Study: $20 Billion in Health Care Incentives May Be Wasted

(ZS Associates: Evanston, IL) -- While incentives can be an effective motivator in health care, a new study from global consulting firm ZS Associates suggests that more than 75 percent of incentives are so small or poorly communicated that they go unnoticed by providers. As a result, more than $20 billion in health care incentives may be wasted annually.

Performance incentives (and penalties) are a widely accepted tool to achieve health care quality and cost goals. They are a key element in the Patient Protection and Affordable Care Act (PPACA) and also a central part of the design and rationale behind accountable care organizations (ACOs), where participants earn incentives for achieving key performance goals.

In its 2012 “Incentives for Health Professionals” (IHP) report, ZS surveyed more than 4,500 health care providers and payers on the use of pay-for-performance incentives to guide provider behavior and achieve goals, such as increased patient drug compliance, decreased hospital readmission rates, efficient care coordination, and improved quality. ZS concluded most incentives, though well intentioned, neither affect behavior nor help meet health-care quality and cost goals. The goals of some ACOs may also be in jeopardy.

The ZS report found that even though as many as 85 percent of doctors and nurses could earn an incentive, up to 75 percent were either unaware of the rewards or unable to distinguish incentive payouts from base pay. And one-third of respondents who knew about the incentives did not find them motivating.

Big dollars, little impact

ZS advises companies around the world on a broad range of issues, including designing and optimizing incentive strategies to achieve business goals. The company supports incentive compensation programs for more than 100 companies. Combined, these programs cover more than 100,000 employees and exceed $1 billion in payouts.

“While incentive compensation plans are intended to change behavior, improve patient outcomes, and achieve critical business objectives, design and execution of the plans are often flawed,” says Angela Bakker Lee, a co-author of the IHP report and a managing principal for the health-care service providers practice at ZS. “Relatively small increases in a doctor’s rate of reimbursement, for example, fail to motivate change. Incentives are a popular tool in health care, and when designed and managed the right way, they work. But our research suggests payers and providers need to rethink how they design these incentives.”

Torsten Bernewitz, IHP report co-author and ZS managing principal for the health-care insurers and payers practice, agreed. “Many health care organizations—hospitals, group practices, and insurance companies—are missing a huge opportunity,” says Bernewitz. “They spend big dollars but get little impact. To reform how health care is delivered and paid for, we must make incentives more meaningful and truly motivating.”

Guidelines to influence change

Providers and payers in both public and private sectors agree that incentives can influence and improve the current state of health care. Indeed, the ZS report shows that health care professionals overwhelmingly favor incentives—71 percent of respondents viewed health care incentives as positive, and most expected an increase in their use.

“Incentives have proven to be effective in many other settings,” says Bakker Lee. “But they have not been executed in a way that can help change provider behavior in health care. For example, many health care organizations focus on selecting the right pay-for-performance metrics in their incentives plans. They believe if they get that part right, success will follow. However, they often overlook other key principles that make incentives work. It is here where we need to correct the course.”

In its 2012 IHP report, ZS concluded that payers and providers must address several common shortcomings. It pointed to a lack of leadership involvement as the first area where health care incentives could be improved. Seventy-eight percent of medical professionals said their leaders did not play a significant role in designing and implementing the hospital’s incentive compensation system.

“The leadership team is closest to a provider’s business and patient care issues,” says Bernewitz. “It is in the best position to determine the right way to incentivize and motivate. This team’s input and buy-in is crucial for a plan’s success.”

The second area of potential improvement is an incentive plan’s reward structure, say IHP-report authors. Current incentives often reward the health care organization rather than the individual practitioner, and are too small to attract the attention of a doctor or nurse.

“Today’s incentives often amount to less than 7 percent of a health care practitioner’s total compensation,” says Bakker Lee. “Single-digit percentages are too small to attract a doctor’s attention. When designed this way, the incentive becomes indistinguishable from salary and loses its ability to affect behavior. We need to up the ante and increase the part of provider compensation that is variable if we want it to be an effective motivator.”

ZS pointed to a lack of explanation and promotion as the third area where incentives could be improved. According to the survey, more than 40 percent of respondents received payments once each year, effectively removing any opportunity to remind participants of progress toward a goal.

“We need to provide an incentive ‘pulse-check’ instead of ‘annual incentive CPR’,” says Bernewitz. “Incentive compensation can help drive health care reform ideas that have been in the works for years. Adjusting the way the incentives are implemented would save money and increase the likelihood of positive changes, which reformers agree are important. Today, a lot of money is wasted, and we need to sound the alarm.”

Bakker Lee agrees. “If we don’t fix this now, we miss an enormous opportunity,” she says. “If we do this right, all health care stakeholders—patients, providers, payers, employers and taxpayers—will benefit.”

About The Author

ZS Associates

ZS Associates is a global consulting, outsourcing, technology and software solutions firm focused on commercial strategy and implementation. ZS helps companies get the most out of their sales and marketing organizations by addressing market challenges and optimizing performance. ZS uses analytics and expertise to create data-driven strategies that customers can implement rapidly and make cost-effective decisions. ZS also takes on complex sales and marketing operations to make its clients more competitive. Founded in 1983 by Andy Zoltners and Prabha Sinha, both professors from the Kellogg School of Management, in Evanston, Illinois, ZS Associates now comprises more than 1,700 professionals worldwide.