As health care costs continue to rise, health systems are under increasing pressure to find ways to manage expenses without compromising patient outcomes. We wrote an article in Harvard Business Review to help health systems align the incentives of their physicians to manage care costs.
The article is a product of our experience over the last decade working with and speaking with health systems to help them improve their financial, clinical and operational performance, and Dr. Gallani’s research around the design of incentive and performance management systems. Here are the five guiding principles we outlined in the article to help health systems design effective physician incentives for cost control:
1. Broader Incentives Over Narrow, Targeted Programs
Physicians are in a unique position to contribute to cost management in various ways, from selecting more cost-effective supplies to optimizing operating room time and shortening patients' lengths of stay. Incentives can be designed narrowly around specific initiatives, such as negotiating the cost of surgical implants. However, our experience is that broader incentive structures, tied to overall cost savings for a procedure or clinical condition, are more effective.
By focusing on the total cost of care for a specific treatment or condition, physicians are empowered to look for cost-saving opportunities beyond pre-determined initiatives, thus fostering creativity and expanding physicians’ sense of ownership and responsibility beyond their narrow portions of the care delivery process. This broader scope allows them to identify and act on a wider range of cost drivers, thus increasing the potential for savings without compromising care quality.
2. Combine Individual and Team-Based Incentives
Incentive programs should both reward individual contributions to cost savings and foster team collaboration. Individual incentives can motivate physicians to make cost-conscious choices in areas they directly control (such as selecting drugs or devices). Team-based incentives encourage collective responsibility for initiatives that require collaboration across multiple people, such as redesigning the OR scheduling process.
3. Reward Both Cost Reductions and Maintaining Savings
Cost management is not a one-time effort. Hospitals should not only reward physicians for achieving cost reductions but also to a smaller extent for maintaining those savings over time to prevent costs from rising again after an initial reduction. As costs decrease, it gets harder to achieve further savings and so the incentive for physicians should be adjusted to reflect this increased difficulty. This approach ensures that physicians remain motivated to continue cost-conscious practices while recognizing the increasing difficulty of achieving additional savings over time.
4. The Incentives Should be Motivating but a Small Portion of Compensation
We suggest that cost savings incentives for physicians represent about 5% to 15% of their compensation. It is important that the incentive is meaningful enough that physicians are motivated to help effectively manage costs, but not so large that they distract physicians from providing the best care possible to their patients.
5. Offer Choices
Incentive structures should be flexible enough to accommodate the varying preferences of physicians. Not all physicians are motivated solely by monetary rewards; some may prefer alternative forms of recognition, such as preferential scheduling, funding for research projects, training opportunities, additional staff or more family time. By offering a menu of rewards, hospitals can tailor their incentive programs to individual physician preferences, increasing the overall effectiveness of the program.
Conclusions
These five guiding principles provide a framework for designing physician incentive programs to help achieve cost-saving objectives while maintaining the quality of care. By empowering physicians to play an active role in managing health care costs, hospitals can better navigate financial pressures in a sustainable way.
Derek Haas, MBA, is the CEO and founder of Avant-garde Health. Avant-garde's analytics software provides health systems, surgeons, and ASCs with comprehensive insight into their surgical care and empowers them to improve their profitability and care quality.
Susanna Gallani, MBA, PhD is the Tai Family Associate Professor of Business Administration at Harvard Business School. Her research focuses on performance management systems in healthcare provider organizations.