Those of us involved in developing the prototype for the Medicare prospective payment system knew more than 20 years ago that the failure to align physicians' and hospitals' economic incentives would result in a major structural dysfunction, which would forever compromise the PPS. This is why we greeted with interest the recent gain-sharing activity and the HHS inspector general's bulletin concerning this issue. Gain-sharing refers to payments to physicians of "a portion of the hospital's cost savings in exchange for identifying and implementing cost-saving strategies," according to the bulletin. In other words, gain-sharing is a strategy for linking physician compensation to the hospital's financial performance.
Performance-based compensation is the catalyst for the success of the American economy. People in the healthcare industry have long known that certain "easy savings" could be achieved simply by altering physician financial incentives. Other operational savings that require the medical staff's active collaboration might require a more aggressive approach to incentives. But neither level of savings can be achieved without a financial framework that aligns the economic incentives of physicians and hospitals, making them partners in solving the problem.
Payments to physicians to control beneficiaries' use of services provide the cornerstone of risk-based managed care. But, the inspector general's office contends, such arrangements between hospitals and physicians are prohibited under the Social Security Act. Under the PPS, doctors are sealed off in a parallel financial universe. Agreeing in the bulletin that "hospitals have a legitimate interest in enlisting physicians in their efforts to eliminate unnecessary costs," the inspector general nevertheless declined to approve gain-sharing for two reasons: the potential for abuse and the need for a uniform approach to the issue.
While the inspector general makes valid points, an unfortunate paralysis results from the continuing failure to resolve this issue. Hospitals are pressured relentlessly, particularly by Medicare, to become more efficient. But physician compensation, linchpin to the obvious solution, presents problems to policymakers because of the issue just below the surface-the role of the profit motive in healthcare.
We submit the following framework to help resolve this critical debate. Proposals for eliminating the conflict between physician payment and hospital payment under the PPS can be grouped under two philosophies: neutralizing disincentives to performance and creating performance-based incentives.
Strategies that focus only on payment for professional services give a limited role to profit. For example, with the development of severity-adjusted DRG-based patient classifications, payment by the case for physician services is now feasible. Undercompensation of physicians who treat sicker patients has been eliminated. This opens the door to a variety of solutions: A single payment could be made for all professional services associated with an admission or just for the services of the attending physician or the hospitalist. This approach is targeted and relatively risk free. Payment by the case neutralizes disincentives to operational improvement and creates no extra payments for doctors for withholding services to patients. It is less problematic than gain-sharing for many policymakers, because in gain-sharing, physicians receive "bonuses" in addition to their normal compensation if they contribute to lower hospital costs.
The line is crossed if hospital and physician payments are combined into a single DRG rate. Because this form of payment permits a redistribution of money between hospitals and physicians, this strategy raises the key question about the relationship of compensation to financial performance in healthcare. It is this kind of strategy that leads to the uneasy debate about quality of care and ethics, motivation and money.
HCFA identified sites for a combined Part A/Part B payment demonstration last year. Gain-sharing is simply a roundabout way of achieving the same result, and many managed-care strategies cross this same line. Gain-sharing is important, however, if the profit motive is essential to achieving the next level of operational savings. And it is easy to implement. No changes to the PPS are required; payments are made through a reconciliation process at the provider level.
Aligning physician and hospital incentives so doctors no longer have a financial incentive to do more cannot happen too soon. Watching the nation's healthcare system struggle with an intractable economic problem left from 1983, the year the PPS began, cannot be in the national interest. Good public policy requires equilibrium: a financially sound, quality-driven healthcare delivery system that functions with reasonable efficiency.
The PPS already has introduced financial incentives for hospital providers. The same incentives have been withheld from doctors in the belief that doctors may compromise the care of their patients by withholding necessary services, or that preserving conflicting incentives creates a balance that maintains quality of care. Yet few people argue that more care is necessarily better or that most physicians would risk their reputations for financial gain. Perhaps more to the point, achieving the level of operational performance necessary for hospitals to regain financial equilibrium in the current environment will require a substantial personal investment by the physicians. It will require reorganization and retraining. Also, improving hospital efficiency could result in loss of income to physicians under fee-for-service medicine. It is hard to envision the behavioral change that would be required without the opportunity for gain.
No system is without its weaknesses. But it is too cynical to assume that doctors will compromise patient care for money. Surely we can find a better balance than simply perpetuating a conflict. If we can get away from generalizations, solutions to the inspector general's concerns become apparent: Physician participation could be limited to those who satisfied certain eligibility criteria. National resource norms could limit the opportunity for incentive payments. This strategy would ensure that the level at which quality can become an issue is not approached and would also avoid the problem of competition for referrals among hospitals. And caps on incentives could mediate the role of money in medicine.
The point is, if we want to elicit help from physicians in resolving hospital operational problems, we probably have to do the same thing that we do when we want a certain performance from anyone else-reward them.