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Primary Care Physician Incentives in Medical Group Practices
Craig A. Pedersen, PhD;
Eugene C. Rich, MD;
John Kralewski, PhD;
Roger Feldman, PhD;
Bryan Dowd, PhD;
Terence S. Bernhardt, BA
Arch Fam Med. 2000;9:458-462.
ABSTRACT
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Context Although medical groups are adapting to changes in financing health care, little is known about individual physician incentives in this environment.
Objectives To describe methods group practices use to compensate primary care physicians in a managed care environment and to examine the association of revenue sources for the group practice from all patients and primary care physician incentives.
Design We surveyed by mail group practice administrators for practices that had at least 200 members continuously enrolled in 1995.
Setting Group practices that had contractual arrangements with Blue Cross/Blue Shield of Minnesota.
Participants One hundred of 129 group practices returned usable surveys.
Results Most groups had some portion of primary care physicians' compensation at risk, although 17 groups compensated them through fully guaranteed annual salary. Seventy-one groups used productivity, 4 groups used quality of care, 1 group used utilization, and 30 used group financial performance. Factors reported to significantly influence primary care physician compensation included billings or charges, overall group practice performance, and net revenue or profit. Groups that had a higher proportion of income from various types of fee-for-service arrangements used lower proportions of base salary for primary care physician compensation and were more likely to relate physician income to measures of productivity.
Conclusions Substantial variation exists in the types of primary care physician incentives implemented by medical groups. Base salary, individual productivity, and group financial performance were most frequently used to determine compensation. Physician personal financial risk was higher overall in group practices that derived more revenue from fee-for-service contracts.
INTRODUCTION
BECAUSE PHYSICIANS in the United States are joining medical group practices in record numbers, both the number and the size of medical group practices have substantially increased in recent years.1-3 In 1991, 33% of US physicians were affiliated with medical groups, a 3-fold increase over 25 years.4 From 1983 to 1994, the proportion of physicians who are employees almost doubled (24% to 42%).3
The manner in which health plans pay these practices for physician services has also changed dramatically.5-9 Much research and policy debate has centered on health plan contracts with physicians.10-18 Although there is evidence that medical groups are adapting in a variety of ways to accommodate these new methods for financing health care,19-22 relatively little is known about individual physician incentives in this new environment.
The purpose of this study was to describe the methods group practices use to compensate primary care physicians (PCPs) in a managed care environment. We also evaluated the association of revenue sources for the group practice from all patients with different types of PCP incentives. This study is unique in that it quantifies how PCPs are paid and describes administrator opinions of the importance of specific factors in influencing PCP compensation when compensation is a function of a number of factors.
MATERIALS AND METHODS
This study focused on physician practices that accept financial and administrative responsibility for primary care services for enrollees in Blue Cross/Blue Shield of Minnesota managed care plans. All practices in Minnesota and its border states having at least 200 Blue Cross/Blue Shield of Minnesota members continuously enrolled in 1995 were eligible for this study, including physician groups employed by large organizations and self-employed physicians contracting with Blue Cross/Blue Shield of Minnesota. Medical group administrators were surveyed to obtain information on revenue sources, PCP compensation, and the relative importance of attributes used to determine PCP compensation.
Survey questions were developed from recent literature23 and from interviews with health plan and group practice medical directors and administrators. Factors identified include the organization and administration of the overall group practice (tax classification, ownership, and physician specialty and number), revenue sources (risk assumption and managed care contracts), and methods of physician compensation (eg, productivity, quality of care, utilization management, and group financial performance). Individual survey items were developed through focus groups, and extensive pilot testing was conducted with the use of health plan and medical group administrators.
After administrators of the medical groups were identified through telephone contact, questionnaires were mailed. Telephone follow-up and repeated mailings were conducted for nonrespondents. Data were collected between July 15 and October 15, 1996. Survey responses were reviewed for completeness, and incomplete responses were clarified through follow-up telephone interviews.
