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Transmission Of Financial Incentives To Physicians By Intermediary Organizations In California

Abstract

 
Many U.S. physicians participate in provider-sponsored organizations that act as their intermediaries in contracting with managed care plans, particularly where capitation contracts are used. Examining a survey of 153 intermediary entities in California, we trace the cascade of financial incentives from health plans through physician organizations to primary care physicians. Although the physician organizations received the vast majority (84 percent) of their revenues through capitation contracts, most of the financial risk related to utilization and costs was retained at the group level. Capitation of primary care physicians was common in independent practice associations (IPAs), but payments typically were restricted to primary care services. Thirteen percent of medical groups and 19 percent of IPAs provided bonuses or withholds based on utilization or cost performance, which averaged 10 percent of base compensation.

Whether or not capitation subjects physicians to excessive financial pressure depends on how payments are structured and how physicians are organized to accept managed care contracts.³ Physician organizations frequently accept capitated payments, but individual physicians are rarely themselves directly "capitated" by MCOs.⁴ When doctors share financial risk through physician organizations (such as medical groups and independent practice associations, or IPAs), the physician organization plays a key role in transmitting incentives through its compensation system. Several features of that system combine to determine both the amount of risk that is passed to individual physicians and the financial pressure that may affect patient care. The most important are the scope of services for which a physician is "at risk," the magnitude of the financial rewards and penalties for reducing (or failing to reduce) costs or use, and whether there are countervailing incentives (such as payments for higher-quality care). These details are critical for understanding the likely impact of capitation.

Previous research has primarily examined financial incentives from the perspective of health plans or individual physicians, but not of physician organizations that receive incentives from health plans and transmit them to physician members.⁵ Yet nearly 60 percent of health plans report that this is their most common contractual arrangement.⁶ Moreover, the American Medical Association (AMA) reported that between 1984 and 1997 the share of physicians practicing in groups increased from 28 percent to 51 percent.⁷ In California more than 75 percent of all practicing physicians reported membership in at least one physician-owned IPA.⁸ Studies that have examined compensation in physician organizations have not characterized payment methods in sufficient detail to characterize the magnitude of individual and group (shared) risk.⁹

In this paper we trace the cascade of financial incentives from MCOs through physician organizations to individual primary care physicians (PCPs). We focus on these physicians because of their central role in resource allocation under managed care.

Data And Methods

Top Data And Methods Study Findings Discussion And Policy... NOTES

 
The sample studied consists of all physician organizations in California that contract with PacifiCare Health Systems (the third-largest health plan in California and the fifth-largest in the nation). The survey data reflect the practices of the physician organizations for all of their patients, not just PacifiCare enrollees. In total, the organizations we surveyed cared for approximately 7.8 million capitated enrollees, 6.5 million of whom were enrolled in commercial plans. In comparison, there are approximately nine million Californians enrolled in an HMO, excluding Kaiser, which has an exclusive arrangement with the Permanente Medical Groups.¹⁰ Thus, our sample covers approximately 87 percent of the enrollment in managed care plans (exclusive of Kaiser).

Data were collected through forty-five-minute structured telephone interviews with the chief executive officers or medical directors of each group between May 1999 and June 2000. Respondents were asked to use calendar year 1998 as their frame of reference. Because of their executive roles in the organizations, these respondents were well positioned to provide accurate answers to questions both about contracting between the group and HMOs and about the method of compensation for individual physicians.

Group financial incentives. To assess group incentives, we asked: "Approximately what share of the physician organization’s patient care revenue was paid for by managed care organizations using the following methods?" A choice of six categories was offered: discounted fee-for-service (FFS), FFS with withhold, capitation for professional services, capitation for professional and ancillary services, global capitation (which includes full risk for hospital costs), and other. For professional and professional plus ancillary capitation, we asked what proportion of contracts included shared hospital risk and what share of surpluses and losses from the risk pool the group received or was responsible for paying. For pharmacy costs, we asked respondents to categorize risk arrangements for their "typical" capitation contract as "no risk," "shared risk," or "full risk."

