Non-Financial Performance Measures and Physician Compensation

Abstract:     
This study utilizes a national survey of physicians in the United States, administered four times between 1996 and 2005, to examine the use of non-financial performance measures in physician compensation contracts. Consistent with agency theory, we find that non-financial measures are used more frequently when the measures are more informative, when alternative control mechanisms are complements rather than substitutes, and when external pressures for quality of care and cost-containment are greater. Further, we find that contractual relationships in the healthcare value chain are inter-related; non-financial measures are more likely to be used to evaluate physician performance when the physicians’ practice is compensated based on fixed rate payments (i.e., capitation). We also find that physicians’ compensation contracts are more likely to incorporate non-financial performance measures when productivity in revenue generation is also used to evaluate performance. Taken together, the results suggest that non-financial performance measures play a significant role in physician compensation, acting to balance incentives tied to individual physician productivity.

Keywords: financial and non-financial performance measures, incentive contracts

JEL Classification: M46, J33

Accepted Paper Series