American College of Physicians: Internal Medicine — Doctors for Adults ®


As they struggle to improve quality, HMOs try a new incentive: bonuses

From the June 2001 ACP-ASIM Observer, copyright 2001 by the American College of Physicians-American Society of Internal Medicine.

By Phyllis Maguire

How some employers and physician groups are introducing their own quality innovations

How medical groups are using quality incentives to pay their physicians

Ask Allyn M. Norman, DO, an internist in Getzville, N.Y., about quality, and he points to specific changes he has made in his solo practice.

Quality, he explains, is making a podiatrist available once a week for diabetic foot exams. It is performing minor surgeries himself to get quick answers about skin lesions. And most importantly, it is providing same-day scheduling to give patients better access to him and his nurse practitioners.

“Same-day scheduling allows us to catch a lot of conditions in early stages,” he said, “and abort many expensive treatments because we keep conditions from progressing.”

Lately, those efforts have also meant a chance to earn big bonuses from a local HMO. Through an incentive program that pays physicians for their efforts to improve quality, Dr. Norman last year earned an extra $18,000.

He is not alone. Across the country, a small but growing number of health plans are using bonuses and other financial incentives to encourage physicians to embrace quality improvement efforts. Health plans realize that in health care, as in most other industries, the fastest way to implement innovation is by using financial rewards.

The new incentives

Health plans have typically used the term “quality” to cover a lot of ground. In part, that’s because they have tried to analyze physicians’ quality by looking at factors they can easily measure.

Many health plans have long used Health Plan Employer Data and Information Set (HEDIS) surveys, which measure the use of preventive and clinical measures. Health plans have also typically looked at patient satisfaction measures to examine factors like access—how long patients have to wait for appointments or referrals—and physician communication skills.

Several health plans, however, are now expanding the measures they use to monitor quality. Some plans are measuring how physicians use disease management programs and patient counseling services. Others are monitoring physicians’ use of technologies like handheld computers and prescription-writing software to reduce medical errors.

Rather than merely monitoring how well physicians measure up to these quality markers, some health plans are also paying physicians significant bonuses. While health plans have factored patient satisfaction and other quality measures into physicians’ bonuses, those financial rewards have typically been too paltry to change practice patterns.

HMOs like Independent Health Association in Buffalo, N.Y., however, are upping the ante. The health plan rewards Dr. Norman for meeting specific quality measures. And the nonprofit HMO, which has 400,000 members, sets its bonuses high enough to make a difference.

Independent Health bases its quality bonus on five measures. It analyzes Dr. Norman’s patient satisfaction results, which reflect factors such as how thoroughly he explains medical conditions and discusses prescribed medications. The plan also looks at emergency room utilization, service access (which refers to the number of plan members Dr. Norman sees each year), mammography rates and colorectal cancer screening rates.

In each of the five categories, Dr. Norman can earn 20 cents per member per month for average performance, and 30 cents for high performance. In the three years that he has participated in the program, his quality incentive payment has grown from $12,500 in 1998 to $18,000 in 2000. Because he earned slightly more than $100,000 in capitated payments from Independent Health last year, Dr. Norman said he views the figure as an 18% bonus.

Dr. Norman explained that Independent Health’s quality measures have helped him improve the care he offers patients. In part because of the changes he has made to qualify for the incentive program, he has improved his screening rates for breast and colorectal cancers. His patient satisfaction scores have also climbed because he has implemented open access and started patient education programs.

And these successes have inspired him to measure other areas of his practice. “You don’t know what you’re doing until you measure it,” Dr. Norman explained. “I’m embarrassed to say, but less than half of my diabetic patients used to have hemoglobin A1c values of 7.5 or less. Now 84% do.”

‘Breath of fresh air’

Independent Health is not alone in giving physicians incentives to improve quality. Since 1998, the Hawaii Medical Service Association (HMSA)—the state’s Blue Cross and Blue Shield plan—has offered an incentive to both generalists and subspecialists in its preferred provider organization network. The incentive is a bonus that can equal up to 5.5% of their annual billings, with a $12,500 maximum cap.

Richard S. Chung, MD, medical director for HMSA’s Care Management, explained that 70% of the bonus is tied to a combination of clinical and patient satisfaction measures. For example, physicians are rewarded for using antihypertensive medications or long-term control drugs for asthma patients and conducting diabetic retinal exams.

Physicians earn the other 30% of the bonus by changing their administrative processes and filing electronic claims, using an Internet eligibility system and participating in other HMSA products. This year, the plan expects more than 1,600 of the network’s 2,200 physicians to participate.