Individual financial incentives. The questionnaire then focused on compensation of PCPs. We asked respondents to characterize "the average PCP’s base compensation" as being either salary, productivity, or capitation.¹¹ For PCPs paid by capitation, we identified the services that were included in the capitation payment: primary care services only, referrals, ancillary services, and pharmacy (California law precludes capitation of individual physicians for hospital services).

Next, we considered the presence of withholds or bonuses related to the cost of care or use of services. If such arrangements were present, we asked about the specific measures of cost or use that were factored into the bonus or withhold arrangement, whether individual PCPs or subgroups were the unit of measurement, and the average magnitude of the incentive during the previous year (as a percentage of base compensation) related to each identified factor. Information about quality-of-care and productivity bonuses and withholds was elicited through a parallel approach. Finally, we queried respondents about profit-sharing arrangements, defined as any arrangement whereby bonuses were based on overall group profitability, although individual shares might vary based on factors such as seniority (but not individual performance).

Organizational types. Our sample contains three types of organizations: medical groups, IPAs, and "wraparounds" (Exhibit 1). Because these organizations relate to physicians in different ways, both formally and informally, many of our results are presented by organization type.

Independent practice associations. In contrast, IPAs are decentralized physician organizations. Physicians typically have nonexclusive, contractual relationships with IPAs and manage their own offices independently. In addition, IPAs contract with both individual and small groups of physicians, so there may be further risk pooling below the level of the IPA that we do not observe (that is, among the physicians that make up the small groups).

Wraparounds. The third type of entity, the medical group with IPA wraparound ("wraparound" hereafter) represents a hybrid approach. In the wraparound there is a core medical group alongside a related IPA. For contracts with MCOs, the wraparound generally acts like a single integrated entity. For many purposes, however, the group and wraparound IPA operate as two separate physician organizations: one for employed physicians and the other for contracted physicians. Because this is especially important for compensation, we report two sets of numbers for wraparounds in what follows: one for the physicians in the group (the "wraparound group") and one for the IPA (the "wraparound IPA").

Study Findings

Top Data And Methods Study Findings Discussion And Policy... NOTES

 
Of the 157 sampled physician organizations, 153 (97 percent) completed our survey. More than half (53 percent) of the sample consists of IPAs. Wraparounds were the next largest category (31 percent), with medical groups making up the remaining 16 percent. Nearly all of the physician organizations were multispecialty; three were primary care only. The median number of physicians in the surveyed organizations was 216, while the mean was 343, reflecting the influence of several outliers. Three-quarters of the organizations consist of at least fifty physicians. IPAs and wraparound IPAs have more physician members than medical groups and wraparound groups have (p= .07), although the numbers of physicians are not strictly comparable across model types because of the nonexclusivity of IPA arrangements. On average, the physician organizations cared for 51,538 capitated enrollees.

Sources of group revenue. Surveyed physician organizations reported receiving 84 percent of their revenue from some form of capitation contract (Exhibit 2). Because so little revenue was derived from FFS contracts overall, we report only total FFS contracts (with and without withholds). IPAs reported the least FFS revenue (9 percent) because physicians who belong to IPAs typically receive their FFS income directly from health plans. Nevertheless, even in traditional medical groups, only 25 percent of revenue is received via FFS payments. The most common form of capitation across all organizational forms includes full risk for professional and (outpatient) ancillary services and shared risk for hospital services. About 49 percent of revenues were received through such contracts. Global capitation contracts were responsible for only 15 percent of average revenues. There was much variation in the mix of capitation contracts across respondents, which is reflected in the large standard deviations.

