[This article was originally published in Healthcare Quarterly, 8(4)]

This article explores the growing trend of physician executive pay-for-performance plans in the U.S. and Canada and discusses the underlying principles of incentive-based compensation models. Pay-for-performance plans are becoming increasingly popular with boards of many healthcare organizations across the country. They may offer an opportunity for increased accountability in the context of the 2003 Health Accord. Although there is little current evidence to support the notion that incentive-based compensation has long-term implications for quality improvement, their popularity continues to increase.

Introduction

Pay-for-performance programs are becoming increasingly popular in private industry as well as in healthcare (Mathers 2004). Hospital boards demand a high level of performance from their senior executives in short periods of time (Flannery 1999: 58). In the U.S. pay-for-performance is used to reward productive physicians in clinical practice (May 2005). As Canadian healthcare organizations increasingly appoint physicians to executive/administrative roles, they will likely expect a high return on their investments (Flannery 1999). Pay-for-performance and other incentive-based compensation plans may assist healthcare organizations in the process of aligning physician executive and organization interests and to inspire them to deliver their very best (Cejka 1998).

What are the Goals of Pay-For-Performance Plans and How Are They Accomplished?

The major goal of any pay-for-performance plan is to motivate and optimize individual performance. Motivated and engaged employees will actively work toward achieving an organization's operational and financial objectives, which in turn, improves the likelihood of the fruition of organizational goals (Neilly and Kapel 2003).

Neilly and Kapel (2003) suggest a well-designed incentive plan should provide a strong connection between the level of compensation awarded and the organization's ability to pay. In such a model, poor corporate performance would mean limited or no award payouts, thereby reinforcing the importance of achieving key objectives (Neilly and Kapel 2003).

Performance-based pay can also be used to internally communicate the importance of organizational priorities, which outputs will be measured, the value the organization places on individual, team, and organizational performance. Incentive-based pay can also help align executives around the most critical goals (Neilly and Kapel 2003).

Pay-For-Performance For Clinical Improvement

Ellen L. May (2005), editor of Healthcare Executive, observes that an "increasing number of providers agree that offering financial incentives to physicians for achieving specific quality benchmarks is the future of healthcare delivery" (May 2005: 24). In fact, in the United States pay-for-performance programs are not uncommon among many primary care physicians and consultants. For quite some time, healthcare maintenance organizations (HMOs) have placed a "substantial portion of their new physician employees' pay 'at risk' in the form of incentive compensation to motivate performance" (Bledsoe et al. 1995: 41). Many program management schemes reward or provide incentives for innovation by giving discretionary spending authority of a portion of realized savings to programs that achieve such economies.

Other proponents view pay-for-performance as a "potential remedy for the fragmented, costly delivery of health services" (May 2005). This view does not stem from the perception that physicians fail to provide high quality, effective care. Instead, experts such as May (2005) feel the healthcare system, due to its dysfunctional nature, fails caregivers by hindering their efforts to do just that (May 2005: 24). As a result many managed care providers in the United States have embraced pay-for-performance for clinical quality improvement (May 2005; Cejka 1998).

Pay-for-Performance Plans for Physician Executives

Pay-for-performance plans are becoming more frequently stipulated in physician executive contract negotiations in the United States and Canada. A 1997 survey by the Medical Group Management Association (MGMA) found that 48% of academic practice managers surveyed have some type of bonus/incentive plan as part of their compensation package in addition to direct compensation (Healthcare Financial Management 1997). The stated hopes of many of these programs are to attract and retain talented physician executives while helping organizations meet goals (Wegmiller 2001: 52).

Evidence of the growing popularity for pay-for-performance plans in U.S. can be found in the literature. Bjork (2002), a consultant specializing in healthcare compensation, writing in Healthcare Executive, states that, "incentive compensation has become almost universal for system and hospital executives" (Bjork 2002: 54). Rollins (2004), writing in the journal Hospitals & Networks, writes, "pay for performance is quickly becoming the mantra for hospital executives" (Rollins 2004: 32).

Canadian literature on physician executive compensation and pay-for-performance is scant. There is no doubt that "Corporate Canada" has generally embraced pay-for-performance for senior executives. Mathers (2004) writing in Canadian Business states that in 2004, "82% of the 360 Canadian organizations polled in Hewitt Associates' Canadian Salary Increase Survey offered variable pay, compared with 69% of companies in 2000 and 43% a decade ago" (Mathers 2004: 38).

Although the literature shows pay-for-performance plans are not as common in healthcare as in the for-profit sector, healthcare in Canada is now presented with an opportunity to assess the appropriateness of incentive-based compensation in an age of greater fiscal accountability. There is no doubt that Ministries of Health across the country are demanding greater accountability for expenditures relating to health, especially in the context of the 2003 Health Accord and accountability legislation in Ontario. The Health Accord includes the commitment of the First Ministers to "enhance the transparency and accountability of our healthcare system while ensuring that healthcare remains affordable" (Canadian Policy Research Network 2004). Ontario's accountability legislation places a significant percentage of the CEO salary at risk if he or she fails to achieve fiscal objectives.

