The new competitive edge: Quality brings more money, patients

Purchasers influence performance-based incentives

Everybody talks about quality, but all they really care about is cost. That is the prevailing wisdom in health care today, but it is wrong. Financial incentives are shifting toward quality.

Envision the day when patients pay a lower copayment or premium contribution if they go to medical groups with better outcomes measurements. Instead of assuming that patients will choose medical groups with better ratings, employers may make it financially advantageous for them to do so. This is the upcoming competitive edge: Practices that demonstrate better performance or quality improvement receive more in reimbursements while their patients pay less.

Large health care purchasers are already basing part of their HMO premiums on quality and satisfaction measures. They are asking plans to provide quality incentives to medical groups. And they are developing more sophisticated payment systems that ultimately will impact physicians.

The trend toward quality-based premiums is most pronounced in California, where managed care has driven prices to rock bottom. But it is a harbinger of things to come throughout the country, outcomes experts say.

"The theory is that when you can’t distinguish that much on the basis of price, the only thing you have to distinguish among the plans is quality," says Helen Schauffler, PhD, associate professor of health policy at the University of California at Berkley School of Public Health. "A growing percentage of the premium will be held at risk [by purchasers] to meet specific performance targets [such as Health Plan Employer Data and Information Set (HEDIS)]. Can you put 20% at risk, 50% at risk? I don’t know how far it can go."

Patients respond to cost, not ratings

Initially, employers tried to promote quality among health plans and medical groups simply by reporting health plan performance measurements to consumers. While those efforts continue, they haven’t created a health care revolution. (For more information on consumer report cards, see Patient Satisfaction & Outcomes Management, December 1996, p. 135.)

A case in point is Southern California Edison’s experience in providing outcomes data to its employees. In 1996, only about 150 to 200 of the Rosemead, CA-based utility’s 14,000 employees switched to plans with higher report-card ratings — hardly a massive change.

So Edison will look at other options, says Suzanne Mercure, healthcare plan manager. "Companies have seen the greatest change [in consumer choice] when they change the contributions," she says.

Mercure envisions tying contributions or copayments to quality measures both at the health plan and medical group levels. The primary barrier to that now is a lack of data, she says.

"We’ve met with several medical groups in Southern California and asked, ‘What can you tell us that differentiates you and why should we tell our members to go to you?’" she says.

Physicians are skeptical about so-called quality incentives, particularly since many at the health plan level are actually based on utilization. "The physicians haven’t seen the [quality-linked] dollars yet," acknowledges Mercure. "That’s probably what they’re saying — ‘Where are the dollars?’ Someone like me would have to say, ‘Where are the outcomes?’"

Currently, Edison provides employees with a health plan score card that includes HEDIS measures, Washington, DC-based National Committee for Quality Assurance (NCQA) accreditation, patient satisfaction, and financial information about the plans. Mercure would like to provide similar "value measures" at the medical group level. But she struggles with how to obtain that information and even how to define quality. (For more information on defining quality, see related story, p. 65.)

After all, if a plan or medical group makes significant improvements in care, isn’t that more telling than a simple HEDIS statistic? "Unfortunately, we’ve emphasized the scores rather than the process for improvement," Mercure admits.

GTE in Stamford, CT, offers employees a 5% discount on their premium contribution if they choose one of the company’s health plans with an "exceptional quality" designation, which is based on HEDIS measures, NCQA accreditation, patient satisfaction, customer services, and cost. But Bruce Taylor, CLU, director of national health care policy for GTE, says the company isn’t ready to provide similar incentives related to medical groups. "To say this medical group is better than that medical group — I’m not sure anyone can do that yet with any degree of specificity," he says.

That is, in fact, the frustration for physicians. Health plans can raise their "quality" standing with purchasers only by influencing physicians. Physicians then face pressures and requests for data from various plans, often facing requests for different types of data from different health plans. "We are trying to determine how to respond to these very costly requests for data," says Alfredo Czerwinski, MD, senior vice president for clinical resources and chief medical officer of Sutter Health in Sacramento, CA.

