HMO QUALITY INCENTIVE

SACRAMENTO, Calif.-In a first for the health care industry, PacifiCare of California is tying a share of its senior executives' compensation to an employer group's satisfaction.

In an agreement reached with the California Public Employees' Retirement System that also capped rate hikes for three consecutive years, 10% of the bonus paid to as many as eight of PacifiCare's top executives will be withheld unless at least 80% of CalPERS members enrolled in the plan say they are satisfied with the HMO and its contracting physicians.

The exact number of executives receiving the incentive has yet to be determined but will include PacifiCare President and Chief Executive Officer Jon Wampler, a spokeswoman for the Cypress, Calif.-based health maintenance organization said.

"This is long overdue for the health care industry," said Alan Johnson, managing director of executive pay consultant Johnson Associates Inc. of New York.

"Other industries have been doing this for years," he said. For example, "I have fast-food clients that use it," he said. "Their bonuses depend on whether customers like the burgers. Health care is just now catching up."

Linking pay to performance is a "fabulous idea," said Dr. David Friend, global director of health care consulting for Watson Wyatt Worldwide in Wellesley Hills, Mass. "In effect, you're creating a much more responsive system."

Jim Foreman, a principal at Towers Perrin who manages the benefit consultant's West Coast health and welfare practice, agreed.

"It make sense to tie some of the consumer equation into the pay packages," he said, especially with all of the criticism that has been leveled against entrepreneurial HMO executives in recent years.

"I hope there's truly something at risk and it's not just a bunch of fluff," he said.

The incentive pay program is part of a three-year contract to improve satisfaction, quality and efficiency in health care service provided to 105,000 CalPERS members enrolled in PacifiCare's HMO in California.

Under the contract, PacifiCare also will receive a 2.5% rate increase for the calendar year beginning Jan. 1, 1998. Rates for 1999 and the year 2000 will be based on increases in the medical care component of the Consumer Price Index.

The 1998 rate hike is the first that CalPERS has granted to PacifiCare since 1993.

"This new agreement will be a significant step toward building a stronger partnership with Cal-PERS and PacifiCare," Mr. Wampler said in a press release announcing the contract last week.

"We greatly appreciate the opportunity to form this innovative arrangement with CalPERS and hope to develop similar contracts with employer groups serviced by PacifiCare of California," he added.

PacifiCare also agreed to increase collection of patient data from all physician groups to help monitor the health status of CalPERS members.

CalPERS has made national headlines by using a managed competition-like strategy to reverse the rise in health care costs that previously had been soaring at double-digit rates.

But while CalPERS offered similar three-year agreements to all of its 11 HMOs, PacifiCare was the only HMO that agreed to such an arrangement.

Instead, CalPERS' 10 other HMOs will receive one-year rate hikes averaging 2.7%, still far below industry predictions of an up to 10% increase in nationwide health care premiums next year.

The CalPERS rate increase also trails the 2.9% increase in the medical cost component of the CPI.

The new rates take effect Jan. 1, 1998, for CalPERS health plan members, 76% of whom are enrolled in HMOs.

While most health care experts applauded PacifiCare's innovative move to accept CalPERS' terms, some expressed reservations.

For example, Suzanne Mercure, manager of health care plans at Edison International in Rosemead, Calif., said, "We would rather see more incentives to increase the amount of money spent on health care delivery rather than on executive compensation."

"It duplicates incentives that are already there" in the marketplace, said Doug Sherlock, senior health care analyst at Sherlock Co. in Gwynedd, Pa.

For example, Humana Inc. Chairman David Jones didn't get a bonus because the managed care company didn't meet enrollment goals, he said.

And at CIGNA HealthCare of California, "a significant portion" of management employees incentive compensation already is tied to the portion of National Committee for Quality Assurance accreditation that deals with employer group satisfaction, according to Leslie A. Margolin, president of CIGNA HealthCare in Glendale, Calif.

Still, PacifiCare's agreement to put a specific portion of executive compensation at risk is unprecedented in the health care industry, Mr. Sherlock acknowledged.

A few industry observers expressed concerns that such an incentive program could lead to preferential treatment for CalPERs members.

"From a public policy perspective, I would be more comfortable if it were not just CalPERS but all enrollees that were polled" about member satisfaction, said Charles King, an associate with benefit consulting firm William M. Mercer Inc. in San Francisco.

He also said that incentives can have unintended consequences, pointing to Sears, Roebuck & Co.'s auto centers as an example. The retailer was sued for establishing an incentive pay program that prompted its auto center managers to sell car owners more services than they needed.

But Mr. King said a similar situation is unlikely to happen at PacifiCare because the executives whose pay is at risk are far removed from the actual delivery of care.