Pay-for-performance plans may be an instrument for hospitals and other healthcare organizations to ensure administrators are focused on accountability. They may help reinforce the notion that physician executives wear the hat of senior administrator. Accordingly, they should be prepared to deal with the possibility of being seen and treated as an outsider by his or her fellow physicians when making difficult decisions that may be unfavourable with medical staff.

The professional autonomy of physicians is very much a staple of practising medical providers. However, when a physician is accountable to a hospital board as an officer of that organization, his or her loyalties are to the board and to the CEO of that particular healthcare organization. Other reasons hospitals may pursue pay-for-performance plans relate to legal responsibilities. Physician executives are board appointees and have a legal responsibility, as stipulated by the Public Hospitals Act of Ontario (bylaws), to assist in ensuring appropriate cost-effective use of hospital resources (Public Hospitals Act, R.S.O. 1990).

A further benefit from pay-for-performance programs is alignment. Cejka (1998), a consultant specializing in physician performance improvement, believes healthcare organizations that move toward an incentive-based compensation model also move toward aligning physicians and organization interests (Cejka 1998: 38). In the United States, physician interests are naturally more aligned with organization interests due to incentives inherent in a for-profit healthcare system. This concordance of interests is very straightforward and apparent in the U.S. healthcare system. For-profit hospitals in the United States seek to increase patient volumes since patients are sources of revenue.

Physicians are also interested in high patient volumes, as patients represent sources of revenue to them as well. This concordance of interests in the American system makes pay-for-performance a very effective way at rewarding those who meet organizational goals of increasing revenues and controlling costs.

Rollins (2004) discusses the potential pay-off of rewarding physician executives in the U.S. system. She cites the example of Sentara Healthcare, an acute care hospital in Norfolk, Virginia, which achieved an 85% reduction in cases of ventilator-associated pneumonia over a two-year period (Rollins 2004: 32). Gary Yates, the executive medical director for clinical effective at Sentara, attributes the success to an alignment of incentives (Rollins 2004: 32).

In Canada, the healthcare system is characterized by discordance. Hospitals seek to decrease patient volumes and contain costs by performing less costly procedures, while physicians seek to bill provincial government insurance plans for procedures and interventions. Physicians are not interested in sacrificing their incomes by decreasing patient volumes, as their incomes are tied to performing medical procedures and seeing patients.

This discordance is very important in the Canadian health-care system because in order for healthcare organizations to succeed in achieving their stated objectives, they require the buy-in of physicians. Pay-for-performance plans may be an answer. Experts in the area of physician executive compensation offer suggestions on how healthcare organizations can use pay-for-performance plans to align physician interests more closely with those of healthcare organizations. The steps in the transition process outlined by Cejka (1998) include: outline critical success factors, quantify and measure physician behaviour and secure physician buy-in. The following steps are suggested to be useful in ensuring the success of a new incentive-based compensation plan.

Critical Success Factors

i) Be Selective

Cejka (1998) suggests organizations should choose four to six factors that will have the highest impact on the greatest number of physicians and deal only with them. Critical success factors should include objectives such as increasing patient satisfaction over items such as reducing cost in an individual physician practice (Cjeka 1998: 38). Lesser numbers of critical success factors are far more manageable. Senior executives can only achieve a finite number of objectives. Another benefit of fewer factors is the ability to prioritize the factors according to organizational importance. This may be a more difficult task if the measure is dynamic. If this is the case, the contract should be amended to reflect this. For instance, a healthcare organization that strives to reduce length of stay (LOS) for a specific patient group by 2.5 days within two years should not change the goal to 3.5 days during the performance cycle. If 3.5 days becomes best practice, the hospital should amend the performance contract to reflect this. The goals and objectives for incentive-based pay should also be consistent with local and provincial policies. It would make no sense for a physician executive to strive toward the establishment of a new hospital-based ambulatory care program when ambulatory care is shifting to the community.

ii) CEO Support/Mentoring

The CEO should also play a crucial role in the support of the physician executive in meeting goals. He or she should work closely with the physician executive to identify any specific leadership skills needed by the organization and ways the physician can acquire those skills if they are lacking through professional development (May 2005). The CEO should also provide regular constructive feedback on job performance and provide mentorship through educational programs such as a physician MBA program.

iii) Data

Physician executives should be supported with good data. Only accurate and current data will be able to provide a clear picture of the true state of an organization. The accurate measure of key benchmarks includes: patient satisfaction, utilization, access to routine appointments are imperative and can be quantified and reported (Cjeka 1998).

iv) Secure Physician Buy-in

Physician executives may not be entirely comfortable with a significant percentage of their salary being paid as an incentive bonus. Neilly and Kapel (2003) suggest options that may make the transition less overwhelming. One common method is to pay the incentive bonus at the end of the performance cycle, namely, the end of quarter or fiscal year (Neilly and Kapel 2003). Cejka (1998) believes it is helpful to plan, educate and communicate effectively with physician executives prior to development of an incentive-based compensation plan for physician executives and supports the idea of physician involvement throughout the process to ensure the plan is accepted (Cejka 1998).

