An incentive payment is an additional payment to employed physicians beyond the base payments they receive. Doctors can earn this payment through some form of work performance. The payment is usually based on productivity, but it can also be based on other goals determined by the employer, such as patient satisfaction or clinical processes.

Most employed physicians have incentive payment programs. Among all physicians, including those who are not employed doctors, 58% of primary care physicians (PCPs) and 55% of specialists have incentive payments, according to the 2020 Medscape Physician Compensation Report.

The amount and percentage of incentive payments varies widely. In new contracts, they are often set at 30%-40% of total available compensation for PCPs and 10%-20% for specialists, according to Merritt Hawkins.

Although physicians have the potential to earn a stated percentage as their incentive payment, many physicians don't earn 100% of their possible incentive. Medscape's Physician Compensation Report polled all physicians, not just new contracts, and found that the average level of incentive payments for PCPs was 10.7%. In that survey, PCPs earned 64% and specialists 68% of their potential bonus.

Physicians rarely have the option to accept an incentive payment arrangement. It tends to be a non-negotiable item in the physician contract. However, many doctors looking for positions have come to expect an incentive payment. These doctors are drawn to the higher potential income when an incentive payment is included.

Hospitals, large medical practices, and other organizations provide incentive payments to employed physicians in order to motivate them to engage in activities that will help the organization's profits. To win payer contracts, a hospital needs to offer a wide spectrum of physician specialties and plenty of PCPs and may need to pay very high amounts to get the physicians they require. In some cases, employers paid top dollar to lure a physician to work for them, but the compensation package that the physician agreed to would not be financially tenable unless he or she had higher than average productivity.

Hiring physicians is highly competitive because the United States faces a growing physician shortage. This shortage is partially due to an aging physician population, which reduces supply; an aging patient population, requiring more time spent by the doctor for each patient; and healthcare coverage expansions under the Affordable Care Act, which have been stimulating more demand for services.

Physician shortages are most apparent in rural areas, but even in urban areas, there are long wait times to see many doctors, particularly specialists. There is no easy way to ameliorate these shortages. Physician supply cannot be markedly increased because the number of training slots financed by the federal government, the chief source of funding, has been frozen since 1997.

When employers compete with each other for physicians, they drive up compensation levels. Hospitals must offer physicians the same salaries that they could make in private practices, even though employed doctors are often less productive than doctors in private practice.

An internist generates $2.7 million in average revenues for his or her hospital, which can be 10 times his or her salary, and a cardiovascular surgeon generates $3.7 million in average revenues, nearly nine times his or her salary, according to a 2019 survey by Merritt Hawkins. However, the lion's share of these extra earnings are needed to pay overhead, including other employees' salaries. In 2018, multispecialty physician groups owned by hospitals lost almost $196,000 per employed physician, according to the Medical Group Management Association.

Once an organization has hired the physician, it has to find ways to make the physician's high salary workable. The chief way is to condition payment on reaching a certain level of productivity — the point at which the physician can bring profit to the organization.

When employers pay high amounts to lure doctors, they also have to worry about violating federal law. The Anti-Kickback Statute and Stark Law prohibit organizations from overpaying doctors for their services. Employers must pay doctors fair market value for their services, as reflected in regional, specialty-specific thresholds. When doctors are generating income well below the threshold, federal investigators may determine that the employer overpaid the doctor in relation to that doctor's low output. (Fair market value is discussed in more detail in Chapter 4.)

Organizations that violate these laws are subject to stiff penalties. In September 2019, for example, a healthcare system in Montana paid $24 million to resolve a lawsuit alleging that it overcompensated 63 specialists in exchange for referrals and paid some as full-time employees even though their productivity for the organization was quite low.

Traditionally, incentive payments were limited to productivity, but many organizations have expanded them in recent years to activities that promote a few specific goals of the employer, such as process measures, quality measures, patient satisfaction, or clinical outcomes.

These payments are generally called "value incentives," but they are also known as "value-based incentives" or "quality incentives." For example, if the employer wants to make sure doctors are providing evidence-based care, the incentive payment may be tied to a particular process measure. Payments may also be tied to physicians' participation in activities of the organization, called "governance."

In physician searches conducted in 2018 by Merritt Hawkins, 75% had a salary with a production bonus and 43% had a value-based bonus, usually in addition to the production bonus.

Employers are not the only ones who make incentive payments to doctors. Medicare, Medicaid, and private insurers also make incentive payments. But owing to their different role in the healthcare equation, payers' incentive payments are never tied to productivity, but to the value of services. Whereas employers focus on productivity so that they can earn more money, payers focus on making sure that the services have a high quality.

For example, under Medicare's Merit-based Incentive Payment System (MIPS), physicians can earn plus or minus 5% in 2020, depending on their performance on a variety of measures, and that amount rises to plus or minus 9% in 2022.

In MIPS, an employer may decide whether its doctors are measured in groups or as individuals. Usually, the employer does not pass on bonuses or penalties to its doctors, although this may change as MIPS payments get larger.

Do employers' incentive systems exact penalties, as MIPS does? Not directly. An employer that docked its physicians' pay would not be able to hire many doctors. However, incentivizing doctors is too important just to leave just to extra payments. Many employers reserve the right to reduce an inefficient doctor's base pay in the succeeding year. This is discussed further in Chapter 4.

The theory behind incentive payments is that they motivate the doctor to do more. It is thought that monetary rewards motivate people to work harder, be more efficient, and even adapt new behaviors, such as more closely monitoring patients with diabetes. Many studies, however, dispute this notion.

These studies have shown that even when financial incentives succeed in changing physicians' behavior, the changes tend to be modest and short-lived. Studies show that such factors as achievement, recognition, responsibility, and advancement are much more powerful motivators. However, it is hard to turn these factors into useful motivators.

Research show that incentive payments work better in some areas than in others. For example, a 2011 study found that such payments are generally effective in improving processes of care, referrals and admissions, and prescribing costs, but showed mixed effectiveness on consultation and visit rates.

Many employers, however, have had a more positive experience with using incentives to stoke productivity. They have concluded that, for all their flaws, not having incentive payments is worse than having them.

When hospitals began abandoning physician employment after an earlier hiring spree in the 1990s, they concluded that their practice of offering employed physicians a guaranteed compensation was a mistake. So when hospitals began hiring physicians again in the mid-2000s, they added productivity incentives to physicians' pay packages and then saw a steady 2%-3% increase in productivity for almost a decade, up until 2017, according to figures from the American Medical Group Association.

A decline in productivity since 2017 has been ascribed to the rise in value-based incentives, which reward physicians for documentation and process rather than productivity. The decline is deeply concerning for hospitals and other employers, especially because it has been accompanied with a continued rise in physician compensation. In effect, employers have been paying ever-higher compensation with no return on productivity.

Then along came the COVID-19 pandemic, which destroyed physicians' productivity and reduced hospitals' and practices' income. After the pandemic has settled down, will employers continue offering incentives, or will a new model arise? It is uncertain what is going to happen next.