Cost- and quality-of-care bonuses. Bonuses or withholds related to quality of care were more common than those related to costs (p < .01). In addition, there was a positive correlation between offering a quality-of-care bonus and a cost-of-care bonus (r = .36, p < .01). Of organizations that offered PCPs bonuses based on the cost of care, 61 percent offered a quality-of-care bonus, compared with only 16 percent of groups that did not provide a cost-of-care bonus (p < .01). Groups that used salary or FFS compensation methods for PCPs were the most likely to reward physicians for quality of care (p = .12). Such bonuses averaged 8 percent of base compensation and were somewhat larger for PCPs paid by FFS. Quality of care was generally measured by patient satisfaction, patients’ complaints, or Health Plan Employer Data and Information Set (HEDIS) scores for a PCP’s panel of patients.

Productivity bonuses. About one-third of salaried PCPs and 9 percent of capitated PCPs received bonuses related to their productivity. For capitated physicians, these productivity bonuses were typically based on the delivery of specific services, including "borderline" primary care services, such as cervical cancer screening, that might otherwise have triggered a referral to a specialist.¹² Productivity bonuses for salaried physicians averaged 5 percent of base compensation; for capitated physicians, 20 percent of base compensation.

Profit sharing. Just under half of the organizations had a profit-sharing arrangement with PCPs (Exhibit 5), which provided an average of 7 percent of base compensation. As with bonuses, a subset of organizations paid out considerably larger amounts under their profit-sharing arrangements. Ten percent of physician organizations paid out profit shares of 10 percent of base compensation or more; 4 percent gave PCPs profit shares of 20 percent or more.

Discussion And Policy Implications

Top Data And Methods Study Findings Discussion And Policy... NOTES

 
Our study found that in 1999–2000 financial risk for hospital services, referrals, ancillary services, and pharmacy in California was generally spread over a large group of physicians rather than passed through to individuals. Capitation of individual PCPs for primary care services was common, and some physician organizations used bonuses and withholds based on individual physicians’ performance on cost or utilization measures. Bonuses and withholds based on individual performance on quality-of-care measures were about equally prevalent as those based on cost, while profit sharing was the most common adjustment to PCP compensation.

Bonuses and use of services. Do these arrangements provide a large or small inducement to PCPs to constrain use of services? Although rarely used, capitation payments to individual PCPs that covered ancillary services, referrals, or pharmacy costs appear to involve substantial risk, the magnitude of which is difficult to assess. Bonuses or withholds related to utilization or costs are clearer. With PCPs’ annual compensation averaging around $150,000, bonuses of 10 percent of base salary—the average among those entities that offered such a bonus—mean a $15,000 increase in earnings.¹³ Previous surveys of physicians in California suggest that many doctors are acutely aware of these incentives.¹⁴ On the other hand, nearly 75 percent of physician organizations in our survey offered no financial incentives based on an individual PCP’s ability to reduce spending on hospital services, referrals, ancillary services, or pharmacy.

Risk-sharing thresholds. Regulatory agencies have tended to set thresholds for acceptable risk sharing with physicians that exceed the magnitude of all but a handful of the arrangements we identified. For physicians who treat Medicare and Medicaid patients, the Centers for Medicare and Medicaid Services (CMS) limits risk sharing to 25 percent of compensation.¹⁵ Similarly, some physicians concerned about the ethics of payment incentives have called for a 20 percent threshold for aggregate risk.¹⁶ It is important to note, however, that there is little empirical basis for these thresholds. Research on the impact of financial incentives on outcomes is primitive at best.

Profit sharing and cost control. Profit sharing was about twice as common as bonuses and withholds related to individual performance in reducing costs of care. The impact of profit sharing on cost control is attenuated because it is not tied to an individual physician’s behavior. Profit sharing, however, almost surely has additional important symbolic value.

Mixed incentives. Incentives to PCPs to cut costs or improve quality derive from a complex interaction between compensation mechanisms and the formal and informal rules governing employment. The payment arrangements we studied commonly included several elements that appeared to counterbalance one another. For example, we showed (in Exhibit 5) that some physicians who were paid by means of capitation and contracted primarily with IPAs, where the physician organization has little say over how doctors practice, also received bonuses based on indicators of quality of care (20 percent) and measures of productivity (9 percent). Salary compensation coexisted with bonuses based on quality of care (in 37 percent of practices using salary) and productivity measures (in 32 percent of practices using salary). Similarly, physician organizations that paid PCPs using FFS were also likely to put in place bonus payments based on "cost-of-care" performance.

