Physician incentive plan yields resource savings

Bonus plans produce capitated behavior

There is little argument about the need for your physicians to become more efficient in order to succeed in a capitated environment, but until there is a financial incentive to do so, behavior will be slow to change. That’s the distilled message from experts who say that if you want your physicians to change their clinical behavior, you have to "show them the money."

An increasingly popular way to do this is with bonus plans that reward your physicians financially for changing practice patterns that not only save money but also protect and guarantee a high level of clinical care for the patient.

The first step in this process is deciding on the right time to institute a capitated-based bonus program, says Reed Tinsley, CPA, partner and health care consultant with O’Neal McGuiness & Tinsley in Houston.

The next step is recognizing when to start such a program. "I recommend a trigger of 20%," Tinsley says. "When capitated contracts account for that much of your total revenue, you are probably at a point when you can start making this work."

The reasoning here is that the carrot — in this case, the pot of bonus money — needs to be big enough to get your physician’s attention and give them the motivation to change clinical behavior that makes the health system more efficient.

Such incentive also is needed to compensate physicians for the extra work that is often required in the re-engineering process, says Tom Andrews, director of managed care and medical management services for DeKalb Medical Center in Decatur, GA. "The problem in the past has always been that physicians had no incentive to come in on the weekend to discharge a patient or stay late on a Friday night to handle an inpatient case that normally could have waited until Monday," Andrews explains.

Getting physicians to do such things would reduce lengths of stay, thereby cutting hospital expenses, which would be realized immediately. The physicians’ compensation would come later as a bonus that can be calculated on the total amount the hospital has saved.

After it is determined that a health system has enough capitation revenue to set up a bonus pool that rewards efficiency and clinical quality, the next step is developing the mechanism to create the bonus pot.

There are three ways of doing this, says Doug Chaet, president and chief executive officer of Lenox Hill Physician-Hospital Organization in New York City and president of the American Association of Physician-Hospital Organizations in Glen Allen, WV. They are:

1. On most risk deals, health systems are paid a percentage of the premium the payer receives. "One option is to take a percentage of what you receive right off the top and put it into a bonus fund," Chaet says. "Typically, this is an allocation of 3% to 5%."

2. Institute a withhold internally on the hospital’s portion of the capitated payment. The withhold range should be 5% to 10%.

3. Establish a withhold on the physicians’ capitated funds ranging from 5% to 15%.

Health systems can elect to use just one of these methods or a combination of the three. "Ultimately, what you want to end up with is monies that equate to about $3 to $10 of the per member per month [PMPM] payment," Chaet says.

It also needs to be noted that if enough efficiencies aren’t generated, this money may very well be turned into a contingency fund needed to cover deficits in primary, specialty, or ancillary care, as well as any hospital deficits. Chaet stresses that this should not become a pattern since it would make the incentive self-defeating. In short, if your physicians know they are not going to get the bonus, they probably won’t put in the extra work to generate the goal efficiencies. If that does happen, "there is nothing wrong with doubling the percentages" listed above, he says.

Define goals

The next step is to specifically define goals you want to achieve as a capitated health system. "The rule of thumb is to structure your bonus programs so you are tying your bonus dollars into basically anything you want the physicians to do," Chaet says. This could include:

• resource utilization;

• patient satisfaction;

• length of stay;

• preventive care programs;

• administrative contributions and efficiencies.

"How you weight each of these things depends on your objectives," Tinsley says, adding that he recommends placing resource utilization at the top of the list. "In a capitated environment, you have to be very efficient, or you can lose big time," he says. One physicians group he knows lost millions of dollars when they took on capitation but failed to change clinical behavior.

Distribution mechanism

Once the bonus pot is established and objectives defined, the next step is to create a mechanism to distribute the money. Chaet offers several methodologies, none exclusive of the other, with a blend often the most effective. The numbers used are arbitrary and chosen for explanatory purposes only. Each health system must develop its own trigger numbers. Chaet suggests:

Inpatient utilization.

This is a bonus tied to inpatient utilization, with the bonus pot coming from a hospital-side withhold. A baseline is established at 325 inpatient days per one thousand covered lives. At this utilization rate, no bonus money would be generated. The hospital would need it all to cover costs.

"But let’s say utilization came in at 275 days per thousand," Chaet says. "In that case, what you could do is distribute half of the money in the bonus fund to the physicians as a way of rewarding them for keeping utilization down, and the hospital gets the other half to replenish what it needs."

If inpatient performance was outstanding, for example 200 days per thousand, all the bonus money would go to the physicians. "In that case," Chaet explains, "the hospital wouldn’t need any of the withhold money because of the savings generated from the decreased utilization."

How this money is divided among physicians varies, but generally at least 50% —- and sometimes 100% — goes to primary care doctors, Chaet says.

PMPM budget.

Link the bonus to the PMPM budget. Under this scenario, the health system would need to determine the expected per month cost of treating each member based on age and sex, and then calculate a monthly total for the entire panel of members.

If the expected annual expense was determined to be $500,000, and actual expenses were less than that, a bonus could be paid.

Quality factors.

Determine bonus based on quality and other non-financial factors. "You don’t want to incentivize doctors strictly on financial factors," Chaet warns. "You don’t want them to cut costs so much that quality is sacrificed."

While few health systems have the data- capturing ability to quantify quality outcomes, it can be done and will be increasingly common in the future, Chaet says.

In the absence of quality outcome measurements, another option is tying a portion of physicians’ bonuses to patient satisfaction. "A lot of payers incorporate this into their own bonus methodology, and it can certainly be done on t he provider side as well," Chaet says. This information is gathered through patient satisfaction surveys.

Another non-financial bonus mechanism is physicians’ attendance at meetings. "As organized provider groups evolve, in order for them to be really successful in a globally capitated environment, they need to be educated on how to work the system," Chaet explains.

A chronic problem for many health systems is that when they schedule physician capitation education meetings, "no one shows up," Chaet says. "If that is a problem you are having, then tie part of the bonus to meeting attendance. If all physicians do is breeze through a couple of memos on how capitation works, they probably aren’t going to be real successful at making it work."