The complexities and challenges of getting doctor incentives right

However, effectively structuring doctor incentives is a very challenging proposition which requires a delicate tap dance through complex questions of law and commercial trade-offs. 

From a legal perspective, there is a need to navigate the legislative regimes which regulate not just remuneration of medical specialists but also any other financial benefits provided to them. 

From a commercial perspective, there is a need to appropriately motivate the right outcomes whilst also recognising the importance of clinical, professional and personal factors.  Career development and prestige, including the opportunity to participate in clinical trials and scientifically important activities and publications, is also an important motivator for many doctors.  This is highlighted by one Australian research paper which found that 93.2% of GPs would remain at their current practice despite being offered a financial incentive to move practice locations and that GP practice ownership and control played almost as important a role in determining whether to change practices as earnings ^[1].

The legal framework

In Australia, the provision of incentives and benefits to doctors by healthcare companies are primarily regulated under two regimes:

• the National Health Law, which has broad-sweeping provisions which seek to protect patient outcomes by prohibiting persons from inciting unprofessional conduct; and
• the Health Insurance Act 1973 (Cth) which has provisions dealing with the provision of incentives and other benefits in specified contexts, including provisions dealing with incentives given to doctors in connection with the admission of patients to private hospitals and broad ranging prohibitions on benefits given to referrers of diagnostic imaging and pathology services.

Section 136 of the National Health Law prohibits a person from directing or inciting a doctor to engage in unprofessional conduct or professional misconduct. Examples of unprofessional conduct or professional misconduct include a medical professional:

• accepting inducements may affect the way that he or she treats or refers patients
• allowing that their personal interest in a healthcare organisation to adversely affect the way they treat or refer patients
• failing to declare a material interest that he or she has in any aspect of a patient’s care.

It is worth noting that these prohibitions are direct obligations on the doctor and exist regardless of how a doctor ultimately acts.

Section 129AA(1B) of the Health Insurance Act prohibits a proprietor of a private hospital from giving doctors benefit that would influence or affect a doctor and the purpose or effect of which is to enable a person to be admitted as a patient in the hospital.  Section 129AA(1B) only applies to: patients who can claim benefits under private health insurance, admissions to private hospitals, and if the relevant benefit is “without reasonable excuse”. The concept of “without reasonable excuse” is not defined in the legislation and is inherently vague.  This leaves doubt as to whether an incentive plan which is designed to financially motivate doctors within accepted commercial parameters has a reasonable excuse and the extent to which the expression includes ordinary business relationships between doctor and hospital.

Part IIBA of the Health Insurance Act sets out broad prohibitions in relation to incentives for pathology and diagnostic imaging services. It is unlawful to ask for, accept, offer or provide a benefit that is reasonably likely to induce a ‘requester’ (including a doctor and a company or other entity which employs or otherwise engages a doctor) to make diagnostic imaging or pathology requests or that is related to the business of providing diagnostic imaging or pathology services unless it falls within one of the specified narrow buckets of permitted benefits. Permitted benefits include remuneration which is not substantially different from the usual remuneration paid to people engaged in similar roles and certain payments for goods or services which are at market rates.

Structuring financial incentives

For this purpose, we can look at 3 basic incentive options:

1. Straight salary / minimum fee guarantee plus potential cash bonus:

This structure offers simplicity and certainty to doctors about how much they will earn.  There is minimal downside risk for doctors’ earnings, which may be especially valued by doctors in healthcare groups which have a more difficult history and junior doctors who are in the initial stages of building their practices and have other financial commitments such as medical school bills and costs of starting a family.

However, depending on the financial hurdle for payment of the cash bonus, and specifically whether it is based on a group or individual target, there may be low to moderate incentives for doctors to work ‘harder’ (be that through working additional hours, treating more patients or otherwise) and there will likely be no incentive for doctors to engage in longer-term group building activities (because there is no ownership track). 

Like all cash dependent programs, because the doctors have no equity ownership in the healthcare group as a whole, this also reduces their longer-term stickiness with the group, which could also be disadvantageous on a financial sponsor’s exit.

2. Productivity-based compensation:

Productivity-determined compensation can take a myriad of different forms. 

