Bringing Value: What to Consider in a Physician Incentive Plan

Structuring a compensation plan requires a delicate balance of being fair to the people and being fair to the organization. These key principles can help clarify some of the process.

As a physician leader, you might be asked to recommend or help build a physician incentive compensation program for your organization. In addition, and maybe more important, you will be entrusted to persuade your medical staff about the merits of the program. This is a tall order.

Any discussion of the topic should consider the quality-based incentive programs that have been instituted by Medicare and other third-party payers. These programs, designed to reduce cost and increase efficiency, might become part of an overall compensation package for any employed members of a medical staff. That will significantly complicate efforts to create a compensation program for employed physicians, because you will need to meet the third-party requirements and yet provide a structure in which your physicians feel adequately compensated for their work.

However, what’s becoming clear in today’s increasingly capitated reimbursement environment is that production-based incentive programs do not appear to work well. Some experts suggest there are five specific components1 that should be built into an overall physician incentive program:

  • Appropriate financial incentives.
  • Managed-care efficiency incentives.
  • Group citizenship.
  • Patient satisfaction.
  • Group profitability.

Quality metrics are a big part of third-party reimbursement programs today. They are best categorized as managed-care efficiency incentives. Physician leaders must develop quality metrics that align not only with the requirements of third parties, but also with the business goals of their organizations.

The goal of any incentive program is to ensure physicians provide high-quality, patient-centered care using the available institutional resources. But it’s not always easy to find the right way to create one.

There are a few general principles that can guide you in the selection of these metrics.2 First, select measures you are already using, to keep the process simple for physicians who already are accustomed to them. Then, decide whether you will reward top performance or whether you will reward improvement in performance, even if it’s improvement over a low level. It’s probably best to establish gradations in performance and reward accordingly. Benchmarking performance is critical, but make sure the benchmarks you select are coming from a recognized authority and are achievable.

To incorporate the five components into an overall program, consider developing a compensation committee — composed of highly respected staff physicians, along with members of your quality, human resources and finance departments — that will evaluate each component toward determining the final individual physician compensation package. The goal of any incentive program is to ensure physicians provide high-quality, patient-centered care using the available institutional resources. It also should be constructed to discourage physicians from ordering unnecessary services.1

Building a Plan

Building an incentive plan generally starts with reviewing the financial-incentive components of the organization’s contractual agreements. Obviously, these must be met and therefore must be built into the final version of any physician incentive program.3 Many institutions divide the compensation model into two components: a fixed-base compensation and a productivity-based compensation. The productivity-based component uses the elements noted previously. The fixed-base component often is based on a variety of parameters, such as hours worked

There is evidence that the design of physician incentive compensation programs will alter physicians’ perceptions as well as how they provide care to patients.3,4 Well-designed programs can enhance the quality of care and improve patient satisfaction, but poorly designed programs can have an adverse effect on the institution’s overall quality of care, patient satisfaction and costs.

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Complex compensation plans used since the 1990s largely have been abandoned and are being replaced with plans that focus on productivity, efficiency and revenue generation by the physician.5 It is important for any compensation plan to have a bonus component built into the plan. To be effective, bonuses should be at least 5 percent of the base salary and be paid out frequently — even quarterly.2 

Most organizations determine their base salary component on regional market factors, including how well the organization is being compensated by third-party reimbursement contracts and reliable compensation surveys.5 If base salary for certain specialties is set by local market factors, then the variable for a physician leader to determine is how the bonus should be structured. Most physicians will fixate on that part of their package.

Easy to Understand

Initially, new incentive plans should be simple and easy for physicians to understand. They might start with the quality metrics required by managed care plans and Medicare. Later, productivity and efficiency measures can be added. In any incentive plan, it is important that the bar isn’t too high for the affected physicians to reach.5

Attention also should be paid to the needs of the younger physicians on the medical staff. A salary without incentives might give them a sense of security that allows them to develop their careers and patient base without having to worry about productivity or efficiency measures early on.

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Incentive plans give structure to physician practices and will help reduce use and waste.5 However, most plans tend to assume that all physicians are equal in capability and work ethic. This assumption distorts the relationship between high-income generators (typically, surgical specialists) and low-income generators (typically, primary care specialists).5 Therefore, it’s important to be careful in structuring a plan that is seen as equitable across the board.

Some incentive plans are based on the idea that what a physician produces is what he or she is paid. These are considered productivity-based plans. They encourage physicians to work as hard as they desire, but the downside is that they might lead to physicians competing against each other and reduce the level of camaraderie within the medical staff.5 

Improving Patient Care

Financial aspects aside, how should physician leaders address patient care — the quality aspect — within an incentive plan? In 2001, the Robert Wood Johnson Foundation worked with two consulting groups to consider the question.6   After extensive literature review, individual interviews and focus groups, they concluded that financial incentives to improve quality generally are more influential than nonfinancial incentives, and that incentive strategies are more effective when based on individual performance than at the group level.

