularly those that are self-insured, as well as with public employers. This risk of this model is that the terms of the contract may overshadow what is best for the patient.
Cash Only
Under this model, physicians are compensated by cash or credit cards directly by paying patients. This model encourages physicians to practice medicine without regard to the clinical and administrative requirements of a health plan. This is also known as a retail medicine model. The risk of this model is that physician may migrate toward overutilization because this model is similar to fee-for-service.
Alignment of Patient/Physician Interest
There is lot of talk about physician alignment and strategically aligned physician compensation. This is important but fails to address the alignment of patient and physician interests. Whose interests should come first—the patient or the physician? On the surface, the answer is simple and apparent. Kassirer 7 writes, “There is general agreement that patients’ interests must take precedence over physicians’ financial self-interests and that professionalism also entails service to vulnerable populations and civic engagement.” Compensation, particularly variable compensation, can have an impact on directing the energy, motivation and work toward serving vulnerable populations.
The Affordable Care Act (ACA) is likely to increase the conflict between patient and physician interests in part due to the fact that millions more American will have coverage through the ACA and the expansion of Medicaid. Decker, 8 in a survey, found that nearly one out of three (31%) of physicians reported they would not accept any new Medicaid patients. Their intention is not solely an individual decision by a single physician. This decision has an impact on access to care. Moreover, this decision brings to light the reality that level/type of reimbursement and even socioeconomic status make a difference in access to care.
The fact that Medicaid generally pays comparatively less than Medicare and commercial health plans such as United or the Blues poses two potential barriers related to compensation: (1) the impact on base salary, which can result in a perceived inability to meet physician life style needs, and (2) design of variable compensation plans to incent physician behaviors/outcomes aligned with the best interests of the patients. Beginning in 2013 and 2014, some primary care services covered by Medicaid are supposed to be paid at the higher Medicare rate. This change in coverage should theoretically remove the barrier of primary care physicians not caring for Medicaid patients based on reimbursement concerns.
Where is the alignment between physician compensation and patients without access to health insurance? There is naturally a greater alignment between physicians who are compensated for their services directly through an insurance plan or cash payment from a patient but there are patients still lacking health insurance. However, since the opening of the ACA exchanges, the uninsured rate in the United States is the lowest it has been since 2008, with 15.6% of the population without health insurance. 9 Yet patients without health insurance are still able to receive medical and other health services by seeking care in any number of Federally Qualified Health Centers as well as free and indigent clinics. Most of these free and indigents clinics rely on philanthropic funding but also depend on volunteerism among physicians and other care providers. However, it is well established that volunteers do indeed receive payment, but not monetary payment. Volunteers are motivated to serve others because of gains in intrinsic satisfaction 10 and gains in external benefits such as enhancing value in labor market and broadening or deepening a social network. 11 The question still remains as to whether these nonmonetary forms of compensation are aligned with the best interests of the patient. An unknown at this time is the impact on compensation with patients who obtain health insurance on the exchanges recognizing that there are five types of plans: bronze, silver, gold, platinum and catastrophic. Table 1 shows the breakdown of the percentage of individuals as of April 2014 who signed up for the different levels and the percentage of the premium paid by the health plan and individual, respectively.
Plan Enrollment and Coverage by Metal Level.
The implications of these levels of coverage are that the amount paid by individuals may place the health care organization and the physicians at risk of receiving only the portion of the payment for which the health plan is responsible. The question, yet to be answered, is as follows: What is the impact of this reimbursement type on serving the best interest of patients? Will physicians who see a higher proportion of patients with one type of coverage be compensated differently from others? All of the issues brought up in this article revolve around the notion of trust in the physician–patient relationship.
Patient Trust–Physician Compensation: Is There a Connection?
In one empirical study, it was found that patients trust their physicians more than the health insurance companies. 12 This is not surprising given the fact that Hollywood movies such as John Q starring Denzel Washington portrayed health insurance companies and managed care companies as well as hospital leaders with focusing on money more than anything else, including obtaining a lifesaving surgery for Denzel’s movie son.
Magill and Prybil 13 have described the loss of trust in all types of businesses including health care organizations. Previous research has reported on the relationship between patient perceptions of how physician are compensated and the impact on trust.14,15
The Physician Payments Sunshine Act, which is part of the ACA, requires pharmaceutical, medical device and biological manufacturers that participate in U.S. federal health care programs to report payments and items of value given to physicians and teaching hospitals. This regulation is intended to mandate that physicians disclose any financial relationships with manufacturers as a way to promote transparency that can advance trust.