To understand the net effect of a payment method, one must take account of the multiple elements of compensation alongside the terms of employment. For example, salary arrangements, at their most basic, guarantee a physician a fixed level of compensation for being employed by a medical group, thereby creating an incentive to work fewer hours, produce fewer services, and treat the simplest cases. However, such pure arrangements seldom exist in practice. Employment contracts for salaried physicians may specify hours of clinical effort, productivity standards, and participation in other activities that benefit the group. Together, these features of payment and employment alter the pure salary incentive.

Study’s strengths and weaknesses. Our results should be interpreted in light of several strengths and weaknesses of the study. Because California has a longer history with managed care and capitation of medical groups than does the nation as a whole, our results may not generalize to capitated arrangements elsewhere. In particular, physician organizations in California are much larger than elsewhere in the United States and more likely to be multispecialty.¹⁷

The California health care market also has been very turbulent over the past several years, as a number of physician organizations have entered bankruptcy or suffered major financial losses. To protect themselves from further losses, many of the remaining organizations have accepted less risk from HMOs. It is possible, then, that financial incentives for individual physicians within the organizations we studied have changed as well. The direction of change is unclear, however. Capitated organizations may be passing along more financial risk to individual physicians to improve their financial performance, or, because they are accepting less risk, there may be less risk sharing.

Compensation method and solvency. More generally, it is of interest to understand the relationship between transmission of financial incentives and financial performance of the intermediary organization. Some insight may be gained here by pairing our data with two available measures of financial performance: the occurrence of bankruptcy or closure and an indicator for positive working capital. Bankruptcy or closure information was collected from a California Medical Association report and our own notes from survey calls.¹⁸ The indicator for positive working capital was taken from financial solvency reporting results released by the state’s Department of Managed Health Care (DHMC) for risk-bearing organizations in California.¹⁹ The DHMC report, last updated in October 2001, captured information for fifty-nine organizations that were also in our survey.

Bivariate analyses indicate that the use of capitation to pay PCPs is associated with a higher likelihood of failure and worse performance on the working capital measure. Conversely, physician organizations that paid PCPs by salary or offered bonuses (for cost or quality) exhibited better financial performance on both measures. In multivariate analyses, however, the inclusion of a variable for organizational structure rendered the financial incentive variables insignificant. Although there may be an independent association between financial incentives and performance, this relationship cannot be determined from our data because of the relatively small sample size and high degree of correlation between incentives and organizational form.

If health insurance premiums continue to rise amid a slowing economy, we may well see renewed interest in models of managed care that involve the use of capitation payments to organized providers. Thus, understanding whether and how intermediary entities spread risk and transmit incentives to achieve cost control without putting undue financial pressure on physicians is likely to continue to be important to purchasers, health plans, and policymakers. Our findings suggest that critical assessments of financial incentives for physicians in a capitated environment need to account for the risk-pooling function of intermediary entities as well as a broad array of both financial and nonfinancial counterbalances to cost-control incentives.

Editor's Notes

 
Meredith Rosenthal is assistant professor of health economics and policy at the Harvard School of Public Health. Richard Frank is the Margaret T. Morris Professor of Health Economics in the Department of Health Care Policy at the Harvard Medical School. Joan Buchanan is a lecturer in health care policy at the Harvard Medical School. Arnold Epstein is the John H. Foster Professor and chair of the Department of Health Policy and Management at the Harvard School of Public Health.

Financial support from the California HealthCare Foundation is gratefully acknowledged. Excellent research assistance was provided by Elizabeth Côté, Rena Conti, Peter Harper, Christie Herring, and Virginia Wang. Joel Weissman and two anonymous referees provided helpful comments on an earlier draft.