They also noted these key factors in implementing an incentive program:

  • There needs to be a high level of trust between the physicians and the organization. Physician leaders should remember that building trust is an ongoing process and requires a high level of communication with physicians.
  • The size of the incentive is important. If it’s too small, it will not change behavior.
  • Peer and consumer knowledge of individual physician performance helps drive performance.
  • Data on which the incentive is to be based must be accurate and timely.
  • Medical staff leadership must support the plan to give it legitimacy.
  • Physicians must recognize the need for the change and understand the rationale behind the plan.
  • Physicians must understand how the plan is constructed and the metrics that form its basis.
  • It should be as simple as possible.

However, since the foundation’s report was published, incentive plans apparently haven’t had the desired impact. A growing consensus suggests that quality-incentive pay isn’t paying the dividends first envisioned; accordingly, physician leaders should consider four actions to improve their institutional incentive model.7

First, create alignment between the business model and the payment model. Second, identify the actual barriers that exist between the desired behaviors and the results the organization wants to achieve. Third, simplify the payment model. Complex reimbursement formulas generally aren’t well-accepted by physicians; in the long run, they don’t achieve desired results. Fourth, choose improvement opportunities that are clear and attainable.7

Understanding Motivation

Traditional incentive programs that employ the carrot-and-stick model do not appear to yield the intended results.8 This suggests they might be structured incorrectly. If a physician leader wants individual physicians to perform at their highest level, incentive plans should be approached by employing the tenets of the science of motivation.

Indeed, many current compensation models act as a barrier to physician engagement and subsequent positive outcomes, and bonus compensation models fail to inspire better outcomes.8 This sometimes is called “the Sawyer Effect” — a term inspired by Mark Twain’s 1876 novel, The Adventures of Tom Sawyer, and describes a practice that either turns play into work or work into play. The book’s main character tricked his friends into painting a fence for him by convincing them that the chore was fun.

So how do you motivate an individual physician to perform at peak levels? Fostering intrinsic motivation, as opposed to extrinsic motivation (for example, monetary incentives), in an individual is the key to better results.8


Have you ever been challenged with structuring a compensation plan? What worked? What didn’t? What advice would you give fellow physician leaders? Share your experiences with your colleagues, and we might publish them in the Physician Leadership Journal. To send a letter for publication or to request our manuscript guidelines, email

Extrinsic incentives can encourage unethical behavior, create addictions and foster short-term thinking.8 Intrinsic motivation is thought to be the third “driver” of human nature, next to hunger/thirst and sex.9

Maximizing intrinsic motivation depends on three elements:

Autonomy — the human desire to manage our own lives.

Mastery — the human urge to make progress and get better at something.

Purpose — the human desire to do what we do in the service of others and to be a part of a larger cause.8

Physician leaders who recognize the difference between extrinsic and intrinsic motivation likely will migrate to some form of pay-for-performance (an intrinsic motivator) to achieve better outcomes for the institution and the patient. Inserting intrinsic drivers of motivation into your physician workforce will take advantage of the three elements noted above and perhaps create an environment that allows your physicians to become more innovative and productive in the long run.

Eugene Fibuch (1945-2017) was professor emeritus at the School of Medicine and co-director of the physician leadership program in the Henry W. Bloch School of Management at the University of Missouri in Kansas City. This article is part of an ongoing series he submitted in 2016.

Arif Ahmed, BDS, PhD, MSPH, is chair of the public affairs department and an associate professor of health administration in the Henry W. Bloch School of Management at the University of Missouri in Kansas City, where he also is academic director of the physician leadership program. 


  1. Smith M. Building the Right Incentives into a Physician Payment System. Managed Care, 5(9):42-9, Sep1996.
  2. Maguire P. How to Design Quality Incentives. Today’s Hospitalist, January 2008.
  3. Reschovsky JD, Hadley J, Landon BE. Effects of Compensation Methods and Physician Group Structure on Physicians’ Perceived Incentives to Alter Services to Patients. Health Serv Res, 41(4pt1):1200-20, Aug 2006.
  4. Conrad DA, Christianson JB. Penetrating the “Black Box”: financial incentives for enhancing the quality of physician services. Medical Care Research and Review, 61(3, Suppl):37S-68S, Sep 2004.
  5. Darves B. Physician Compensation Models: the basics, the pros, and the cons. September 2004. Retrieved Feb. 21, 2018.
  6. Robert Wood Johnson Foundation, Bailet Health Purchasing and Sixth Man Consulting. National Health Care Purchasing Institute, 2001.
  7. Rice S. Physician Quality Pay Not Paying Off. Modern Healthcare, May 30, 2015.
  8. Lewis C. The Problem with Physician Compensation. Advisory Board – Practice Notes. May 29, 2016.
  9. Pink DH. Drive: The Surprising Truth about What Motivates Us. New York, NY: Riverhead Books, 2009.

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