Anthem Blue Cross and Blue Shield of New Hampshire also pays physician bonuses based on the use of mammography, Pap smears and diabetic eye exams. The program also rewards physicians for enrolling patients in disease management programs.

Anthem pays primary care groups a bonus of $10 to $30 per member per year, depending on their performance. Practices can earn up to $20,000 a year in bonuses.

Frederick S. Kelsey, FACP, a general internist with Speare Medical Associates in Plymouth, N.H., said that the incentive is “a breath of fresh air. You get to be like everyone else in America: If you do good work, you actually make more money.”

The seven-physician group earns only about $15,000 a year from Anthem’s quality bonus, Dr. Kelsey said. The practice spends some of that money paying staff to fill out plan forms and double-check claims data, all of which are necessary to earn the bonus.

While no one at the practice is getting rich from Anthem’s incentive program, Dr. Kelsey said physicians view their ability to earn the bonus as a matter of professional pride. Besides, Dr. Kelsey explained, the program is a welcome departure from the usual stance of many health plans, which withhold pay from physicians, and punish them for not meeting certain criteria.

California’s efforts

As health plans in scattered markets around the country link physician bonuses to quality measures, several California insurers are moving ahead with projects that promise to link even more bonus money to meeting quality measures.

For years, California physicians have had to live with a quality incentive system of sorts. Health plans have collected data on medical groups and then distributed the results in “report cards,” rating practices on measures of clinical care and service.

While health plans thought these efforts would help steer patients to the best-quality care and let them vote with their feet, the report cards have received low marks.

Consumers, it turns out, have a hard time digesting report care information. “Health care performance ratings are very unfamiliar to consumers,” explained Arnold Milstein, MD, medical director of the Pacific Business Group on Health (PBGH), the largest U.S. employer health purchasing coalition. (The group hosts its own HealthScope rating site at

And when patients have used report cards, Dr. Milstein said, physicians have complained. Shifting sicker patients with AIDS or diabetes to better-performing practices without paying those physicians more, he said, essentially penalizes a health plan’s top performers.

Because report cards haven’t done much to boost quality, the state’s health plans are now considering a model that will pay bonuses to medical groups that meet certain measurements. The Integrated Healthcare Association (IHA), a leadership group made up of the state’s major physician groups, health plans, health systems and employers, is currently working with four of the state’s largest plans. The goal is to craft a quality measurement system that will be used in a statewide incentive program.

As the IHA pursues its incentive plan, two of the state’s insurance giants have quietly rolled out quality incentive programs of their own. Blue Shield of California will pay groups that provide patients certain services—like smoking cessation education and relatively quick access to appointments—an end-of-year bonus equaling 5% of their capitated rates, or about $2 per member per month. For larger IPAs, the incentive could result in bonuses of hundreds of thousands of dollars.

Blue Cross of California, which is separate from Blue Shield in the state, is going a step further and launching an incentive program to offer medical groups bonuses equaling up to 10% of their capitated rates.

Since 1994, Blue Cross has offered physicians a bonus of up to 70 cents per patient per month. The old bonus was based on measures such as patient satisfaction, HEDIS scores and management of both utilization and appeals and grievances.

The new program will still reward groups based on patient satisfaction and clinical measures, but it will also give groups bonuses for collecting quality information on their individual physicians and implementing a pay system that compensates physicians based in part on how well they meet those goals. Through the new program, Blue Cross hopes to encourage groups to link physicians’ day-to-day reimbursement to their performance in certain quality measures.

“We have many administrative costs related to dealing with unhappy customers who file grievances and change doctors,” explained Jeff Kamil, MD, Blue Cross vice president and medical director. “This program provides incentives directly to physicians to treat our members well, and we think having more satisfied members should help grow our enrollment.”

Dr. Kamil also pointed out that Blue Cross will dismantle its older incentives that rewarded physicians who kept their utilization of hospital services and drugs in line with the insurer’s guidelines. “We think members will have more trust in physicians who get rewards for quality rather than for utilization management.”

Raising the bar for data

Analysts say these efforts to reward for quality performance are necessary to change the health care system. “We expect health care to exist in some bizarrely different economy than the rest of our lives,” said Charles M. Kilo, ACP–ASIM Member, president of GreenField Health System in Portland, Ore., and a faculty member with the Institute for Healthcare Improvement, a Boston-based nonprofit group that works to improve quality improvement.

