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The American Journal of Managed Care October 2014
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Physician Compensation Strategies and Quality of Care for Medicare Beneficiaries
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Physician Compensation Strategies and Quality of Care for Medicare Beneficiaries

Bruce E. Landon, MD, MBA; A. James O'Malley, PhD; M. Richard McKellar, BA; James D. Reschovsky, PhD; and Jack Hadley, PhD
Quality of care varies according to the compensation methods used in primary care, but the relationship between compensation methods and preventable hospital admissions is inconsistent.
To examine the relationship between the compensation strategies of primary care physicians (PCPs) and the quality and outcomes of care delivered to Medicare beneficiaries.

Study Design
Cross-sectional analysis of physician survey data linked to Medicare claims. We used a previously constructed typology that was developed based on the survey to categorize physician compensation strategies.

We combined data from the 2004-2005 Community Tracking Study Physician Survey on PCP compensation methods with administrative claims from the Medicare program. We analyzed the proportion of eligible beneficiaries receiving each of 7 preventive services and rates of preventable admissions for acute and chronic conditions. We measured the latter using Prevention Quality Indicators (PQIs), available from the Agency for Healthcare Research and Quality.

The 2211 PCP respondents included 937 internists and 1274 family or general physicians who were linked to more than 250,000 Medicare enrollees. Employed physicians with productivity and other incentives were more likely to deliver care of high quality when compared with salaried physicians. For instance, the odds of appropriate monitoring for diabetics ranged from 1.26 to 1.47 (all P <.01). Physicians in highly capitated environments had similar or better quality compared with physicians in other environments across most measures. The association between compensation strategies and outcomes of care as measured by PQIs was inconsistent, although owners with no other incentives had consistent higher rates of acute and chronic PQI admission (eg, for the chronic PQI composite: odds ratio = 1.07; 95% CI, 1.02-1.12).

Physician compensation strategies are associated with the quality of preventive services delivered to Medicare patients, but inconsistently associated with outcomes of care. Increasing use of global payment strategies is not likely to lead to lower quality.

Am J Manag Care. 2014;20(10):804-811
Using data from the Community Tracking Study Physician Survey linked to Medicare data from 2004 to 2006, we investigated the relationship between primary care physician (PCP) compensation strategies and the quality of preventive care and outcomes of care as measured by avoidable hospital admissions. We find that:
  • PCPs paid via productivity formulas delivered care of higher quality than those paid by straight salary.
  • PCPs who owned their own practices generally delivered care of lower quality.
  • PCPs in highly capitated environments delivered care of similar or better quality compared with physicians in other environments across most measures.
The continuing national debate over federal spending, deficits, and the debt underscores the need to find ways to address problems related to escalating costs and inadequate quality of care in the US healthcare system.1,2 Changing physician practice incentives, through payment reforms such as global payments, pay-for-performance, or shared savings arrangements, is a primary focus. Ideally, a reformed payment system would promote the delivery of high-value care, meaning care that is relatively high in quality and low in cost. Some reforms, such as accountable care organizations (ACOs), explicitly set up rewards for both reducing costs and improving quality. Many are concerned, however, that efforts to reduce costs through physician payment reform will have deleterious effects on quality, either indirectly, by shifting care from higher-quality to lower-quality physicians (who happen to be less costly) or directly, by leading to the underprovision of beneficial care.

Although there is a relatively strong literature documenting how financial arrangements are structured between physician practices and health plans, much less is known about how arrangements between payers and practices are translated into specific compensation arrangements for physicians, and how these arrangements, in turn, influence the delivery of care.3-9 We recently found that physician compensation arrangements are related to costs and intensity of care,10 but the relationship between physician-level compensation incentives for primary care physicians (PCPs) and the quality of care they deliver has not been studied.

Physician organizations generally compensate physicians with fixed salaries or through a variety of productivity arrangements that provide incentives to see more patients or provide more intensive services. At times, these arrangements are coupled with incentives to achieve quality benchmarks, improve patient satisfaction, or hit targets on measures such as generic drug use or hospitalization rates. Such arrangements can be present in practices whether they generally receive fee-for-service payments or per patient capitated payments. Physician organizations design such compensation strategies in order to maximize their revenue in the face of the net effect of all of their payment arrangements with various health plans and programs such as Medicare and Medicaid. With the current resurgence in global and partial-capitation payment strategies, such as through bundled payments and ACOs, many are concerned that quality of care will suffer as physician organizations strive to generate profit by tightly controlling spending.

In this study, we investigate the relationship between physician compensation strategies and the quality of care delivered to Medicare beneficiaries by analyzing data from a large, nationally representative sample of physicians, the Community Tracking Study (CTS) Physician Survey, linked to claims data from Medicare.11 We employ a validated typology of physician payment arrangements derived from the 2004-2005 CTS survey.10,12 We focus both on process measures for routine and preventive care that Medicare beneficiaries should receive and on hospitalization for ambulatory care sensitive medical conditions that should be reduced by good quality primary care.


Data on Physicians

The CTS Physician Survey, conducted periodically by the nonpartisan Center for Studying Health System Change, surveys a nationally representative sample of nonfederal physicians who have completed residency training and spend at least 20 hours per week in direct patient care. The fourth CTS survey, conducted by telephone in 2004-2005, had 6628 respondents (weighted response rate of 52%) drawn from 60 local healthcare markets that together are representative of the continental United States. Details of the survey are available at Our study included 2211 PCPs, defined as those with a primary specialty of family practice, general practice, geriatrics, or general internal medicine.

