Aligning physician financial incentives in a mixed-payment environment

Under a shadow-pricing approach to physician compensation, physicians who deliver healthcare services to a mix of fee-for-service (FFS) and capitated patients are compensated for services via a payment schedule that treats all patients as if they were capitated. By encouraging physicians to adopt the same care-management approach for all patients, shadow pricing helps a group practice prepare for a larger share of revenues to be derived from capitation, thereby making the organization more attractive to many managed care payers. An apparent drawback of shadow pricing is that it gives physicians an incentive to reduce FFS utilization, resulting in a loss of potential revenue to the healthcare organization. This loss can be strategically justified, however, as an investment in the organization's ability to remain viable under capitation and to retain patients for whom payment may shift from FFS to capitation. In developing a shadow-pricing compensation approach, healthcare organizations can include incentives that encourage physicians to meet specific utilization targets, establish review procedures to identify physicians who deviate from the targets, and account for differences in acuity levels among different physicians' patient panels.