Dr. Kilo explained that no other industry operates under a one-size-fits-all payment plan, and that the lack of differential payments for medical performance stifles quality innovations. “If people who strive to produce a fundamentally different product are not financially rewarded,” he said, “then what is their incentive to innovate?”

Physicians, however, have reservations about how health plans will rate their performance. Physicians say that performance measurements are only as good as the data they are based on—and the organizations collecting them. They claim that historically, much of the data they have received from health plans has been incomplete.

“The data we usually get are junk,” said Dr. Kelsey, the New Hampshire internist. While the incentive program he participates in with Anthem relies on the plan’s claims data, the group’s own support staff does some chart reviews to make sure the plan’s information is accurate.

In part, physicians’ distrust stems from health plans’ use of standards that they can easily measure, like HEDIS scores. Internists complain that some HEDIS measures penalize physicians who care for sicker populations.

Dr. Kelsey, for example, said that while he appreciates bonus payments his group receives for mammograms and Pap smears, paying for preventive measures typically rewards practices with healthier populations. “How do you measure good quality care for the chronically ill, relapsing, aging population?” he asked. “It’s great to be paid for preventive health, but what about the demented lady at home with diabetes who crashes all the time?”

In response to such concerns, several organizations are working on more sophisticated measures of physician performance. Philadelphia-based is developing a system it calls “quality contracting.”

Chief executive officer David J. Shulkin, FACP, explained that there are important differences between the quality contracting system and HEDIS scores. While HEDIS tries to measure broad areas like diabetes care, the quality contracting model will look at the use of specific measures for diabetic care such as patient education, administration of retinal eye exams, use of foot examinations and consistency in taking urinary albumin and hemoglobin A1c levels.

“HEDIS measurements are an early stage of quality contracting,” Dr. Shulkin said. “We’re working on the next level, where measurements get much more clinically focused and into specific patient-provider interactions.”

New investments in technology also promise to advance physicians’ ability to measure quality performance. This summer, General Motors Corp. (GM) will work with Medscape Inc. to distribute handheld computers to 5,000 physicians who treat GM employees. Through the partnership, GM will also distribute 1,000 electronic medical record systems.

The two companies hope to reduce medical errors by giving physicians better access to the information they need to make clinical decisions. But a secondary benefit is giving physicians the ability to monitor their own pharmacy and clinical data.

“You can’t get to a robust quality measuring system until physicians universally begin to collect clinical information on a routine basis,” said Dr. Milstein of PBGH. To get physician buy-in, he added, doctors need to provide a richer set of clinical information that includes patient information like lab and pharmacy data.

Dr. Shulkin of, however, cautioned that the best time to start to make a case for quality is now. “If we wait for the perfect measuring and reporting system that no one disagrees with, we’re going to be waiting a long, long time,” he said. “Are the new models we’re rolling out now going to be perfect? No, but they will influence behavior for the better. I think there’s no question about that.”


How some employers and physician groups are introducing their own quality innovations

In “Crossing the Quality Chasm: A New Health System for the 21st Century,” the Institute of Medicine’s latest report on quality, analysts point out that current payment models actually penalize physicians for quality innovations.

The report gave the example of a physician group that implements a blood sugar control program for diabetic patients. Physicians and staff spend extra time managing patients but get no extra reimbursement. As patients have fewer complications, physician revenue goes down from fewer office visits. And health plans, not the physicians, pocket savings from reduced emergency episodes and hospitalizations.

The report recommended that purchasers remove payment barriers that “impede quality improvements” and build stronger quality incentives. It also called on HCFA to better align payment methods with quality improvement, and it asked Congress to appropriate funds for systems that can track and monitor quality care.

Some employer groups are taking steps toward implementing those recommendations. The Silicon Valley Employers Forum, for instance, a nonprofit consortium of major regional employers, has authorized health plans to reimburse physicians for a pilot program of responding to nonurgent patient e-mail.

The Leapfrog Group, a coalition of 80 major purchasers like General Motors Corp., is promoting three key patient safety quality issues in hospitals—the use of computer order entry, high-volume centers and intensivists in critical care centers—and plans to pay more to better performers.

Some medical groups are also moving forward with quality innovations. At Buffalo Medical Group PC, a multispecialty group of 100 physicians in Buffalo, N.Y., John C. Notaro, ACP–ASIM Member, said that he and his colleagues set out to solve a growing puzzle: Even though they were prescribing more statins, more patients were being hospitalized for acute cardiac events.