In 2014, the Centers for Medicare & Medicaid Services publicly released physician payment and charges for Medicare services and procedures. This may prompt not only increased transparency but also encourage a discussion about reimbursement, fees and compensation with their physician. In fact, some savvy patients may even begin to negotiate fees with physicians assuming that is allowed by health insurance companies. These two federally mandated disclosure requirements serve to protect the public and may indeed increase trust in the medical profession at the macro level and increase trust between a physician and a patient at the micro level.
One way for both physicians in health care organizations and even health plans to regain that trust is to design physician compensation in a way that promotes stewardship. Stewardship is typically defined as to the manner in which limited resources are used and for whose benefit. Physician compensation and stewardship are intimately related. In fact, Magill and Prybil 16 posit that the ethics of stewardship is “pursuing fiscal responsibility for the community. The key word in this quote is the community not the individual physician or the organization.
Designing an Aligned Physician Compensation Model
Given the challenges discussed in this article, an alternative model is presented for consideration by organizations. An aligned physician compensation model must include all of the following elements referred here as the triangle of physician compensation: (1) base salary, (2) incentive compensation and (3) nonmonetary compensation. Beaulieu 17 discusses alignment of physician compensation in the following manner:
Thus, medical groups should look at ways to align their compensation models with the way revenue flows into the practice, which may include incentives for patient satisfaction, quality of care, and cost containment. (p. 48)
This view by Beaulieu is similar to the “Triple Aim”: enhancing patient experience, improving the health of the population and reducing per capita cost of care for the benefit of communities. 18 Incentives should be based on these three elements of the “Triple Aim” at a minimum. As conceptualized, the overarching goal of the “Triple Aim” is to improve health system performance in the United States. Additional incentives beyond the “Triple Aim” may include patient safety, appropriate utilization, contributions to the organization and community as well as population health. Figure 1 shows the Triangle Model of Patient Centered Physician Compensation.
The patient is at the center of this model.
Base Salary
There are two elements of a base salary that must be in place. First and foremost, base salary must assure the physiological and security needs of physicians. It should be high enough to provide physicians with some of the luxuries of life as compared to the wages of average college-educated Americans. This luxury element is essential to achieving the following objectives:
Attracting college students to pursue medicine as a career
Incenting medical students to select medical specialties based on interests and demand rather than compensation and paying off student debt
Retaining physicians in clinical roles in all types of organizations in all parts of the nation working with all types of patients including the most disadvantaged and most challenging medically
To avoid triggering the flight or fight response, the base salary must guarantee to some degree that the physician’s standard of living does not distract physicians from focusing on delivering the highest quality of care and satisfaction at the level of appropriate utilization. Yet against this backdrop is the reality that physician compensation is considerably higher than that of average workers and for good reason.
According to a McKinsey, 19 the average U.S. worker makes 5 times less than a U.S. primary care physician and 10 times less than a U.S. specialist. In other developed nations, this gap is not as wide, with primary care earning twice the income of the average worker and specialists earning 2.7 times. 20 To exacerbate the problem, there is even income inequality among physicians whereby the median income of specialists ($384,000) is nearly twice that of primary care physicians ($212,000), according to the Medical Group Management Association. 21
There have been calls for closing this wealth gap among physicians. 22 In a free market health care system, the gap between primary care physicians and specialists must be closed if college premedical students and medical students will choose a primary care path rather than a specialist path because anticipated income has an impact on career and specialty choice, 23 as eloquently stated in the blockbuster movie Jerry McGuire—“Show Me the Money!”
A related gap that needs to be closed to increase equity in physician base salaries is the gender gap. Lo Sasso and colleagues 24 empirically found a $16,819 gender gap in base salary controlling for the following factors: choice of specialty, work hours, practice setting and other factors. One of the conclusions of this empirical investigation 25 is that “female physicians may be seeking out employment arrangements that compensate them in other-nonfinancial ways.” This calls for innovation in physician compensation, which is the focal point of this article. More specifically, this emphasizes the importance of nonmonetary compensation.
Second, base salary ought to be guaranteed but it not should not be a guarantee without any performance expectations. To pay an individual without any expectations creates a sense of an entitlement that is not appropriate for the practice of medicine. After all, medicine is a profession. As such, there are certain standards of performance that should not be compromised.
In health care today, base salaries are determined based on the amount of work done as measured by the work RVU (relative value unit) system. This system to overvalue productivity and does not even account for work such as population health management and care coordination. Stecker and Schroeder 26 comment about the ideal model to reimburse physicians:
Ideally, physicians’ work would be reimbursed on the basis of metrics that signal whether their clinical services efficiently improve patient outcomes and that use effective clinical risk adjustment. (p. 2176)
In short, the goals of the organization and the daily focus of the physician must be aligned if the organization is to achieve its goals. Ideally, the goals of the organization are to put the patient first and increasingly the community first recognizing the truism of no margin, no mission. But if the unarticulated goal of the organization is to generate a higher operating margin or greater profit and this goal overshadows all other goals, then the organization will benefit financially, the senior executive team will benefit financially, most physicians will benefit financially while at the same time nonphysician staff will be working harder for the same pay and patients will be at risk of overutilization. In closing, the overarching recommendation is to make sure that the base salary is performance driven and that the performance measures are formulated based on what is in the best interest of the patient and increasingly the health of a specific population and community.
