Scott MacStravic, PhD
It has long struck me that paying employees in general for their measured or even estimated performance value makes eminently good sense. For example, when a windshield repair firm shifted from traditional hourly wages to P4P based on productivity and revenue production, it found performance improved by 44% in the first year of the new system. Moreover, turnover among low performers increased, while it dropped by 21% among high performers, promising even greater improvements in future. [E. Lazar “Performance Pay and Productivity” American Economic Review 190:5 Dec 2000 1346-1361]
As an added benefit, for employees who are not “place-bound,” such as contact center staff and phone health coaches, P4P, when it includes reliable measures of performance enables organizations to let employees work at home, which has been shown to increase their productivity and reduce their turnover, both dramatically. When Best Buy permitted this, its corporate staff productivity increased by 35%, while turnover dropped from an average of 16.6% per year to zero. [M. Conlin “Smashing the Clock” Business Week Dec 11, 2006 (www.businessweek.com)]
When HCOs merely measure their employees’ productivity or performance, in objective, valid and reliable ways, they automatically enter the forefront in any employee health management (EHM) investments they are thinking of. P4P information can not only be used to track the objective impact of EHM initiatives, but to quantify the ROI from EHM investments, when employee performance measures include reflections of the value of their performance, not merely its amount.
For example, whenever HCOs are subject to P4P revenue bonuses or penalties by payors, the amounts of both will vary primarily due to the efforts of its employees, including employed physicians as well as other professional and non-professional staff. To the extent that the performance of individual employees can be linked to P4P bonuses or penalties, the dollar differences they make can be directly computed, and compared to any and all investments in improving their performance.
The impact of P4P on professional performance has already been demonstrated with physicians, and it would be absurd to think that the same effects would not be available with other professional staff as well, and with non-professionals, as well. Managers and executives are routinely offered performance bonuses, for example. When the UK’s National Health Service began offering physicians P4P bonuses in 2003, they found that rates of improvement in both asthma and diabetes increased markedly, while the rate for coronary heart disease kept improving at the same rate. [S. Campbell, et al. “Quality of Primary Care in England with the Introduction of Pay for Performance” New England Journal of Medicine 357:2 July 12, 2007 181-190]
Paying physicians on a performance basis has been largely responsible for the renaissance of HCO employment of physicians, when this practice declined after its boom years in the 1990s, thanks to its changing this strategy from a money loser to a solid producer. One ’97 study, for example, found that owned practices lost an average of $97,000 per physician per year for their HCO investors. Now, thanks to the vast majority of HCOs switching to performance-based vs. guaranteed salary (only 21% now offer the latter), employment is proving an attractive option for physicians and HCOs alike. [“Facilities Are Learning from Past Physician Management and Compensation Mistakes” Physician Compensation Report 8:10 Oct 2007 1-3]
Physicians, themselves, as well as employees in general have often resisted the idea of performance-based payment. “Piecework” compensation has long been resisted as a device to force workers to produce more in highly stressful conditions. Subjective performance ratings and annual increases are rarely considered true reflections of employees’ worth – by employees, at least. But the same method useful in converting physicians from salary to P4P would probably work well with other professional, and perhaps even non-professional employees.
One example is the approach used by LexMedical, Inc., the physician practice arm of Lexington (NC) Memorial Hospital. It had found that its salary compensation method led to a decline in performance of its primary physicians compared to their peers in the state. With only a modest 10% bonus incentive available, from productivity levels significantly greater than were enough to keep them satisfied with their salaries, only one physician had even earned the bonus since its inception. By contrast, the new P4P method was aimed at creating a congruence between physicians’ compensation and the hospital’s earnings.
When the idea was first proposed, physicians saw little to like in it, with many dead set against it. The 16 primary physicians in 7 practices warned that many would likely leave, threatening the hospital’s survival as well as community service mission. By taking a full year to “test” the new method, physicians were gradually brought on board, and by the time the year was over, all had converted to the new compensation system, and none had left.
The “secret” to this total success was creating a “shadow” compensation report that described for each physician how much each would have made in each month of the trial year, had they been compensated under the new system compared to the old. This meant that those physicians who were already high performers were told how much more they could have made if they had been in the new system, and they began converting to the new almost immediately. Those who were lower performers could compare themselves to the higher compensation available from increased performance, and how much they would lose if they didn’t increase their productivity by the time the new system was in force.
The combination of natural competitiveness causing them to strive to gain higher compensation, and peer pressure from those who converted early, improved the productivity of all the physicians to the point where they would make more in the new system, so all converted. All still get a pre-set monthly draw to gibe them predictable cash flow, though it one month’s draw is less than they merit under the P4P system, the next month’s draw will be lowered accordingly. Now each of the physicians earns more than they would have under the former salary arrangement, while each performs well above the peer average for each’s specialty. Before, all were paid above median for their peers, while performing at less than their peers, on average. [“NC Hospital Turns Practices Around with Productivity” Physician’s Compensation Report 8:10 Oct 2007 7-8]
Engaging physicians as “partners” in a problem-solving effort to achieve mutual goals, e.g. better care, improved financial performance -- while recognizing the mutual advantages of a continuing relationship, helps to improve working relationships between HCOs and physicians. It seems likely that the same approach, aided perhaps by ideas such as “shadow” reporting of the specifics of how P4P compensation would affect them, before it actually does, would work equally well with at least some, most, and even all HCO employees, with significant gains for all.
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