Physician Compensation Methods

A long-standing theory of why there is inappropriate ordering of some services and treatments for patients is that when physicians are paid a fee for each service delivered, they may be incented to increase their overall compensation by increasing the volume of services, whether really needed by the patient or not.  One suggested remedy is to stop paying physicians by a fee-for-service method and instead pay them on some global basis that ignores units of services or put them on salary.  For many years staff model health plans have employed most of their primary care physicians and many specialists and those doctors are usually salaried.  Large group practices also often use salary-based compensation.  And as hospitals increasingly employ physicians, they also tend to use the salary method.

A recent Health Affairs blog, however, explores the extent to which these salary-based schemes still reward volume of activity, or productivity.  (HA Blog) The authors examined the compensation practices of 12 large multi-specialty practices, including such well-known groups as the Mayo Clinic, the Cleveland Clinic, Kaiser of Northern California, the Marshfield Clinic, Intermountain Medical and the Henry Ford Medical Group.  Most of these groups participated in a Medicare study showing that they had better quality and lower spending in treating Medicare patients.  The authors found that these groups continued to pay physicians for the number and type of services they provide, so the results in the Medicare study probably weren’t related to form of compensation.

Only two of the large practices paid their physicians solely on the basis of salary–Mayo and Kaiser.  The rest used some form of volume-based incentive or formula in determining total compensation and adjusting base salaries.    And productivity is often measured by the same relative value units method used for most fee-for-service payment methods.  The doctors in these large practices thus have an incentive to increase their, and consequently the group practice’s, volume of services.  It is rarer, however, for the doctors to have any financial interest in the equipment the practice owns, so they may be less incented to order tests using that equipment.  The authors conclude that simply placing every physician on salary is unlikely to by itself eliminate inappropriate utilization.  Further research would be helpful in understanding the effects of various forms of doctor payments.