Physician financial incentives trim hospital costs

June 1, 2007

Physician financial incentives can be a powerful tool to motivate physicians to improve hospital-related practice patterns which can save health plans millions of dollars in reduced hospital costs.

Health plans struggle to reduce operating costs and improve profitability. Physician financial incentives can be a powerful tool to motivate physicians to improve hospital-related practice patterns which can save health plans millions of dollars in reduced hospital costs.

Traditional per diem and discounted charge payments offer hospitals little financial incentive to reduce costs associated with unnecessary lengths-of-stay or patient services. Similarly, physician fee-for-service payments offer physicians no financial incentive to reduce unnecessary hospital costs. The use of physician financial incentives can counter-act the financial disincentives inherent in these traditional hospital and physician payment methods.

Traditional utilization review processes have had some success in moderating hospital cost increases but have come with a hefty price tag. Health plans typically spend many thousands of dollars designing and implementing concurrent utilization review processes that significantly increase their own administrative costs as well as the administrative costs of physicians. These processes have strained working relations between physicians and health plans, making cooperation on cost control and quality improvement initiatives extremely difficult. Financial incentives can mitigate these negative aspects of utilization review by providing positive motivation for change, which can lead to significant improvements in hospital efficiencies without incurring significant additional administrative expenses.

The first step in creating physician financial incentives is to use historical claim data to establish expected or "normative" cost levels for the different types of inpatient who can be treated in acute care hospitals. Physician claims can be linked with hospital claims and then grouped into statistically and clinically reliable categories using a standard classification system, such as diagnosis-related groups (DRGs). Payment data on the grouped claims can then be used to calculate normative physician and hospital costs for each DRG. Each physician's individual historical physician and hospital costs by DRG can then be compared with the normative costs by DRG to identify high- and low-cost physicians. With this information, health plans and physicians can discuss where potential cost savings can be achieved and can negotiate a plan for providing incentive payments to physicians who can achieve savings in these areas.

During the incentive payment period, actual average costs by DRG are compared with price-adjusted normative costs by DRG to identify total achieved savings. These savings are then apportioned between the health plan and the physicians based on a percentage split agreed upon at the beginning of the incentive payment period. The physician portion of the savings is then apportioned among individual physicians according to the extent to which each physician has contributed to the achieved savings.

Success factors

Be accurate: The foundation of an effective incentive payment system is the accurate identification of volume-related reductions in hospital costs. All identified reductions must account for shifts in patient case-mix as well as price changes negotiated between the health plan and the hospitals and physicians. Also, random variations in costs must be accounted for with the use of proper statistical tests, including identification and elimination of statistical outliers.

Communicate clearly: Achieving physician understanding and buy-in to the incentive payment methodology is critical to the plan's success. Physicians must have confidence that calculations accurately reflect hospital cost reductions related to reductions in volume of services, as measured by case-mix and price-adjusted patient days or patient charges. Past physician incentive plans have failed because they have been based on questionable statistics which physicians view as vague, irrelevant abstractions (eg, reductions in hospital days per 1,000 surgical cases).

Physicians should receive detailed, case-mix-specific feed-back on progress toward reducing costs and earning incentive payments. This can be accomplished by providing easy-to-understand, physician-specific progress reports on a monthly or quarterly basis. Such reports can be shared with physicians through existing physician-specific web pages that health plans use to communicate with physicians.

Ensure budget neutrality: Incentive payments should be based on net savings achieved by all participating physicians. The health plan can then ensure that the incentive payment system will be budget neutral if it is not successful in reducing the health plan's hospital costs. Similarly, individual physician incentive payments should be computed on the basis of net savings to account for increases as well as decreases in physician efficiency.

Protect quality of patient care: It is important that the system address potential adverse affects on the quality of patient care, particularly premature patient discharging. Such practices can be detected by the health plan through the systematic tracking and evaluation of physician-specific, short-term re-admission rates. Physicians found guilty of systematically discharging patients prematurely should be dropped from the program.