Crozer-Keystone Health System in suburban Philadelphia developed what it thought was a sure-fire way to make money on its physician practices: offer to pay doctors 90% of the profits on their practices on top of their base salaries.
But now, 10 years after Crozer-Keystone's predecessor began buying practices, the four-hospital system's president admits the incentive plans failed in the goal of motivating physicians to work harder so the system can recover the cost of buying and maintaining practices. Maintaining 200 physicians is expected to result in an $8 million loss for the system this year. Media, Pa.-based Crozer-Keystone has $420 million in net revenues.
So, the system is considering taking the next step in bonus plans: tying physician pay to quality measures such as utilization management and patient satisfaction, measures that have been used for years by staff-model HMOs.
There's more at stake in this change than simply adjusting physicians' income, says John McMeekin, Crozer-Keystone's president and chief executive officer.
McMeekin believes mixing productivity and quality-based measures will give the system an idea of the value of owning particular practices. As a result, physicians who aren't productive or effective may be shown the door, he says.
"It's a question of how many of these practices do we need," McMeekin says. "This will make it clearer in terms of just evaluating performance . . . who the better performers are and allow us, if we need to, to eliminate some."
High pay, low return
Crozer-Keystone's experience has not discouraged other not-for-profit hospitals from offering incentive pay plans. According to a survey conducted in May 1996 by Hay Group, a Walnut Creek, Calif.-based compensation consulting firm, hospitals constitute a significant portion of the 75% of physician employers that plan to institute an incentive system this year.
As of 1996, 43% of hospitals had some sort of incentive pay program for physicians, and 61% of the incentives were based on individual productivity, the Hay Group survey says.
Hospitals also are subjecting a larger proportion of physicians' salaries to incentive plans. In 1996, those hospitals with incentive plans for doctors paid 18.6% of physician salaries from incentive plans, compared with 14.6% in 1995, according to the results of a physician salary survey by Oakland, N.J.-based Hospital & Healthcare Compensation Service.
"It's almost universal that this transition (to incentive pay) is happening," says Dana Daniels, a KPMG Peat Marwick partner who has developed incentive plans for health systems. Hospitals, he says, are "trying to connect doctors with the purpose of the healthcare system and to get the doctors better aligned with what that system is trying to accomplish."
Incentive pay is becoming more common because hospital executives feel it's a necessary way to get physicians to work harder. Executives often blame declining physician productivity for financial losses on practices. And many also say the Healthcare Financial Management Association's 1995 calculation that 83% of hospital-owned physician practices are losing money is a conservative estimate.
"A question I ask in any seminar is, when you put physicians on a base salary, do you see a productivity decline? The answer invariably is, they do," says Tim Cotter, managing director of Detroit-based consulting firm Sullivan, Cotter & Associates. "They find a serious decline, about 20%."
The problem, Cotter says, often stems from the hospitals themselves. When hospitals purchased physician practices in an attempt to build up their market share by creating a referral pipeline, they enticed doctors with offers of four-week vacations, holidays, sick days, medical education days--perks physicians never gave themselves when they were responsible for paying all the bills.
Meanwhile, physicians appeared to be happy with the salaries hospitals offered, says William Hanlon, a partner at healthcare investment bank Shattuck Hammond Partners in New York.
"The bar was set for the salary component at a level that would hold the physicians whole to prior-year compensation," Hanlon says. "Sometimes there was a variable above that, and (hospitals) thought physicians would achieve a higher compensation level. But people found physicians were happy working at the bar."
It's not worth it
Not-for-profit hospitals that already have implemented incentive plans are finding the plans do not usually lead to moneymaking practices. Lacking the ability to give physicians an equity stake and wary of violating federal rules on compensation, not-for-profit hospitals are struggling to come up with plans that result in more money for doctors and for hospitals. Meanwhile, managed care is putting pressure on hospitals to move fewer people from primary care up through the rest of the system.
Those cost pressures are resulting in a steady drop in physician salary increases. Salaries for hospital-based physicians are expected to grow by an average of 3.2% in 1997, down from 3.8% in 1996, according to the Hospital & Healthcare Compensation Service.
At Henry Ford Hospital in Detroit, salary increases are expected to drop to about 2% in 1998, down from past levels of 6% to 8%, Chief Financial Officer Thomas Nantais says. Henry Ford, has had a productivity-based bonus plan for most of its 1,000 physicians since 1981, and Nantais says incentives can help make up for the lower raises.
However, many physicians at Henry Ford find its plan lacks adequate rewards. Mark Seidman, M.D., a Henry Ford otolaryngologist, says his incentive plan pays a maximum 2% extra for reaching certain productivity measures, which isn't much considering the extra work he puts in, he says.
"It ain't worth it, but that's what I'm doing," he says.
The problem at Henry Ford is not unique. Many hospitals with incentive plans did not make them valuable enough to attract physicians, says Rick Helfrich, a partner at consulting firm Medical Alliances of Washington.
McMeekin at Crozer-Keystone says its incentive plan hasn't worked because the targets are nearly unattainable.
Crozer-Keystone offers to pay individual physicians 90% of revenues after they cover office expenses, which sounds simple enough, but the cost and accounting of office expenses changes once the system acquires a practice.
For instance, Crozer-Keystone subtracts depreciation from office expenses, something physicians rarely do, McMeekin says. Also, employee salaries and benefits go up to meet the system's standards.
