How should managed care physicians be paid?

In the 1970s, the prevailing standard fee for a service was from the local Blue Shield reimbursement fee schedule. Often the fee was related to the availability of the specialty in a geographic area and to "profiles" physicians created for themselves by their "usual and customary" charges. Those who performed technical procedures, i.e., subspecialists and surgeons, could demand higher fees for their "technologically advanced" services. Physicians new to practice in an area were reimbursed more for the same service than was the seasoned physician with a lower "profile." As the number and complexity of procedures increased in the 1980s, the CPT procedural codes were established, to which insurance companies would attach a payment fee schedule. Primary care or nonspecialist physicians tried to collect from the patient whatever the local market would bear, while the specialists' services became increasing "totally covered" by third-party payers.

Managed Care Professional Fees

The arrival of managed health care systems began to turn that situation around. Health maintenance organizations would offer many federally mandated health benefits, including outpatient care, and most financed coverage of all visits to a preauthorized provider for a relatively low copayment. Copayments ranged, on average, from $2 to $5.

Most HMO and managed care insurers use capitation (a set fee for each "head" or member signed up) to pay individual physicians, specialists, or group practices. IPAs and PPOs contract for discounted fees for specific services or withhold a portion of the payment for profit sharing or capital reinvestment. But how do these group practices or HMOs choose what to pay each of their physician members?

Many established or larger group practices have already grappled with the issue of how to pay each other. Many group practices pay their physicians' salaries. Employee agreements became commonplace in the 1980s, with negotiated or predetermined salary tables by specialties. Some group practices are partnerships and use the "equal-share" method of paying each other. These latter types are predominantly single-specialty groups, where age, level of experience, and workload of the members are essentially comparable.

Method of Physician

Reimbursement

Individual productivity, specialty type, and seniority became the key elements of how salary was determined by group practices in the 1970s. "Value to the organization" was thrown in if a partner was doing something other than seeing patients, such as administration, research, teaching, or just adding to the prestige of the group. Accounts receivable, collection rates, and profitability, of course, determined the bottom line. A percentage of everyone's expected salary might go down in a "bad" year, or there might be money left over for big bonuses in good years.

By the mid-1980s, group practice salaries, as well as average working hours per week and average patient work load per week, became the subject of surveys as well as journal publication. The American Medical Association and the American Group Practice Association started to compare specialties and group compensation packages. Publications of salaries became commonplace in trade journals. The gap between the salaries of primary physicians and those with subspecialties became evident to many.

The question remains, what should go into the determination of compensation for managed care providers? Should an "FFS-equivalent dollars" method be used? Should physicians receive pay proportional to how ma patients they see? Should physicians be paid by how many visits they can generate, needed or not, from their established patients? What happens when the managed care portion of the practice increases significantly and the collected capitation fees lag behind the projected or promised salaries? What if one physician cares for a panel of patients within budgeted capitation payments, conserves medical service resources, and still gives good quality care, and a partner sends every other patient to a consultant? Should the physician keep the profit he or she produces? What about the group practice that lowers hospital utilization days and receives a substantial incentive payment for efficiency? How should the payment be dispersed among the group? Should dispersement include those who did not hospitalize patients or to those who cared for hospitalized patients?

One Group's Experience

Many physician groups have gone through each of these financial decision points. Over the past 25 years, one large multispecialty group practice has undergone several stages of physician compensation or "income distribution." The customary way of determining salary and bonus in the 1960s and 1970s was to take individual billings minus uncollectibles minus a general business overhead that often approached 40 percent. When a physician signed an employee agreement each year, the next year's annual salary was indicated by the treasurer confidentially. It was usually a reflection of the current year's productivity with a slight increase for anticipated increase in fees plus a "value to the organization" factor. If the paid-up billings for a physician ran much ahead of that physician's anticipated productivity, a midyear bonus would be granted. When fiscal year-end figures were in, perhaps other bonuses were available during the annual salary negotiation session.

Several task forces composed of board members, departmental chiefs, and medical division directors have been formed over the years to establish both individualization and standardization of salaries. They would suggest policies to the board about the dispersement of professional fee receipts. For years, the group's salary structure paralleled community and nationwide patterns. Surgeons and medical subspecialists, especially those with procedure-oriented practices, made more than the general internist, who made more than even the hardest working pediatrician. Surgeons who complained that their salaries were not similar to their community peers needed only be reminded that the group's primary care doctors saw 50 bellyaches and heartburn cases before that one cholescytectomy was "presented" to the surgeon.

