Jeffrey J. Denning
Contributing Editor

A medical group I know is positioning itself for capitation. Its members have no experience with capitation payment, but, from what they have heard, the idea is to avoid rewarding a physician for doing a lot of work, since the payment to a practice is independent of what services are actually rendered each month.

The group, therefore, has adopted a new formula in which a significant share of each doctor's income — rising as capitation comes to dominate practice receipts — is determined on a straight-salary basis irrespective of productivity. The group hopes the new formula will encourage internal referrals, allowing more effective subspecialty development and less competition for highly remunerative cases. All sounds plausible, no?

Here's the catch: The assumptions are wrong.

Wrong Assumption 1: Physicians are only competitive when it comes to money. Nobody gets into medicine by being noncompetitive. Everything physicians do is competitive, from comparing OR time to crossing the street.

Wrong Assumption 2: There is something wrong with competition. Sure, predatory competition that involves cheating is unconscionable. But striving for excellence, including high earnings, is what pushes the best groups to better themselves each year.

Wrong Assumption 3: High productivity will somehow jeopardize group performance.

Most folks agree that encouraging conservative, cost-effective care is what capitation payment is designed to do. Because you're paid the same whether you do surgery or just prescribe a change in life style, physicians are encouraged to do what is necessary for the well-being of the patient, not what results in the highest fee.

But getting a good outcome and top-quality care still matters to the patients — all of them. A pay system that tempts doctors to cut corners isn't going to work either. Not in the long run.

Work done per hour

What is needed is an environment in which physicians are encouraged to be highly productive without wasting costly resources like MRI machines, operating theaters and consulting cardiologists. Higher production is still a winner if one considers the doctor as the highest-cost resource in the medical practice.

Much of the pressure to switch from productivity to flat salaries is to prevent "gaming" of the system. Suddenly, partners are in the awkward position of health insurance medical directors, fearful that colleagues will overtreat patients if they are rewarded on production.

Abuses must be avoided, certainly. But abandoning an income mechanism that is largely responsible for the highest productive physician capacity in the world seems wrong. And there is plenty of evidence that paying physicians equally or for something other than work output results in lower practice efficiency and lower output.

The author, a practice management consultant in Long Beach, Calif., edits Uncommon Sense, a monthly newsletter for physicians.