Incentive Compensation
Incentive compensation is based on applying a consequence to an expected performance behavior or outcome. The consequence may be positive or negative. Positive consequences can include monetary payments tied to the expected behavior/outcome as well as nonmonetary compensation in the form of recognition such as awards. Negative consequences include but are not limited to withholding or reducing monetary payments. When the expected behavior/outcome is demonstrated, then the payment is released.
Loss aversion as applied to incentive compensation design has not hit the headlines of the academic or trade publications. Prospect theory introduces the notion of loss aversion. 27 The goal of incentive compensation or performance pay is to change behavior or to align behavior with the strategies of the organization. Accordingly, compensating physicians for failing to achieve specific goals is likely to be effective. In fact, Mirrlees 28 discusses the potential effectiveness of this type of incentive compensation model. Accordingly, it is recommended here that physicians be compensated using the full continuum from providing positive consequences (e.g., bonuses) to negative consequences (e.g., fines, penalties, withholds).
The use of incentives is under scrutiny within the popular psychology and management press, which suggests that incentive compensation “crowds out” intrinsic motivation. Yet the evidence is clear that rewarding desired behavior is reinforcing based on learning psychology. 29 The current research is equivocal regarding the negative impact on expected behaviors if these behaviors are externally rewarded. Given the reality that physicians fall along the continuum from extrinsically to intrinsically motivated lends credence to designing an incentive compensation program that is attractive to performers along this continuum.
The art of designing and delivering incentive-based compensation schemes is to first to select the “right” target and second to determine the amount/proportion of the target. The targets should be structured at three levels, individual, group/team and organizational, as well as focused on four domains: patient, physician, organization and defined local geographic area. The three levels and four domains are described below:
Performance Target Levels, referring to the focus of the expected behavior/outcomes:
Individual: The incentive/disincentive is triggered by what the individual physician achieves or fails to achieve.
Group/Team: The incentive/disincentive is triggered by what the group/team achieves or fails to achieve
Organizational: The incentive/disincentive is triggered by what the organization achieves or fails to achieve.
Targeting incentive compensation at the level of the individual physician is commonplace and targeting incentive compensation at the level of a group/team is increasing under team-based and patient-centered medical home models of care. However, targeting at the level of the organization is not as common, yet targets should be set at all three levels to promote not simply individual and group/team performance but also organization-wide performance.
Four Domains, referring to the focus of attention, or effort as well as expected behavior/outcomes:
Patient: The incentive/disincentive is tied to the health status and satisfaction of the patient.
Physician: The incentive/disincentive is triggered by what the physician achieves or fails to achieve. Refer to three levels above.
Organization: The incentive/disincentive is linked to measures of organization performance. Refer to three levels above.
County: The incentive/disincentive is elicited by the health rankings of the county or other “community” definitions, based on metrics such as those published in U.S. County Health Rankings (http://www.countyhealthrankings.org/).
Focusing attention and energy across all four domains, although in varying proportions, is critical to assuring that the Triple Aim is achieved as well as aligning the interests of the patient with the physician, the organization and the community in general but the county in particular.
One of the challenges of building an incentive compensation system with three levels and four domains is that if you add too many variables it becomes confusing and the individual physician can experience choice fatigue. 30 It is possible they may choose not to achieve any one of these targets based on the dollar amount/proportion of the incentive. Another challenge is attribution; some physicians may believe it is unfair to hold them accountable for factors not under their direct control, such as the performance of other team members, the health behaviors/outcomes of patients and even the health status of a population (as defined by U.S. County Health Rankings or other measure). Finally, another challenge is the ethics of designing and administering such incentive-based physician compensation programs. Two ethical issues of note include the disclosure of financial incentives to patients and the potential for violating the principle “First Do No Harm” due to the nature of the financial incentive that may motivate the physician to either provide care which is not medically necessary or withhold care which is medically necessary.
Nonmonetary Compensation
Monetary compensation obviously matters particularly in the U.S. economy and in a largely free-market health care system where individuals have a choice of service provider. This emphasis on monetary compensation does not dismiss a total rewards philosophy. In fact, the decline in health care reimbursement at the level of health systems/hospitals makes it is even more important to design nonmonetary forms of reward and recognition. This increasing emphasis on nonmonetary compensation may offset, to some extent, the declines in absolute or relative financial compensation.
