Physician Compensation
Payment models can influence prescribing decisions. Here’s what you need to know . . .

Top-performing pharmaceutical and biotech sales representatives generally do well because they know how to tap into physician needs and shape their presentations accordingly. Typically, needs-based discussions focus on specific product-related issues such as efficacy, safety, and convenience.

But physicians have another set of needs, too, and they relate to money. Very often physician compensation methods influence practice methods, including how and when they prescribe certain medications.

The purpose of this article is to provide an overview of today’s most common methods of physician compensation. When you understand how physicians are paid, you gain insights into how financial factors influence prescribing behavior. With this knowledge, you can fine-tune your messages in ways that can help address physician needs while assuring appropriate utilization of your products.

Three major categories

Current physician compensation models are highly variable and continue to evolve, but they generally fall into 3 basic categories:

• Fee-for-service (FFS)
• Capitation
• Salary

Fee-for-service. Under the fee-for-service model, a physician sets a specific charge for each service he or she provides. Charges are listed on a fee schedule, which is a comprehensive, line-item list of services provided, along with a dollar amount for each service.

Fee schedules usually are based on a set of billing codes derived from the physicians’ Current Procedural Terminology (CPT), a system of the American Medical Association that assigns a unique 5-digit code to each medical procedure or service performed by physicians (see table).

Relative value unit (RVU) – Relative value scales feature units of measure called relative value units (RVUs). RVUs apply to 3 components of a service:

• the amount of physician work that goes into the service
• the practice expense associated with the service
• the malpractice liability expense for the provision of the service

RVUs are often used by practice management groups and health plans to compare performances among doctors within a group.

The table shows selected 2005 Medicare RVUs for office-based primary care. Note that RVUs are multiplied by a dollar conversion factor to create a cost for each service. The right-hand column translates RVUs into the cost for each service using a conversion factor of $36.18 in 2006. Under an unrestricted FFS model, there is a direct relationship between performing a service (eg, a routine examination) and the payment (eg, $150). Physicians are incentivized to perform as many services as possible in order to generate maximum revenue – the more services a physician provides, the more he or she earns.

FFS remains a very common method of compensation, even in a time of restrictive managed care contracts. Traditional indemnity insurance companies use FFS to compensate physicians, as do many Blue Cross Blue Shield companies, Medicare Parts A and B, most state workers’ compensation programs, and many managed care payers (HMOs and PPOs).

FFS physicians who participate in HMOs and PPOs often agree to provide discounts off their regular fee schedules in return for the guaranteed patient flow provided by the plans.

Plans may also use a withholding system that forces physicians to assume some degree of risk. A “withhold” is a percentage of a physician’s monthly fee that the plan retains and places in a “risk pool.” The plan tracks physician costs and, if necessary, uses the withheld funds to pay for cost overruns related to specialist and hospital referrals and possibly prescription drug costs. If the health plan is profitable and the physicians meet productivity measures (see below), the plan pays the withheld amounts back to physicians at the end of the year.

Key Difference: FFS vs Capitation It’s important to note the key difference between FFS and capitation. Under FFS, the physician receives payment after the fact (retrospectively) and only if he or she provides a service to a plan member. Under capitation, the physician receives payments for all plan members before any services are provided (prospectively); and capitation payments are provided even for patients who are healthy and never show up at the office.

Capitation. Capitation fees are prepayments to a physician practice for each health plan member assigned to the practice. Capitation payments are usually calculated on a per-member-per-month (PMPM) basis, and in return for the fees, physicians agree to deliver a specified set of healthcare services.

With capitation, physicians must manage services and related costs within the totals specified in a capitation contract. Capitation allows health plans to forecast healthcare costs more accurately and to hold providers at risk for the utilization and cost of services.

Healthy plan members are a great benefit for capitated physicians. This is because healthy individuals require few, if any, physician services. This means fewer expenses for physicians and a higher percentage of income that can be retained for office expenses and profit.

As is the case with FFS, some capitation contracts may include risk pool/withholding clauses to motivate physicians to closely manage expenses. Some contracts capitate for pharmacy costs, too, an issue that we will revisit later in this article.

Salary. Salaries are fixed, contracted annual income arrangements between physicians and employers. In managed care, salaried physicians usually work in staff model HMOs and plan-run medical centers. (Academic hospitals and some physician groups also pay physicians via salary.) Salary contracts define physician compensation rates as well as expected performance/productivity levels.

Salaried physicians typically work in highly structured, restrictive environments. Their employers must manage costs effectively and generally demand that physicians “follow the rules.” These rules relate to drug utilization review, tiered formularies, prior authorization, and prescribing guidelines, such as step therapy and clinical algorithms.