Meanwhile, physicians have less time for their practices because they have to attend Crozer-Keystone network meetings.
"You can talk about (providing incentives), and we have," McMeekin says. "But if you worked under an incentive that was so unreachable, it would be more of a frustration and an insult than an encouragement to work harder."
The right reward
If productivity-based bonuses don't always work, then what does? Samaritan Health System in Phoenix is sold on measures that combine productivity with quality of care and other measurements.
Samaritan's 15 salaried staff physicians are paid bonuses based on the number of lives they manage, how well they manage their research and teaching budgets, how they score on patient satisfaction surveys and how they adhere to National Committee for Quality Assurance certification criteria, says Victor Buzachero, the system's vice president of human resources.
"I think what hospitals are looking for is how does the system come together to provide what the customer may be looking for," Buzachero says. "It may be a greater advantage to the system to manage lives rather than try to build volume in an individual unit. How physicians help us with it is very, very critical."
Buzachero says this philosophy has helped make Samaritan's physicians a profitable unit. (Samaritan is in the midst of a merger with Phoenix-based Mercy Healthcare Arizona. Buzachero said physician compensation had not yet been discussed in merger talks.)
An example from KPMG's Daniels also shows how productivity and qualitative measures can be used to determine bonuses.
In Daniels' example physicians are awarded points based on meeting certain targets. A doctor can earn up to 100 points for beating targets in total attributable revenues, total relative value units (a measure of worth independent of fee generation and patient visits), cost per patient visit, referral costs per patient and patient satisfaction ratings. The higher the point total, the greater the bonus.
Henry Ford in Detroit is putting together such a system for a bonus model it expects to put in place for most of its 1,000 physicians by Jan. 1, 1998, Nantais says.
The plan calls for each department to set up its own point system and reward physicians based on that system, Nantais says. The finance office will audit each department, and physicians will have the chance to double-check the numbers as well.
"For the last several years, we've been telling (department) chiefs that they have to bring salaries more in line with efforts of physicians," Nantais says. "This formula will help them do that."
In structuring a plan, hospitals have to be careful not to violate the "Stark rules" regarding paying for referrals and paying more than fair market value--defined usually as the average pay in a particular market, says Gary Davis, a healthcare attorney and partner for the Miami law firm Steel Hector & Davis. The rules refer to legislation introduced by Rep. Fortney "Pete" Stark (D-Calif.).
Hospitals have to be more careful acquiring practices than they once were because of the establishment in July 1996 of "intermediate sanctions." The sanctions impose fines on hospitals and their executives for excessive or illegal compensation packages, Daniels says. The fines represent a move away from a penalty called inurement, which results in hospitals losing their Medicare and Medicaid reimbursement. Federal authorities are loathe to impose inurement because it's so severe, he says.
To ensure they don't violate federal regulations, hospitals often study salary surveys from the Medical Group Management Association and other organizations to determine "average pay" in their markets.
"Now boards have to have very specific oversight of all the key players within their institution, including the doctors," Daniel says. "The hospital and the board and the responsible management are scrutinizing the total compensation arrangement for doctors much more carefully than they ever did before."
Although hospitals can't explicitly pay physicians for referrals, they can assume to an extent that owning doctors results in the patients of those doctors eventually seeking care from the hospital's specialists and ancillary services.
Developing a system that rewards doctors based on productivity and quality can help determine how physicians are benefiting a hospital's integrated delivery system, Nantais says.
"What happens in a system like ours is there are things that physicians do for a hospital that don't help the doctors," he says. "We'll try to recognize that they connect to overall gain, so they can at least share part of that gain."
What worries some doctors is that hospitals also want them to share part of the losses. Henry Ford's Seidman says the hospital administration suggested early on that doctors put 20% of their salary at risk. So, for example, a doctor making $100,000 could make as much as $120,000 or as little as $80,000, depending on performance.
"Everybody sort of shot that down," Seidman says.
Nantais says, "One of the survey questions (given to doctors about bonus plans) asked if they wanted more incentive-based compensation. They said yes, yet they say they're risk averse. If (a plan) had more upside risk, it would have more support."
Robert Weinman, M.D., president of the Union of American Physicians and Dentists, says the problem with bonus plans, even those based on qualitative measures, is they are based on improving a hospital's bottom line, not its care.
"Almost always, bonuses are given for the wrong thing," Weinman says. "They are usually given as rewards for production, not as rewards for excellence, not as rewards for diagnostic genius, not as rewards for therapeutic success."
Opinions like Weinman's, coupled with Crozer-Keystone's McMeekin saying bonus plans could be used to identify low achievers for potential job cutbacks, have left some physicians uneasy about their jobs and their relationships with their colleagues.
"It's not outwardly stated, but you'd have to be an idiot not to realize (tensions about job security) are there," Seidman says. "(The new bonus plan) hasn't changed relationships as of yet, but people have alluded to the fact that if you start doing that, there will be animosity. But in private practice, the person who works the hardest makes the most amount of money."
"If you don't have physicians performing above the medium level, you're losing your shirt," says Cotter, who is advising Henry Ford on its new compensation plan. "The people I want to focus on are the lowest performers. Incentive systems, because they have measurement systems, can be useful to a physician leader making judgments on who are the most appropriate people to retain."