Beyond enlarging the ways in which you pay physicians, there is evidence that nonmonetary “compensation” increases performance and productivity. For instance, it was found in one empirical study that nonmonetary rewards are associated with gains in productivity and creativity. 31 Furthermore, Long and Shields 32 discovered that nonmonetary compensation represents a developmental and motivational lever for employees in ways that are different from monetary compensation. For instance, if a physician is offered the opportunity to participate in a continuing medical education (CME) program or to redesign their role, then the benefits affect not only the physician but also patients if the CME is designed to enhance the competency of the physician. Despite the growing benefits of nonmonetary compensation, they should be used with caution. This is also the case with monetary compensation.
There are three hidden dangers lurking in the design and administration of nonmonetary compensation programs. First, the base salary part of the total rewards package must be able to pass the “meet physiological and security needs.” The rationale for this point of view is that if individuals are struggling to “make ends meet,” then the power of nonmonetary compensation is nullified. Second, the nonmonetary compensation must be aligned and delivered in a way that reflects the expected performance of the individual physician. Third, for a nonmonetary compensation program to be effective, it is important that those individuals managing the program be able to manage performance, that is, to set expectations, monitor performance, give feedback to close performance gaps, coach to enhance performance and discipline when appropriate. If all of these conditions are met, then a nonmonetary compensation scheme has a chance of being effective.
Employer Recommendations
The recommendations for employers with regard to physician compensation are categorized into four domains depending on the relationship the employer has with employees, dependents and retirees in terms of offering health insurance and/or providing health care services, either onsite or though some type of contractual relationship with a service provider. The four domains to be described below are the following: offer health insurance, provide health care services, serve as member of health care purchasing coalition and lobby state legislature.
Offer Health Insurance
Employers providing health benefits for their employees, dependents and retirees do not have a direct role in the design of physician compensation. Yet employers are affected by how physicians who care for their employees, dependents and retirees are compensated. As such, at a minimum, it is essential to know how physicians are compensated in health care networks and determine whether the interests of covered employees are aligned with the physician compensation scheme.
Provide Health Care Services
Employers providing actual health care services on site, with the increase in the number of worksite clinics and arrangements with retail medicine clinics such as Minute Clinic, also need to know how physicians are compensated. Furthermore, employers in this situation have a larger stake and influence on how physicians are compensated since the compensation may be determined by the policies of the organization, especially if it involves the direct hire of physicians or a contract with a medical group, hospital or some other entity to provide physician services.
Serve as Member of Health Care Purchasing Coalition
Employers serving as members of Leapfrog or a health care purchasing coalitions such as the Midwest Business Group on Health may also leverage their influence by reviewing physician compensation as part of the due diligence in deciding to purchase health care services either directly with providers or indirectly through health insurance companies or health plans. This would broaden the purchasing perspective beyond simply scope of services, pricing and quality criteria but also the inputs to delivering quality and other attributes of importance to employers.
Lobby State Legislature
Employers with a large population of employees, dependents and retirees in one state or a few states should seek to influence state legislators with regard to how physicians are compensated in the provision of Medicaid and Worker’s Compensation. Employers may have employees, dependents or retirees who are under the age of 65 and receiving health coverage from Medicaid and hence have an interest in the delivery of such health services even if not covered by the employer’s plan. The health status of an employee effects the operations of all employers regardless of where the coverage originates. As such, employers are involved in the health status of all employees, dependents and retirees regardless of coverage. For employees injured on the job and receiving Worker’s Compensation, then it is obvious that physician compensation should be aligned not only with what is best for the patient but also the employer such as returning to work as soon as possible with the greatest ability to perform the essential functions of the job.
Conclusion
Returning to the question in the title of this article, “Are Physicians Paid To Promote Health and Well-Being?” it is hopefully evident that physician compensation makes a difference not just for the profession of medicine and individual physicians but also for employers and the employees, dependents and retirees who are cared for by physicians. Physician compensation is complex because medicine is complex given the art and science of practicing medicine. Despite this complexity, as long as our health care system continues to operate largely on free-market principles, then it is critical that physician compensation be designed in a way that goes beyond simply meeting the financial needs of physicians but also meets the health care needs of individuals, families, employers, payers and society. This is no easy task but the consequences of not aligning physician compensation with the interests of patients such as safe, high-quality, satisfying care are too high to throw up our hands and resign to the complexity of the situation.
Footnotes
Declaration of Conflicting Interests
The author declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.
Funding
The author received no financial support for the research, authorship, and/or publication of this article.