Physicians who prefer the security of a guaranteed paycheck and don’t want to deal with practice management issues and risk pool targets often prefer positions that feature salary arrangements.

Beyond the basics: Incentives and productivity models

Those are the basics. In the real world, compensation packages of individual physicians rarely fit neatly into any of the 3 buckets just described. With increased pressure from payers to keep costs in check, incentives and productivity often come into play.

Incentives. In these arrangements, physicians are paid a base component (usually a salary) while earning additional compensation related to specific performance measures. In most situations, these measures include some combination of the following factors:

• Revenue produced
• Quality standards (eg, HEDIS, patient satisfaction, peer reviews)
• Administrative/leadership responsibilities (marketing, staff management, protocol development)
• Teaching/mentoring (eg, training of new physicians, PAs, NPs, nurses)
• Utilization of services (eg, hospital, ancillary care, specialty referrals, pharmacy)
• Cost-effectiveness (eg, staffing, supplies, office space, etc.)

Typically, incentives are based on a percentage of the base amount (eg, 20%). Well-designed incentive agreements offer the security of a guaranteed income while motivating physicians to be attentive to the bottom line.

It’s important to note that shared rebates may function as a physician incentive. Health plans negotiate rebate arrangements directly with pharmaceutical manufacturers or through PBMs. Rebates may be based on market share incentives, so the plan, through a tiered formulary, may encourage physicians to use certain products to generate larger rebates. In some cases, physician groups may receive a share of the rebate.

Productivity. In a productivity-driven arrangement, physician compensation correlates directly to the volume of patients treated or services performed. Physician productivity can be measured in any combination of factors, including net revenues produced for the practice, patient encounters, hours worked, or relative value scales (see box).

Typically, productivity-based arrangements attract physicians who are willing to assume significant financial risk and take on increased professional responsibilities in return for higher income than might be available in straight-salaried positions.

Physician compensation, risk, and pharmaceutical sales

What’s the connection between physician compensation and pharmaceutical sales?
The correlation could be significant, depending upon:

• the physician’s compensation model and embedded incentives
• the physician’s general prescribing habits
• the degree to which the physician conforms to health plan prescribing directives
• the level of financial risk that the physician is exposed to
• the cost of your product (relative to the cost of alternative medications, including generics and OTCs)
• shared rebate arrangements

Any combination of these factors could influence how physicians perceive your product and how they will respond to your messages. For this reason, it is imperative that you understand the financial factors that shape physician prescription drug choices. This is especially so when you consider situations in which physicians are at risk for pharmacy costs.

For example, with a pharmacy risk pool (or withhold) in effect, a physician practice will have a targeted annual budget for total prescription drug expenses. If the practice exceeds the target figure, the health plan retains the risk pool funds and applies the money to the overspend. If pharmacy costs come in under the target, the extra funds are returned to the practice as an end-of-year “bonus.”

In capitation contracts, physician groups may accept responsibility for all or part of pharmacy expenses for a per-member-per-month fee. If prescription costs exceed the total PMPM amount, physicians lose money; if drug costs are less than the PMPM target, the practice keeps the difference.

Whatever the case, it is very often in the physician’s best economic interest to prescribe less expensive medications (or perhaps not prescribe at all when watchful waiting, OTCs, or nonpharmacologic therapy are appropriate options).

Clearly, your advance knowledge of a physician’s compensation method gives you a heads-up on every sales call. The most impressive efficacy and safety data in the world may be of little interest to physicians if they stand to lose money when prescribing your product.

Thus, if economics are an issue, it will be helpful to craft a message that highlights your product’s ability to enhance patient care and save money in the long term. For example, successful treatment with the product might help reduce repeat office visits and cut down on the need for hospital or specialty care. Of course, you will require solid data to support your claims.

Best resource: The account manager

How do you find out what financial factors drive a physician’s prescribing behavior?

You can always ask key physicians you have developed a relationship with, who may be willing to explain the basic mechanics of their capitation and risk pool arrangements.

However, the best resources are your company’s national/regional account managers who service the health plans that contract with physicians in your territory. When negotiating contracts, managers may learn how a plan’s physicians are (or are not) incentivized to prescribe your company’s product—and they may be able to pass this information on to you, if it is available.

Your awareness of how compensation and incentives influence physician prescribing will make it easier for you to match messages to physicians’ underlying needs. The result: More solid relationships with your customers and enhanced sales performance in the months and years ahead.