Bonus pointers: The new models

Compensation used to be very straightforward. Owners and partners received their fair share of revenue, and employed physicians and staff earned a specific annual salary.

Then came the 1990s, with capitation experiments sweeping through many regions and hospital and physician practice management buyouts looking like an unstoppable trend. Suddenly dozens of different compensation schemes emerged. Besides straight salary and straight productivity plans, compensation was often based on quantitative and qualitative factors such as number of referrals received, results of patient satisfaction surveys, use of generics, and even in a few cases lower patient utilization rates. Bonuses were used as a strategy to change physician behavior and in some cases represented a major portion of physician incomes. As physicians' pay got more bonus-based, staff pay echoed the trend.

But physicians were not fans of this model.

"I have never met a doctor who likes being paid that way," said Mark Smith, executive vice president of physician recruiting company Merritt, Hawkins & Associates in Irving, Texas. The plans were often too complex for physicians to completely understand, and the uncertain income hindered doctors from making personal financial decisions. "Like most people, doctors want to know at least approximately how much they can count on earning in any given year," said Smith.

Compensation experiments of the 1990s have been for the most part abandoned. Formulas have become more normalized. But many groups have not discarded the bonus models altogether. "We're seeing a third wave of bonus models. It's less complex and usually represents a smaller portion of the doctor's overall compensation," said Ron Vance, a consultant in the Norcross, Ga., office of national health care consultancy Healthcare Evolutions Inc. This simpler form is used strategically by groups both as an incentive that encourages doctors to work harder and as a recognition for individual and group accomplishments. "Used judiciously, a bonus can advance the group's goals," said Vance.

Bonuses for group practices can be based on quantitative and qualitative criteria. Some of the same criteria can be applied to staff.

Rewarding productivity

Bonuses based on quantitative criteria are primarily referred to as productivity or revenue-generation bonuses. These are by far the more common criteria and almost always provide a larger percentage of a doctor's total compensation than qualitative factors.

"Bonuses based on production can help groups pay doctors a regular salary so they'll be able to pay their bills, but also provide an incentive to work harder," said Gray Tuttle, principal with Healthcare Management Advisors, a consulting firm based in Lansing, Mich.

Tuttle said productivity bonuses are typically provided to employed doctors who have not yet become partners. Often, the group will figure the point at which it breaks even on the doctor (based on the physician's base salary plus the share of office expenses), and then split everything above that amount down the middle. Half goes to the doctor as a bonus, and the other half becomes part of the group's profit.

Besides encouraging doctors to work harder, this type of bonus allows the group, when interviewing prospective physicians, to indicate the possibility or even likelihood of higher compensation without taking on additional financial risk.

"You can give younger employed doctors more, which will help you retain them without the danger of financial disaster inherent in a plan where you commit to an amount of straight salary that you may not be able to sustain," said Jeff Sinaiko, senior vice president of Sinaiko Healthcare Consulting Inc. in Los Angeles.

However, John A. Fromson, MD, assistant clinical professor in psychiatry at Harvard Medical School, points out that many new doctors are carrying very large student loans, and are therefore risk-averse and might not be interested in a compensation package that relies too heavily on bonuses. In his former role as vice president for medical affairs at the Massachusetts Medical Society, Dr. Fromson counseled new doctors and medical groups on compensation issues.

"A lot of new doctors will feel that the group is in a better position to take on financial risk than they are," said Dr. Fromson. So depending on the group, and how difficult it is to attract physicians to its area, it may be more successful in attracting new physicians with higher base pay. Productivity bonuses serve as an added incentive.

Improving effectiveness

Qualitative factors -- whether doctors complete paperwork promptly, arrive to work on time, are accessible to other doctors after hours or even measure well on patient satisfaction surveys -- rarely weigh as heavily as quantitative factors in determining bonus packages.

But as long as these bonuses don't amount to more than around 5% to 10% of overall compensation, they can help improve the office's effectiveness without alienating doctors, said Dr. Fromson.

Nevertheless, he adds that groups should be careful to ensure that none of the criteria encourage doctors to do things that run counter to the interests of patients. criteria such as increased use of generic drugs and reduction in utilization -- factors used to determine both compensation in capitated groups and health plans used in pay-for-performance plans -- may not be in their best interest.

"Just because some behavior may make sense financially doesn't mean it will encourage the practice of good medicine," he said.

Even seemingly patient-centric criteria such as high grades on satisfaction surveys may have a paradoxical effect that runs counter to patient interests. "If my bonus depends on patients liking me, do I give them antibiotics, painkillers or other drugs they demand even if I feel the medicine is not right for the patient?" Dr. Fromson said.

Accordingly, Dr. Fromson believes that it might be better for the practice if bonuses are generally based on administrative rather than clinical functions.

Other groups provide doctors with small bonuses more as tokens of appreciation than as incentives. "Bonuses can be based on past behaviors as long as they're only a limited part of compensation," said Bruce Johnson, an attorney and principal of the MGMA Health Care Consulting Group in Englewood, Colo. One of his areas of expertise is physician compensation strategies.

Johnson and other experts suggest reserving a small percentage of total profit to reward doctors for projects beyond the call of duty. Such projects would include working late to implement an electronic medical record system, taking primary responsibility for opening up a new office or giving marketing speeches in the community.

Experts also recommend that practices spell out in writing, for both physicians and staff, a bonus policy that makes clear what the criteria are for a bonus, how much that bonus could be and how it is paid.