Once the group practice began to receive a significant proportion of its revenues from capitation payments of managed care HMO insurers, the board needed to take a hard look at physician compensation. After several years of successfully managed hospital care, the clinic was also receiving a hospital incentive payment given to the whole group for controlling utilization of bed days. On what basis were the physicians to be paid? Should those who managed the ambulatory care of their patients to avoid hospitalization, who created innovative ways to handle disease processes in the outpatient setting or saw their patients instead of sending them to expensive emergency departments, be favored? How could the clinic acknowledge those who promoted ambulatory surgery or who spent extra time with patients in health education and illness prevention? How could it reward surgeons and specialists who offered high-quality care without doing unnecessary procedures, as opposed to those who operated on anyone who walked through the door? How was the physician rewarded who teamed well with a nurse who participated in the patient's care with no method of reimbursement for nursing visits, who supervised a nurse practitioner or physician assistant? What about the very "flexible" physician who accepted the most complex or most neurotic and demanding patients? How was one to reward the busy practitioner who supervised and taught students and residents "gratis." What about the elderly patients from the growing Medicare Risk Contract population who required more time commitment per visit?

Managed Care Setting

Productivity incentives of the past may not be ideal in a managed care setting. Efficiency, clinical outcome, and cost effectiveness rather than productivity need to be rewarded for the managed care patient and the physician. Compensation needs to address personal incentives and simultaneously reward values important to the group. In the late 1980s, limits were put on productivity, so bonuses became regressive. For instance, a primary care physician who saw 25 percent more patients than his departmental peers was paid closer to the 110% level, as "churning patients" was suspected and quality of care or service might be jeopardized. Higher units were granted for new patients as an incentive to encourage greater accessibility to the physician providers by new HMO members. Many physicians sensed they were getting paid less for HMO patient encounters.

Even though the fee-for-service and managed care patient populations were mixed, what was done for HMO patients became the standard of practice for the FFS patient in the group practice by the mid-1980s. By 1985, when more than 50 percent of the group's revenues were coming from the HMO patients, there was talk of changing to a staff-model HMO and going fully managed car An equal division of the capitation among the physicians after clinic expenses were paid could be the method of payment to the physician. This was voted down in favor of continuing the group-model HMO, and budget of physician salaries by department was established. "Compensation packages" (salary plus benefits) became the topic of annual discussions. Malpractice, health, and life insurance premium pension, profit-sharing, travel, and professional dues expenses began to run 30 percent of the total benefit package.

Physician Performance Reviews

In 1986-87, high productivity wasn't enough to increase salaries. Overall physician performance was looked at A "Quality Bonus" was factored into everyone's salary, along with seniority. The chief gave a grade that predicted the bonus. Marks were given for flexibility with the staff, station teamwork, coworker comments, patient waiting time in the office, quality assurance and utilization review reports, compliments or complaints from membership services department, and chart audits and reviews. This, plus accessibility to patients and a peer review, determined about 5 percent of a physician's salary. The physician performance review process was expanded in 1988, but comparison to peers and the bonus were dropped. Many complained about allocation of prepaid net income being determined by the subjective judgment of physician managers. Physician performance reviews or evaluations are now the standard for advancing along the salary scale.

Salary Scales

In the late 1980s, to remain competitive in the national physician market and attract new recruits into a hostile practice climate, salary scales that ad seven steps were designed for each specialty. Along with each specialty scale were productivity standards for practitioners that were proportional to their full- or part-time status. These patient visits or units of service standards were designed by the medical director on the advice of the chiefs and the division directors of departments. It actually was a modified relative-time based scale, with incentives built in, especially for initial physicals, hospital work, and after hours work. Double value was given for a new patient physical to improve accessibility. These unit values have been modified over the years.

Today, the Hsiao Resource-Based Relative Value Scale and CPT codings are dictating the distribution of the physician component of capitation payments. Another helpful factor on the horizon is the availability of patient panel sizes and utilization data for each primary care physicians. Comparative pharmacy usage and radiological and laboratory utilization per patient ratios are available by department. Patient visit ratios, prescribing patterns, coverage percentages, and use of in-house and external referral services are also now available. Perhaps in the future, each primary care physician will be allotted a budget for his or her panel of patients. Physicians salaries may be determined by how well they manage the resources their patients consume over a year, not how often they see patients.

Future Salaries

How is physician performance going to be rewarded in the new TQM environment? Skill-based pay, a credential review, patient clinical outcomes, and patient satisfaction surveys may be more objective methods to adopt in the future. The physician-employee's compliance with performance goals and objectives of the individual, of the team, and of the organization may be the best way to distribute income in the managed care future rather than the fashionable productivity model of today.