For this study, responses from administrators at the independent group practices and at the corporate level of the group practices were used. Medical directors and administrators at specific clinic sites within these primary care practices were also surveyed. Results from these surveys are reported elsewhere.24-25
One set of questions examined methods of PCP compensation. Group practice administrators were asked about the importance of specific methods used for PCP compensation, including individual physician productivity, quality of care, utilization management, and group financial performance. For each performance measure that contributed to physician compensation, medical group administrators were asked to rate the relative importance of the measure on a 4-point scale (1, not used; 2, a minor consideration; 3, somewhat important; and 4, very important).
Data were collected on revenue sources for the group practice. We obtained information on the proportion of revenue derived from (1) billed charges (traditional fee for service [FFS]), (2) FFS based on a general fee schedule not specific to the medical group, (3) discounted or negotiated FFS negotiated specifically with the medical group, (4) FFS with holdback and settlement, (5) full capitation for PCP services only, (6) full capitation for all physician services only, (7) capitation for physician services with some risk sharing for hospital costs, and (8) full-risk capitation (all physician and hospital services). Responses from this question were required to sum to 100%. The responses from 16 medical group practices did not sum to 100%. Three groups had responses for which the sum was close to 100% (95%-101%); these were included in the analysis and scaled to 100%. The remaining 13 group practice organizations were dropped from the analysis.
To represent the level of managed care risk assumed by the medical group, categorical measures were created with the use of 2 categories of revenue: FFS and capitation. Fee-for-service reimbursement included billed charges (traditional FFS), FFS based on a general fee schedule not specific to the medical group, and discounted or negotiated FFS negotiated specifically with the medical group. The proportion of revenue from these sources was referred to as "percentage of revenue from FFS contracts." Capitated reimbursement included full-risk capitation, capitation for physician services with some additional risk sharing, full capitation for all physician services, and full capitation for PCP services only. The proportion of revenue from these sources was referred to as "percentage of revenue from capitated contracts." Note that the reimbursement method "FFS with holdback and settlement" (which also included target utilization rates and annual readjustment of fees based on targets) was not included in either the FFS or capitation categories because it could fit either category.
Pearson correlation coefficients were used to assess the relationship between revenue sources (managed care risk) and physician compensation.
RESULTS
MEDICAL GROUP CHARACTERISTICS
One hundred fourteen surveys were returned from the 129 medical group administrators, for an 88.4% response rate. Of these 114 completed surveys, 13 did not adequately report information on group practice revenue (risk), and 1 did not adequately report information on typical PCP annual compensation. These groups were dropped from the analysis and therefore are not included in this article. This resulted in a study sample of 100 medical group practices.
Medical group characteristics are described in Table 1. Forty-five percent of groups were owned by all of the physicians working there. A majority of medical groups were for-profit (62%). The average number of physicians in the medical group was 29.7. Medical group administrators reported involvement in capitation or other financial risk–sharing arrangements for the overall group practice for an average of 7.7 years (SD, 5.4 years; range, 0-20 years).
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Table 1. Medical Group Characteristics*
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Group revenue for the respondents in this survey is derived primarily from FFS-based arrangements (Table 1). Capitation arrangements represent a small portion of the revenue for these groups (eg, 2.8% full-risk capitation and 4.5% capitation for PCP services only).
PHYSICIAN COMPENSATION METHOD
Our survey disclosed that the group practices use a variety of methods to determine PCP compensation (Table 2). A number of groups used only 1 method of compensation. Seventeen groups used guaranteed or base salary as the only type of compensation, while 19 used only productivity, and 5 used group financial performance as the only basis for compensation. When 2 methods of compensation were used, guaranteed or base salary was combined with productivity in 29 groups, while 11 used individual productivity and group financial performance, and 6 used guaranteed or base salary and group financial performance. The remaining 13 groups used some other combination of compensation.
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Table 2. Individual Physician Compensation
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PROPORTION OF INCOME
We examined the average proportion of income based on guaranteed or base salary as well as incentive compensation methods. When guaranteed or base salary was used, medical groups based a high proportion of physician income on it. Therefore, for the 62 medical groups that provided some portion of physician compensation as guaranteed or base salary, the average PCP income secured by this guaranteed or base salary was high (74%). Of the 71 medical groups that reported some of their PCPs' annual compensation being derived from individual physician productivity, the average was 62%. Group financial performance accounted for 30% of PCP income when used as an incentive. The PCP income was seldom based on individual physician quality of care or utilization, representing less than 5% of income if used.
