Physicians More Likely to Face Quality Incentives than Incentives That May Restrain Care

Worries that financial incentives for physicians might lead to the withholding of necessary medical care have drawn scrutiny from legislators, regulators, and the U.S. Supreme Court. While public debate centered on how health plans compensate physician practices, this research from the Center for Studying Health System Change (HSC) provided nationally representative data on how physician practices themselves structure incentives -- a factor with potentially more direct influence on clinical behavior. Based on 1999 data, physicians were more likely to face incentives that could promote service use, such as patient satisfaction metrics (24 percent) and quality measures (19 percent), than financial incentives potentially constraining care, such as profiling (14 percent). The complex nature of these incentive structures, combined with their relatively low prevalence, raised important questions about the feasibility and value of regulation and public disclosure.

Understanding the Purpose of Incentives

As managed care expanded, health plans and physician organizations adopted formal financial incentives to shape physician clinical decision making. Critics argued that such incentives could pit doctors' personal financial interests against their patients' welfare, potentially undermining quality and patient trust. Supporters maintained that incentives encouraging cost-effective care were necessary to curb overuse of services driving up spending. Arrangements like capitation -- a fixed monthly per-patient payment -- and profiling drew the sharpest criticism for their potential to discourage delivery of needed services.

While much attention focused on how health plans paid physician organizations, far less was known about how those organizations compensated individual physicians. Yet practice-level incentives likely had greater influence on care delivery, particularly when based on a physician's own clinical performance rather than the group's overall financial results. Practices used such mechanisms to bring individual physicians' interests in line with group objectives.

This research examined four factors used to adjust base compensation or bonuses, each reflecting how physicians treated patients: productivity (a standard measure) and three performance-based measures -- patient satisfaction survey results, quality of care metrics, and profiling that compared one physician's resource use patterns against peers.

Prevalence and Trends in Use

The majority of physicians were not directly exposed to the kinds of incentives perceived as conflicting with patient interests. In 1999, physicians working in practices of two or more reported less exposure to profiling-based financial incentives (14 percent) -- which were more prone to restraining service use -- than to incentives based on patient satisfaction (24 percent) and quality (19 percent), which tended to encourage care delivery. Broadly, physicians faced performance-based incentives (32 percent) at far lower rates than the productivity incentives long used to determine compensation (72 percent).

Performance-based incentives frequently operated in combination with each other and were nearly always paired with productivity incentives. The use of financial incentives by physician practices changed remarkably little between 1997 and 1999, with the only statistically significant shift being a modest decline in profiling.

Variation Across Practice Types

Productivity incentives were widespread and existed across all practice settings. Performance-based incentives, while not broadly adopted, were considerably more common in certain types of organizations. Physicians in group or staff-model health maintenance organizations (HMOs) were more than three times as likely to face profiling incentives as those in small or medium-sized groups, and even more likely to encounter patient satisfaction and quality incentives. Physicians in large groups of 30 or more, as well as those in hospital-owned and medical school practices, also faced these incentives at significantly higher rates than small-group physicians, though at roughly half the rate of group/staff-model HMO physicians.

The pressures to adopt formal incentive structures were likely stronger for HMOs, large groups, and hospital-owned practices than for small and mid-sized groups. These larger organizations may have had more difficulty monitoring individual physician behavior informally; they had greater need to align group and individual objectives since their physicians were more often salaried employees; and they were more likely to hold capitated health plan contracts and possess the resources and data infrastructure needed to build performance-monitoring systems.

Capitation and Individual Financial Incentives

Physicians in practices with higher shares of capitated revenue were more likely to face performance-based incentives than those with less capitation. Physicians whose practices derived more than 50 percent of revenue from capitation were three times as likely as those with no capitation to experience profiling and more than twice as likely to face patient satisfaction or quality incentives.

Under capitation arrangements, practices had reason to use profiling to promote cost-effective care patterns. Patient satisfaction and quality incentives, meanwhile, may have served as counterweights to the inherent risk under capitation that medically necessary services might be withheld.

Policy Implications

Although little evidence existed that financial incentives actually resulted in the withholding of needed care, many states had passed laws governing physician incentives, and Medicare regulations prohibited health plans from paying physicians to reduce or limit medically necessary services to individual patients. Various patient-protection proposals before Congress mirrored these Medicare rules.

Some evidence suggested incentives may have been eroding patients' trust in physicians because of perceived conflicts of interest. As an alternative to outright bans, some patient-protection statutes required health plans to disclose financial incentives or permitted lawsuits when incentives allegedly led to the denial of necessary care. Consumer advocates generally held that patients deserved such disclosure and could make better choices about their physicians and treatment when armed with information about financial arrangements.

However, existing regulations targeting health plans did not account for incentives created by physician practices themselves -- even though practice-level incentives were more powerful and could either amplify or offset plan-level incentives, especially in larger organizations. Policymakers needed to weigh carefully whether extending regulation to physician organizations made sense given the low prevalence of these incentives and the practical difficulties of enforcement at that level.

Public disclosure of incentives at both physician and practice levels would be exceedingly complex. Incentives varied in relative importance and could sometimes work at cross purposes -- profiling might conflict with quality incentives, and productivity incentives with patient satisfaction measures. The effects on patient care remained uncertain, and communicating this information clearly to consumers posed an enormous challenge.

The use of financial incentives by physician practices barely changed between 1997 and 1999, and substantial growth appeared unlikely in the short term. The managed care backlash had driven a decline in primary care physician employment in group/staff-model HMOs, and capitation had slowed or retreated -- though these trends might be partially offset by continuing growth in the number of employed physicians and expanding practice sizes. Given this outlook, policymakers needed to consider carefully whether regulatory intervention was warranted.

Sources and Further Reading

Magnus, S.A. "Physicians' Financial Incentives in Five Dimensions: A Conceptual Framework for HMO Managers." Health Care Management Review, Vol. 24, No. 1 (Winter 1999).

Gallagher, Thomas F., et al. "Patients' Attitudes Toward Cost Control Bonuses for Managed Care Physicians." Health Affairs, Vol. 20, No. 2 (March/April 2000).

Hall, Mark A., Kristin E. Kidd, and Elizabeth Dugan. "Disclosure of Physician Incentives: Do Practices Satisfy Purposes?" Health Affairs, Vol. 19, No. 4 (July/August 2000).

Stoddard, Jeffrey J., James D. Reschovsky, and J. Lee Hargraves. "Managed Care in the Doctor's Office: Has the Revolution Stalled?" The American Journal of Managed Care, Vol. 7, No. 11 (November 2001).

HSC Community Tracking Study Physician Survey, 1996-97 and 1998-99. Nationally representative telephone survey of non-federal, patient care physicians providing at least 20 hours per week of direct patient care, with 12,528 respondents (65% response rate) in 1996-97 and 12,304 respondents (61% response rate) in 1998-99.