Physician executives should be included in the process of selecting metrics that will be used to assess performance in a contract. This way, the physician executive will understand the expectations of the board, and will be able to focus on achieving mutually negotiated results. Metrics that reflect quality may include decreases in readmission rates or infection rates. Those that affect cost include LOS and antibiotic standardization programs. Medical student learner evaluations, for instance, may serve as metrics for quality of educational programming.

Compensation Structuring Under Pay-for-Performance Plans

Experts in executive compensation such as Cejka (1998) and Bjork (2002) suggest incentive compensation should comprise at least 15-30% of total salary (Cejka 1998: 38; Bjork 2000: 54). This suggests rolling back physician executive salary to 70-85% of total expected compensation. Essentially, the organization puts a substantial portion of the physician executive's pay "at risk" in the form of incentive compensation to motivate performance (Bledsoe et al. 1995: 40).

Other experts in the area of executive compensation note that hospitals are placing less emphasis on base salary and more emphasis on variable pay to reward performance. As a result, most organizations are willing to commit to a greater amount of total compensation if a portion of that compensation is at risk because bonuses will only be paid out unless goals are attained (Wegmiller 2001: 52). Salary costs will inevitably increase as goals are attained. However, any salary cost increases should be offset by substantial returns to the organization. Organizations should also be aware of the possibility that recruiting and retaining top performers from other organizations may become even more costly if bidding wars erupt between organizations. It is no surprise in today's challenging healthcare environment that boards are willing to pay top dollar to top performers (Wegmiller 2001).

Other Developments in Physician Executive Compensation

More recent developments in physician executive compensation include incentive-based plans that include supplemental benefits or "add-ons." These benefit packages allow physician executives to add benefits such as cash-accumulating life insurance and disability insurance (Wegmiller: 52). Experts such as Bjork (2002) suggest supplemental benefits could add up to 10% of salary, but that supplemental benefits should be tied to organizational goals. These types of benefits are being used by boards to emphasize retention and for rewarding success (Bjork 2002: 54). Although it is not clear how many Canadian healthcare organizations offer these types of benefits, they may become more important in Canada as pay-for-performance becomes a more known quantity north of the border.

Long-term incentive compensation is another developing trend in physician executive compensation in the United States. Long-term incentive plans focus on rewarding the attainment of objectives that cannot normally be accomplished in one calendar year, such as major strategic objectives that position the organization more effectively (Wegmiller: 55; Bjork: 53). Examples of long-term objectives include strategic objectives and goals that are not easily attained in a short period of time. Wegmiller also characterizes long-term incentive compensation as a reward system that adds compensation on top of base salary, but, unlike pay-for-performance plans, less pay is at risk (Wegmiller: 53).

Literature Review on Pay-for-Performance Plans

Healthcare organizations can look to the non-healthcare sector to assess pay-for-performance programs. Literature in the non-healthcare sector suggests that money may be a weak motivator when it comes to encouraging others to think more creatively. Scott Hay (1999), a department editor for Workforce, writes that an "American @ Work" survey conducted by a consulting firm found that, "1,800 employees ranked pay only 11th as a reason for remaining with the employer, behind such factors as open communication with managers, ability to challenge the status quo, and opportunities for personal growth" (Hay 1999: 70).

Other detractors of pay-for-performance programs, such as Alfie Kohn (1993), one of America's leading thinkers and writers on the subject of money as motivation, believes pay-for-performance programs cannot work because there is inadequate understanding of human motivation. He also points out that the fact that no scientific study has found a long-term improvement of the quality of work as a result of any incentive system and that effects are usually only short term (Hay 1999: 72).

Kohn's philosophy is in keeping with Fredrick Herzberg et al.'s (1959) notion of motivation, "if you want people motivated to do a good job, give them a good job to do." Kohn believes organizations should create a sense of community and maximize the extent to which employees are brought in on decisions large and small, leading to employee empowerment. He supports getting rid of any corporate rewards programs and stresses employees should be paid well and fairly, to ensure their minds are not on money, but on work (Hay 1999: 72).

Summary

As more healthcare organizations in Canada appoint physicians to executive roles, they will want greater returns on their investments. U.S. healthcare organizations have widely tied executive pay with performance in the form of pay-for-performance plans. Experts on executive compensation believe pay-for-performance plans directly reward executives for achieving short- and long-term organizational goals and objectives and also motivate performance.

Experts such as Cejka (1998), Bjork (2002) and Flannery (1999) also point out that by offering benefits such as supplementary or long-term benefits, healthcare organizations can help recruit and retain top talent. It remains, however, unclear whether offering financial incentives truly stimulates long-term improvement in work quality. Experts such as Kohn (1993) contend that incentive-based compensation only improves productivity and performance in the short-run, and their long-term success is unproven.

Due to the lack of scientific evidence on their effectiveness, Canadian healthcare organizations should exercise careful judgement prior to implementing pay-for-performance plans, if indeed at all. Helpful questions to ask prior to implementation include: will the program help support organizational goals such as improving patient quality? What can be done to ensure metrics used to reward performance are objective and measurable? What will be the impact on the organization should the plan be put in place?

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