SPECIFIC MEASUREMENTS OF PCP PERFORMANCE
Medical group administrators were also asked about the relative importance of specific measures in determining PCP annual compensation in their incentive plans (Table 3).
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Table 3. Group Practice Administrator Rating of Specific Measures of Primary Care Physician Performance
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Of the 71 medical groups that used individual productivity as a method to determine PCP annual compensation, 63 group practice organizations rated the importance of various measures of individual physician productivity in determining incentive pay. Forty-eight medical groups (76%) rated billings or charges as somewhat or very important. Thirty medical groups (48%) rated cash collections as somewhat or very important, and 28 medical groups (44%) rated net revenue as somewhat or very important. Measures of visits or encounters and relative value units were infrequently used.
All 4 of the groups that used quality-of-care measures to determine individual PCP compensation rated both patient surveys and chart review as somewhat or very important. Two groups rated supervisor or medical director evaluation as well as appropriate use of preventive services as somewhat or very important. Only 1 group mentioned input by nursing or support staff, and no group used quality-of-care ratings by managed care organizations in determining incentive compensation.
One group based a portion of annual compensation on assessment of individual physician management of utilization. That group ranked laboratory and x-ray utilization as very important, and number of referrals or referral rate, referral costs or charges, and hospital admissions or days as somewhat important. The group did not use prescription drug utilization as a management of utilization factor in determining the typical PCP's annual compensation.
GROUP FINANCIAL PERFORMANCE
Of the 30 medical groups that used group financial performance as a method to determine PCP annual compensation, 24 rated the importance of various measures of performance of the group in which the individual physician was a member in determining incentive pay. The type of grouping used most frequently was the overall group practice organization. Nineteen groups (79%) rated overall group practice organization as somewhat or very important. Three groups (13%) rated specialty group or department of the individual (ie, family practice, internal medicine) as very important, and 8 groups (33%) rated the individual physician's primary practice location as somewhat or very important as a group performance grouping factor in determining annual compensation.
Of the 30 medical groups that used group financial performance as a method to determine PCP annual compensation, 20 also rated the relative importance of specific factors used to determine performance of the group. All 20 groups rated net revenue or profit (eg, revenue in excess of expenses) as somewhat or very important. Ten groups (50%) rated production (eg, charges, visits, cash collections) as somewhat or very important, 5 groups (25%) rated quality of care (eg, patient satisfaction, clinical outcomes, etc) as somewhat or very important, and only 2 groups (10%) rated utilization management (eg, hospital utilization, laboratory utilization) as somewhat or very important as a group performance factor in determining typical PCP annual compensation.
CORRELATION OF PHYSICIAN INCENTIVES WITH REVENUE SOURCES
Measures of revenue sources for the overall group practice organization from all patients were significantly associated with the type of PCP compensation (Table 4). Percentage of revenue from FFS and capitated contracts represented the level of managed care risk assumed by the medical group. The correlation between percentage of revenue from FFS contracts and the proportion of PCP compensation determined by individual productivity was significant and positive. In contrast, the percentage of revenue from FFS contracts was negatively associated with base salary. The percentage of revenue from capitated contracts was significantly positively correlated with greater proportion of PCP income based on quality of care.
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Table 4. Correlation Between Medical Group Payment and Primary Care Physician Compensation (N=100)*
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COMMENT
Primary care physician compensation varies a great deal across these 100 medical group practices participating in a managed care network in the upper Midwest. Although 17 groups compensated PCPs through a fully guaranteed annual salary, most groups had some portion of PCP compensation at risk. Of the groups that put compensation at risk, most used a measure of individual physician productivity. Billings or charges were the predominant productivity measure. Measures of quality of care were infrequently used. While measures of physician utilization rarely influenced physician compensation, measures of group financial performance (particularly net revenue) were commonly a factor.
