More Than $20 Billion Spent on Healthcare Incentives May Be Wasted, Concludes ZS Associates Study

EVANSTON, Ill., May 14, 2012 /PRNewswire/ -- While incentives can be an effective motivator in healthcare, 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 healthcare incentives may be wasted annually.

Performance incentives (and penalties) are a widely accepted tool to achieve healthcare cost and quality 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 healthcare 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 healthcare 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. Worse, 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.  ZS 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.  Relatively small increases in a doctor's rate of reimbursement, for example, fail to motivate change," said Angela Bakker Lee, one of the report's authors and managing principal for the healthcare service providers practice at ZS. "Incentives are a popular tool in healthcare — 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, report co-author and ZS managing principal for the healthcare insurers and payers practice, agreed. "Many healthcare organizations — hospitals, group practices and insurance companies — are missing a huge opportunity.  They spend big dollars, but get little impact. To reform how healthcare 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 healthcare. Indeed, the ZS report shows that healthcare professionals overwhelmingly favor incentives — 71 percent of respondents viewed healthcare incentives as positive, and most expected an increase in their use.

"Incentives have proven to be effective in many other settings," said Bakker Lee. "But they have not been executed in a way that can help change provider behavior in healthcare. For example, many healthcare 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 healthcare incentives could be improved. Seventy-eight percent of medical professionals said their leadership 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. It is in the best position to determine the right way to incentivize and motivate," said Bernewitz. "This team's input and buy-in is crucial for a plan's success."

The second area of potential improvement, the authors said, was the plan's reward structure. Often current incentives reward the healthcare 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 healthcare practitioner's total compensation. Single-digit percentages are too small to attract a doctor's attention," said Bakker Lee. "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,'" said Bernewitz. "Incentive compensation can help drive healthcare 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 agreed, "If we don't fix this now, we miss an enormous opportunity.  If we do this right, all healthcare stakeholders – patients, providers, payers, employers and taxpayers – will benefit."

Follow this link for an executive summary of ZS Associates' 2012 IHP report: http://bit.ly/ZS-HSP.

About ZS Associates

ZS Associates is a global consulting, outsourcing, technology and software solutions firm focused on commercial strategy and implementation. Since its founding in 1983, ZS has helped businesses across a range of industries address market challenges and optimize performance. From 20 offices around the world, ZS uses analytics and deep expertise to help companies make smart decisions quickly and cost effectively. ZS comprises multiple affiliated legal entities. Learn more at: www.zsassociates.com.

SOURCE ZS Associates