Their solution was to build what Dr. Notaro called an internal “data warehouse,” an information technology infrastructure that combined health plan utilization data with the group’s own clinical information. “We found that a very large part of our statin utilization was in low-risk people,” Dr. Notaro said, “while only half of our high-risk patients were getting statins, an incredible mismatch.” The system allows the group to target cardiovascular patients, stratify them according to risk, then match interventions to their risk levels.

That “virtual lipid clinic”—with nurse coordinators tracking patients and their treatments—is already showing early results in terms of risk reduction. It also promises to show a substantial return in surpluses from referral funds maintained by one of the group’s insurers, Independent Health Association, a nonprofit HMO. The plan gives medical groups that share risk a budget for patients’ pharmacy and hospitalization costs; the groups get to keep any fund surpluses that they achieve. Dr. Notaro said that pharmacy surpluses this year as a result of the virtual clinic could reach tens of thousands of dollars.

Yet he stressed that making money was not the driving force behind creating the new data warehouse.

“If we had gone in front of my partners and said ‘This is going to generate surplus,’ they would have rejected it,” Dr. Notaro said. “What we said instead was, ‘We think this is going to rightsize utilization—and we hope that leads to surpluses for decreased pharmacy and hospital use.’ That they were willing to embrace.”


How medical groups are using quality incentives to pay their physicians

While a growing number of health plans are opting to pay bonuses based on quality measures, some medical groups are also tying a sizeable portion of individual physician compensation to quality performance.

Bristol Mark Medical Group in Orange, Calif., is a case in point. A primary care group with 100 physicians, Bristol Park uses a compensation formula that bases 75% of physician pay on productivity and the other 25% on quality performance. The practice uses a dozen measures like patient satisfaction scores, staff and peer reviews, and utilization of preventive services like mammograms, Pap smears, immunizations and diabetic eye exams.

Brian K. Solow, MD, a Bristol Park family physician and member of its executive board, said that the practice has seen dramatic improvements since implementing the plan. He explained that the number of diabetic eye exams, for instance, has increased 40% since the incentives were put in place five years ago. Mammogram and Pap smear rates have risen as much as 25%.

Dr. Solow emphasized that clinical measures are not geared to patient outcomes. "It's not fair that I should be graded on how well a non-compliant patient does," he said. Rather, the quality measures ensure that physicians order indicated tests and measures, such as getting chemistry panels on patients taking diuretics or checking the cholesterol levels of patients who have had heart attacks.

The incentives "make you think twice" about whether you are practicing evidence-based medicine, Dr. Solow explained, and have led to notable improvements in physicians' documentation and coding practices.

How do physicians at the group like the system? Mark D. Schafer, ACP-ASIM Member, Bristol Park's medical director, said that some physicians in the group would like to see the formula weighted even more to productivity. He added that most, however, agree that a significant portion of their income should reflect quality performance, not just how many patients they see.

Dr. Schafer did note that the group has ongoing concerns about "the difficulty and cost of obtaining the data." He explained that the group uses its own internal data and dedicates a nurse to reviewing charts for two months a year. With income on the line, the group wants to make sure that the compensation calculations are accurate.

"How much work it takes to determine the incentive is an issue," Dr. Schafer said, "but you won't get buy-in from physicians unless the data are as accurate as they can be."

In Portland, Maine, the 35 primary care physicians at Martin's Point Health Care have also shown that financial incentives can work. In 1997, the group said it would pay a 15% bonus on top of the physicians' $105,000 base salary to anyone who improved productivity and patient access. When the incentive program was a hit, the group decided to boost its productivity bonus to 40%.

Now, however, the group is looking for ways to replace its productivity bonus with a series of indicators that measure quality. While the final formula for the 40% bonus is still being determined, Jan M. Wnek, MD, medical director for Martin's Point, said that the group is considering a combination of productivity, patient satisfaction and utilization of preventive and clinical measures.

In implementing its new quality measures, Martin's Point will take the same route it took several years ago with its productivity-only bonus. The group will ask physicians to decide which quality indices to measure. It will then crunch the numbers and tell the physicians how large their bonus would have been in the previous year under the proposed system.

And the group will make sure that physicians get the resources they need to improve their quality performance. For instance, if physicians get measured on ordering mammograms once every two years for female patients over age 50, Dr. Wnek said, site managers need to provide them with the names of patients who haven't had mammograms as well as address labels to mail patients reminders.

"You have to give physicians the tools to improve their baseline, so it isn't just a simple reporting piece," she said. "You have to take the next step to help physicians get to where they want to go."


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