The associations of PCP incentives with the sources of group practice revenue were noteworthy. Groups that had a higher proportion of income from various types of FFS arrangements used lower proportions of base salary for PCP compensation and were more likely to relate physician income to measures of productivity. Thus, physician personal financial risk was higher overall in group practices with more revenue derived from FFS contracts.
Other research has suggested that measures of quality of care are emerging as a potentially important method of PCP compensation.7, 26 In our study, only 4 medical groups indicated some use of quality-of-care measures. Despite previous controversies about the value of patient care surveys in the measure of quality of care,27-28 all 4 groups reporting incentives based on quality of care used patient surveys. This is consistent with other recent research that indicates acceptance by group practice physicians of patient care surveys as an evaluation of performance.29
Many authors have warned about the dangers of financial incentives based on utilization.11-12,16, 30-31 Given the proportion of income related to managed care contracts and the many years of involvement with managed care in these medical groups, one might expect heavy use of utilization-management incentives. It is noteworthy, therefore, that only 1 medical group reported a proportion of PCP income based on utilization management.
In contrast to measures of utilization management, measures of group financial performance were used by 30 of these medical groups. This may not be surprising, since physicians own more than half of these group practices. For groups that used group financial performance as a method of PCP compensation, net revenue was the dominant measure of group financial performance. In a managed care environment, group profitability is determined by overall group management of expenses, including utilization of medical services.20, 23 Thus, in many groups, the financial consequences of the various risk contracts are shared with the PCPs as a group without evaluating particular utilization decisions by a particular physician. There remains, however, much concern that physician groups may have adverse results under risk contracts.8, 16 Further research that examines this relationship is needed.
Recent research by Grumbach et al32 also examined physician incentives. While there are important similarities in the types of incentives studied between the study by Grumbach et al and our study, the populations examined were very different and the questions were different. Our study focused on how group practices pay PCPs, whereas Grumbach et al examined the contracts managed care organizations have with physicians.
There are a number of limitations that must be considered when these results are reviewed. The medical groups described herein had substantial, often long-standing participation in a managed care network in the upper Midwest. In addition, the groups were relatively large, with the mean number of physicians averaging nearly 30, and they included a relatively high proportion of nonprofit organizations (almost 40%). Therefore, these groups may not be representative of group practices in other parts of the country. An additional limitation is that we collected data only on PCP incentives. It is conceivable that incentive plans for other physicians differ substantially from those for primary care. Also, it should be noted that the data reported in this article reflect responses from the corporate level and consequently differ somewhat from previously published data focused on site-level responses.24-25
CONCLUSIONS
There remains substantial variation in the types of PCP incentives implemented by medical group practices. Many group practices rely heavily on measures of PCP production. Only a small number of groups use measures of quality of care. Physician incentives based on resource utilization are rarely used among these medical groups, but incentives based on group financial performance are common. Billings or charges as a productivity measure and overall group practice performance and net revenue or profit as group financial performance measures rated highly among the specific factors influencing PCP compensation. Physician personal financial risk was higher overall in group practices with more revenue derived from FFS contracts. More research will be required to determine whether translating the financial risks inherent in managed care contracts into group financial incentives can promote cost-effective care without sacrificing patient access to needed services.
AUTHOR INFORMATION
Accepted for publication November 2, 1999.
Presented at the 15th Annual Meeting of the Association for Health Services Research, Washington, DC, June 21, 1998.
Reprints: Craig A. Pedersen, PhD, Division of Pharmacy Practice and Administration, The Ohio State University, 500 W 12th Ave, Columbus, OH 43210-1291 (e-mail: pedersen.18{at}osu.edu).
From the Division of Pharmacy Practice and Administration, The Ohio State University, Columbus (Dr Pedersen); Center for Practice Improvement and Outcomes Research and Department of General Internal Medicine, Creighton University, St Joseph Hospital, Omaha, Neb (Dr Rich); Division of Health Services Research and Policy, University of Minnesota, Minneapolis (Drs Kralewski, Feldman, and Dowd); and Blue Cross/Blue Shield of Minnesota, St Paul (Mr Bernhardt).
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