NOTES

Top Data And Methods Study Findings Discussion And Policy... NOTES

 

1. S.D. Gould, "Relationships between Patients, Physicians, and Health Plans," Journal of Health Politics, Policy and Law 23, no. 4 (1999): 687–695.
2. T. Lake et al., Health Plans’ Selection and Payment of Health Care Providers (Washington: Mathematica Policy Research, May 2000).
3. S.D. Pearson, J.E. Sabin, and E.J. Emanuel, "Ethical Guidelines for Physician Compensation Based on Capitation," New England Journal of Medicine 339, no. 10 (1998): 689–693.[Free Full Text]
4. D.K. Remler et al., "What Do Managed Care Plans Do to Affect Care? Results from a Survey of Physicians," Inquiry 34, no. 3 (1997): 196–204.[Medline]
5. See, for example, A.L. Hillman, M.V. Pauly, and J.J. Kerstein, "How Do Financial Incentives Affect Physicians’ Clinical Decisions and the Financial Performance of Health Maintenance Organizations?" New England Journal of Medicine 321, no. 2 (1989): 86–92[Abstract]; M.R. Gold et al., "A National Survey of the Arrangements Managed-Care Plans Make with Physicians," New England Journal of Medicine 333, no. 25 (1995): 1678–1683[Abstract/Free Full Text]; and K. Grumbach et al., "Primary Care Physicians’ Experience of Financial Incentives in Managed-Care Systems," New England Journal of Medicine 339, no. 21 (1998): 1516–1521.[Abstract/Free Full Text]
6. Lake et al., Health Plans’ Selection.
7. P.R. Kletke, D.W. Emmons, and K.D. Gillis, "Current Trends in Physicians’ Practice Arrangements," Journal of the American Medical Association 276, no. 7 (1996): 555–560.[Abstract/Free Full Text]
8. K. Grumbach et al., "Independent Practice Association Physician Groups in California," Health Affairs (May/June 1998): 227–237.
9. Ibid.; E. Kerr et al., "Primary Care Physicians’ Satisfaction with Quality of Care in California Capitated Medical Groups," Journal of the American Medical Association 278, no. 4 (1997): 308–312[Abstract/Free Full Text]; and D. Conrad et al., "Primary Care Physician Compensation Method in Medical Groups," Journal of the American Medical Association 279, no. 11 (1998): 853–858.[Abstract/Free Full Text]
10. H.H. Schauffler et al., The State of Health Insurance in California 1998 (Berkeley: Health Insurance Policy Program, January 1999).
11. We allowed groups to respond with multiple methods, for which they provided the relevant weights. Because about 90 percent of responses indicated only one method of base compensation, we recoded the remaining 10 percent to reflect the predominant (majority share) method and analyzed the data in terms of the proportion of groups using this predominant method.
12. J.C. Robinson, "Blended Payment Methods in Physician Organizations under Managed Care," Journal of the American Medical Association 282, no. 13 (1999): 1258–1263.[Abstract/Free Full Text]
13. American Medical Association, Physician Marketplace Statistics 1997/1998 (Chicago: AMA, 1998).
14. Grumbach et al., "Primary Care Physicians’ Experience."
15. "Requirements for Physician Incentives Plan in Prepaid Health Care Organizations," Federal Register 61, no. 252 (1996): 13430–13432.[Medline]
16. Pearson et al., "Ethical Guidelines."
17. M.B. Rosenthal, B.E. Landon, and H.A. Huskamp, "Managed Care and Market Power: Physician Organizations in Four Markets," Health Affairs (Sep/Oct 2001): 187–193.
18. California Medical Association, "CMA List of Medical Group/IPA Bankruptcies, Closures, or Impending Insolvency" (San Francisco: CMA, March 2001).
19. Department of Managed Health Care, S.B. 260 Risk-Bearing Organizations, First Quarter of 2001 Financial Reporting Results (Sacramento: Department of Managed Health Care, October 2001).

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