For doctors who are employees, this may be payments based on volume or dollar value of patient consultations or treatments. 

A more nuanced structure which seeks to take account of the relative value of certain types of treatments and discourage doctors from only performing financially rewarding treatments, as well as encourage other valuable behaviours such as clinical trials and group-building activities, may use a system of units which are allocated taking into account these other factors. 

Doctors on consulting agreements or similar arrangements may be paid fees determined by a measure of their financial contributions such as patient billings, revenue, or profitability after considering clinic costs.  These fees can be linear depending on performance or tiered to create exponential incentives for higher performance. 

Doctors on practice management agreements or other forms of reverse contracting agreements under which they pay for administrative and management services provided by the relevant healthcare group may pay lower fees on a percentage basis depending on a financial measure such as patient billings or revenue.

From a legal perspective, the key challenge with these hurdles is ensuring that they do not fall foul of legislation, such as that outlined above, which prohibits payments and other financial benefits linked to certain patient treatments or admissions.  This can give rise to some challenging questions which require the arrangements as a whole, as well as what doctor actions it takes to meet the hurdles, to be carefully looked at.  A hurdle which can only be achieved by acting in a manner which is not consistent with a doctor’s professional obligations will be obviously problematic.

Incentive criteria also need to be considered from other legal perspectives, including to ensure that they don’t result in any level of medical decision-making or impact on doctors’ medical sovereignty.

This also links into the commercial challenge of incentivising the right behaviours both initially and over time.  Patient treatment quality criteria and other qualitative criteria can also be incorporated with financial metrics to try and discourage adverse behaviours such as competition between doctors and reductions in quality of treatment at the expense of volume.  Private healthcare providers and the financial sponsors who invest in healthcare groups need to be asking themselves about the impact of performance criteria on quality of care, patient satisfaction and costs.  On the flip side, qualitative criteria also need to be carefully considered to ensure that they don’t denude the individual incentives, for example by materially distorting the nexus between individual contribution and the financial incentive and/or become unduly complex with the result that they are poorly understood by the very doctors who are meant to be incentivised. 

Lastly, any incentive plan needs to be outcome tested both initially and at different points in time.  Like a simple salary and cash bonus plan, productivity-based cash compensation can result in low levels of long-term stickiness of doctors with a particular group. 

3. Equity incentive plans

Equity incentive plans, which give doctors the opportunity to participate in the ownership of the healthcare group itself, can involve interest-free loans to acquire shares or share vesting hurdles which are referrable to other financial and/or qualitative criteria such as that that discussed above in the context of productivity-based compensation.

Like all longer-term incentive plans, equity incentive plans encourage commitment to the relevant healthcare group over a sustained period because the doctor’s financial benefits are tied with the long-term growth in the profitability and value of the group. This can be particularly beneficial to financial sponsors, who will look to achieve maximum value of the group on exit, because it strengthens what is ultimately one of the key assets of the group – the veracity and goodwill of its doctor network and relationships.

When using a long-term incentive such as an equity incentive plan, it is important to ensure that the incentive effect remains sufficiently strong.  If the prospect of a return on equity is too remote, risky or small, or there is no clear path to achieving liquidity, there will be insufficient incentive for doctors to perform or remain with the group. This will be especially the case if a doctor is trading off the certainty and immediacy of higher cash remuneration with the potential benefits of an equity payout at an uncertain time in the future.

However, all of the issues discussed about in relation to the effect of the incentives on doctor behaviour need to be considered and the vesting hurdles must be crafted to avoid the pitfalls of the legislation.

Of course, these options can be used in connection with each other.

It is critical for financial sponsors investing in private healthcare groups to remember that the structure of a doctor incentive plan will effect more than just how hard doctors work in the short to medium term and thereby short-term financial outcomes - it will deeply effect culture and the long-term doctor dynamic of the group and thereby ultimately exit valuations. The structure of an incentive plan will also impact:

• practice dynamics and relationships between existing doctors
• succession planning and the motivations for mature doctors to transition their practices over time to more junior doctors
• the way doctors conduct their individual practices, including their willingness to perform treatments and provide services which are experimental or niche and less financially rewarding in the short term but have reputational or clinical importance.

Please note that we have used external resources to contribute to the article.