At the same time, physicians must realize that demand for performance measures are likely to escalate, he says. "The health care industry for a long time has asked patients to believe in quality based on faith," he says. "We live in a new time."

More premiums are at risk

Meanwhile, money is a powerful motivator for physicians to orient their outcomes measurement and quality improvement toward the goals of managed care organizations. When employers base their HMO payments partly on quality, the health plans devise similar mechanisms for medical groups.

"The only way the plans can change those [quality] indicators is by changing the behavior of the medical groups they contract with," notes Schauffler. So as employer-based quality incentives grow, so too will performance payment systems for physicians.

The Pacific Business Group on Health, a San Francisco-based coalition of health care purchasers, places 2% of its premium at risk for performance measures. In 1995, every health plan contracting with the coalition missed at least one target measure. Collectively, they returned about $1 million in premiums to the coalition.

"The employers don’t want the money back," says Catherine Brown, director of the Negotiating Alliance at the business coalition. "We wanted to hold the health plans accountable for their performance. Our wish was that they would have such good performance that we wouldn’t get any money back."

In 1997, about $8 million in premiums from the Pacific Business Group on Health alliance are at risk based on measures that include the rates of mammography, pap smear, and prenatal care. New measures, including counseling for smoking cessation and flu vaccines for the elderly, are being added.

In Denver, the Cooperative for Health Insurance Purchasing, which serves an alliance of self-insured employers, similarly places 2% of premiums at risk based on performance standards.1

And in an unprecedented move, PacifiCare top executives agreed in April to place as much as 10% of their annual compensation at risk based on the satisfaction of California Public Employees’ Retirement System members (CalPERS). As the nation’s second-largest individual healthcare purchaser, the CalPERS arrangement could influence other employers to tie HMO executive compensation to patient satisfaction, outcomes experts say.

Impact of bonuses still small

How do financial incentives currently affect physician performance and patient care? That is still unclear.

"For many of these [managed care] companies, it can involve very small amounts of money," says Fred Hellinger, PhD, a senior economist with the Agency for Health Care Policy and Research in Rockville, MD. Hellinger recently reviewed published information on physician incentives.2

"To find out how important [quality] is and to disentangle it from other incentives and characteristics is very difficult," he says.

Managed care incentives vary widely. Aetna US Healthcare in Blue Bell, PA, provides a "quality-factored enhancement" to the base capitation for primary care physicians. The equation includes customer service issues — such as scheduled office hours and available office procedures — and quality measures — such as patient satisfaction, HEDIS scores, and transfer rates to other medical groups. Utilization comprises 18% of the quality factor.3

Woodland Hills, CA-based Health Net devised a bonus system that is based entirely on quality, satisfaction, and customer service measures. (For more information on the Health Net Quality of Care Improvement Program, see related story, p. 64.)

In either case, the goal is to influence the way physicians provide care. "We want to make sure that we are providing access to high quality care to our members, and we have to be able to document that access," says Antonio Legorreta, MD, MPH, vice president for quality initiatives for Foundation Health Systems, the parent company of Health Net, also based in Woodland Hills, CA.

Health Net also has added a data collection component to its quality bonus program for physicians, in hopes of influencing the quality measurement infrastructure of medical groups. Without adequate data collection on the part of physicians, managed care organizations cannot report accurate HEDIS measures to purchasers.

As purchasers increasingly demand performance information, proving your quality becomes a matter of survival, he says. "I would venture to say that health plans and medical groups that do not invest in this type of program may disappear in the future," says Legorreta.


1. Hoy EW, Wicks EK, Forland RA. A guide to facilitating consumer choice. Health Aff 1996; 15:9-29.

2. Hellinger, FJ. The impact of financial incentives on physician behavior in managed care plans: A review of the evidence. Medical Care Research and Review 1996; 53:294-314.

3. Hanchak NA, Schlackman N. The measurement of physician performance. Quality Management in Health Care 1995; 4:1-12.