Aligning physician compensation with pay for performance

With the introduction of pay-for-performance programs, many medical practices are now attempting to align reimbursement mechanisms (payer to practice) with physician compensation (practice to physicians). Practice leaders have a number of options when developing a pay-for-performance compensation plan for physicians. No matter which option they choose, it’s critical to align the reimbursement mechanism that generates revenue for the practice with the performance measures that generate additional compensation for physicians. This ensures fiscal responsibility and promotes a heightened focus by physicians on the performance criteria that optimize revenue for the medical practice.

Pay-for-performance plans use three strategies – each with advantages and disadvantages – for distributing funds generated by performance measures: direct, indirect and integrative.

Direct method
The direct method uses a “pass-through” approach to revenue earned by physicians. They receive money above and beyond that stipulated in the physician compensation plan. With this method, each physician benefits from his or her work and recognizes the magnitude of that benefit.

However, the direct method of fund distribution has a disadvantage. As the amount of revenue grows from the performance-based measures, the direct treatment may conflict with the goals of the practice’s general compensation plan. These individualistic plans can lead to a lack of team orientation and a lack of focus on other important goals, such as productivity and revenue generation.

Indirect method
The indirect method usually has three options:

  1. The practice treats pay-for-performance dollars as another revenue source in a fund-flow model. This source is available for physician compensation; the overall compensation plan is generally silent on performance-related measures;
  2. The practice creates a separate incentive pool that can be earned by physicians, including those who do not generate the performance-related revenue; and
  3. The practice uses the performance-related revenue for discretionary purposes.

In the first method, the practice’s physician compensation plan is unaffected. If a practice credits physicians for net collections from professional services by using a percentage of net collections to total net collections, for example, the same percentage is applied to the pay-for-performance dollars. Each physician receives his or her portion.

In the second method, the money is awarded to physicians based on criteria established by the practice that may or may not link to the measures used to generate the money. The practice might distribute the funds equally, per full-time-equivalent physician, per a physician’s net collections for professional services as a percentage of total net collections, per individual work relative value units, etc.

In the third method, the practice might use the revenue to defray operating expenses – thereby reducing overall expenditures allocated to physicians – or to support program development and other practice projects.

The indirect pay-for-performance treatment creates a group or team orientation that can ensure high-quality, low-cost care. The downside is the general lack of focus and accountability for performance relative to performance measures. Because physicians do not perceive a direct reward for generating extra revenue, they may not focus on the measures and outcomes.

Integrative method
In this method, the performance-based revenue pays for a program that recognizes physicians for high-quality, low-cost outcomes. This typically involves multiple measures of performance and applies to all patients, not just those from whom the performance-related dollars are derived.

The advantage of an integrative treatment is a more widespread clinical engagement of physicians on cost of practice, practice efficiency and quality measures. A significant disadvantage of the approach is the infrastructure required to administer these plans.

As with any compensation program, pay-for-performance plans require formal policies and mechanisms to respond to physician appeals, questions and concerns. You should review the plan periodically to determine whether any unintended effects have occurred or whether additional program requirements and/or clarifications are needed.

By Bruce A. Johnson, JD, MPA, MGMA Health Care Consulting Group principal; and Deborah L. Walker Keegan, PhD, FACMPE, MGMA Health Care Consulting Group consultant

This article was adapted from the book Physician Compensation Plans: State-of-the-Art Strategies, which can be purchased at

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