Data on Medicare Patients

We obtained data from the Medicare program on Medicare beneficiaries aged 65 years or more who did not have end-stage renal disease (ESRD), were enrolled in the traditional fee-for-service Medicare program, and for whom surveyed physicians submitted at least 1 claim during the 3-year period from 2004 to 2006. For each patient identified in this manner, we obtained a complete history of all claims submitted by all Medicare providers for the entire time period. Since claims data are not available for patients enrolled in a Medicare Advantage health plan, patients are only included for full-year periods in which they were enrolled in traditional Medicare. CTS survey data and Medicare claims were linked by obtaining Medicare’s Unique Physician Identifier Number (UPIN) from the American Medical Association for CTS respondents and matching it to the UPIN recorded on the Medicare claims. As beneficiaries were indirectly sampled though contact with a CTS physician respondent, they are not nationally representative, for 2 reasons: physicians had different likelihoods of being included in the CTS sample, and patients seeing a greater number of unique physicians had a greater likelihood of being included in the beneficiary sample. We constructed beneficiary weights that were based on the weight assigned to the physician respondent through whom they entered the beneficiary sample, divided by the number of unique physicians seen from 2004 to 2006. Weighted beneficiary characteristics closely matched those obtained from administrative data for non-ESRD patients aged 65 years or more.

Assigning Patients to PCPs

We assigned beneficiaries to a PCP using an algorithm that matched the beneficiary to the PCP who provided the plurality of their evaluation and management visits over the entire 2004-2006 period.

PCP Compensation Strategies

The typology of compensation strategies was developed based on the 2004-2005 CTS Physician Survey.10 The survey first asked whether the physician was an owner or an employee, since owners’ net incomes are based primarily on practice profits. It then asked if the physician was paid on the basis of a fixed salary or time worked (wage-based), or some form of variable compensation (such as share of practice revenues). The survey also asked whether the physician received pay in the form of a bonus, withholding, or other performance-based incentive; and whether the amount of compensation was affected by any of the following explicit factors: individual productivity, financial performance of the practice, results of patient satisfaction surveys, measures of quality, or comparative practice profiling. The physician then indicated the importance (not very, moderately, or very) of each of these 5 factors in determining their compensation. Owners of solo practices were not asked about factors affecting their compensation, for they were assumed to be remunerated solely on the basis of productivity. Finally, to identify incentives from the external payment environment likely to influence internal compensation arrangements, the survey asked the percentage of practice revenue drawn from capitated contracts. We constructed and validated a typology of compensation strategies because of multiple combinations of highly correlated answers to these questions.12

The resulting 7-category typology of compensation strategies begins by creating separate categories of physician owners and employees.10 Each of these categories is then further subdivided into those with no other explicit incentives (employees with fixed salaries, owners whose compensation comes only from practice profits), those with productivity incentives alone, and those with productivity and other incentives (eg, for quality), and based on whether the practice receives more than 35% of its revenue in the form of capitation.

Quality Measures

Quality of preventive services. We investigated Medicare claims to measure beneficiaries’ receipt of recommended tests for diabetes monitoring (glycated hemoglobin [A1C] monitoring, retinal eye exams, cholesterol screen, and nephropathy screen); cancer screening (mammography, colonoscopy/sigmoidoscopy); and receipt of a pneumococcal vaccination. The measures have been used in previous studies and are ascertainable by claims.13 Except for pneumococcal vaccination and colon cancer screening, these services should be delivered annually. Fecal occult blood testing was excluded because it is not adequately captured in claims and because colonoscopy has become the most prevalent means for screening for colorectal cancer. Influenza vaccination was also excluded because it is often administered in settings not captured in claims. Because patients may have been eligible for these quality indicators for up to 3 years, we restricted our analyses to the most recent year of data available for each patient.

Prevention Quality Indicators. We also examined the full set of Prevention Quality Indicators (PQIs), which are measures of preventable hospitalizations that were developed with the support of the Agency for Healthcare Research and Quality.1 PQIs can be used to assess the quality of care for ambulatory care–sensitive conditions for which good outpatient care can potentially reduce the need for hospitalization, or for which early intervention can prevent complications or more severe disease. Because these types of admissions are relatively infrequent, we stratify PQIs into acute and chronic categories and create composite measures in both of these domains consisting of any acute or any chronic PQI and use the entire available time period for each beneficiary to identify admissions.

Patient (and physician) Control Variables

Patient control variables were derived from the Medicare beneficiary summary file and included age, race/ ethnicity (categorized as white, black, or other), sex, Hierarchical Condition Category score (to control for case mix), and Medicaid coverage (an indicator of low socioeconomic status).

Physician control variables derived from the CTS survey included primary care specialty (general internal medicine vs family or general practice), age, sex, race, years in practice (less than 5 years, 5-10 years, or more than 10 years), foreign medical graduate status, board certification, and the percentages of practice revenue from Medicare or Medicaid (categorized in terciles). We did not include practice type as a control variable, because this was used to develop our typology of incentives.

Statistical Analysis

We first present descriptive information on the PCPs included in the study and their associated patient populations. Comparisons of this study’s sample of Medicare patients with the entire Medicare population are reported elsewhere.10

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