Health Practitioner Bonuses and Their Impact on the Availability and Utilization of Primary Care Services. B. Financial Incentives for Primary Care Providers in Underserved Areas


Access to health care in areas with insufficient health professionals has been an ongoing source of concern among policy makers. Expansion of health insurance coverage through the implementation of the ACA is likely to stimulate the demand for primary care in general, including underserved areas. Health Resources and Services Administration (HRSA) designates such areas HPSAs. These geographic areas meet a defined threshold of primary care physician to population ratio. Since 1987 Medicare has been paying bonuses to physicians providing primary care in rural HPSAs. In 1991 the bonus payment was increased from 5 to 10 percent and eligibility extended to services provided by physicians in urban HPSAs. Thus, this particular form of bonus payment has been in place for almost 25 years. Section 413(a) of the Medicare Modernization Act of 2003 put in place an additional 5 percent bonus payment for physicians practicing in Physician Scarcity Areas (PSAs). PSAs were those counties and rural zip codes in metropolitan statistical areas (MSAs) that represented the 20 percent of the Nation’s population with the lowest physician to population ratios. These areas often coincided with geographic HPSAs so that physicians practicing in those areas received a 15 percent additional bonus payment during 2005-2008 when the PSA bonuses were in effect (i.e., from January 2005 through June 2008).

In this section we review the literature related to the volume of these bonus programs and their potential effects on primary care services and providers. Programs to address this issue have historically been implemented with the assumption that financial incentives to practice in rural areas are effective in addressing the health professional shortage in given areas. This assumption is largely validated by the literature, with the effect of financial incentives shown to influence the distribution of physicians and health professionals. Importantly, the literature generally suggests a multifaceted approach to incentives, financial or otherwise. Many of the most successful programs evaluated below use recruitment of medical students with specific demographic markers to influence the distribution of physicians. Financial incentives have a broad range of reported specialty choice elasticities that range from 0.01 to 0.95. These discrepancies may also be somewhat determined by the type of financial incentive (e.g., grant, loan, postgraduate bonus).

In an early article on the HPSA bonus, Shugarman et al. (2001) estimate that, in 1991, the total amount of HPSA bonus was almost 31.6 million dollars. Their estimate shows that 58.3 percent of the total HPSA bonus payment went to the rural HPSAs; while the remaining 41.7 percent went to urban HPSAs. They also find that the total bonus payment grew to reach about 106 million dollars in 1996, but then gradually declined to almost 77 million dollars in 1998. The proportion of rural HPSA bonus decreased to 51.1 percent.

In a more recent study, Shugarman and Farley (2003) examined the trends in HPSA bonus payments for primary care specialties (family practice, general practice and internal medicine) under Medicare over the period of 1992-1998 using Medicare claims data for non-metropolitan area beneficiaries. They argue that the bonus payments largely targeted primary care. They find that in 1992 the payments for primary care services represented 29.7 percent of the total Medicare bonus payments for physician services to rural Medicare beneficiaries. The proportion gradually went up to 37 percent in 1998. Their analysis also showed that in 1992 payments for primary care services represented 14 percent of total basic Medicare payments for physician services and this share rose to 18.6 percent by 1998. However, 55.9 percent of all Medicare HPSA bonus payments for services to beneficiaries in non-metropolitan areas were made to primary care physicians. This proportion declined gradually to 49.7 percent in 1998. The authors claim that low levels of bonus payments in general, coupled with the documented declines in those amounts since 1994, may have undermined their future potential to support physicians practicing in rural areas. Their findings suggest that physicians were not claiming the extra payments that were available to them. Factors that could be contributing to such low uses of bonus payments include the extent to which physicians know about the payments, perceived value of the bonus to physicians, effects of administrative procedures on the ease of receiving them and concerns about the risk of audits. Nevertheless, their study highlights the role of bonuses in improving the payments and the supply of primary care services in HPSAs.

The literature regarding the effect of financial incentives in underserved areas on the choice of practice location of physicians is relatively scarce. Chou and Lo Sasso (2009) examined the impact of local characteristics on the practice location choices for newly trained physicians in New York between 1998 and 2003. Their empirical results suggest that PCPs without educational debt are attracted to HPSAs. In other words, they estimate that the propensity of choosing a location by a PCP is higher if the location is designated as an HPSA. However, the estimated propensity is lower if physicians have larger educational debt. Their study, however, addresses the effect of the HPSA status in general rather than any specific effect of the amount of HPSA bonuses.

In a review of rural incentive programs Sempowski et al. (2004) compare rural recruitment and retention programs in the United States against those in other countries (notably Canada and New Zealand). The authors look specifically at Return of Service (ROS) commitments wherein financial incentive is provided though assistance with medical school payment in return for a commitment to serve in a rural area. The authors note that programs offering financial incentives in exchange for ROS commitments to rural or underserviced areas have achieved their primary goal of short term recruitment. However, the authors note that in the US the lenient buyout opportunities have hindered the programs and limited their effectiveness. Sempowski et al. (2004) argue that the programs in Canada and New Zealand may have greater success with retention as compared to the US programs because the programs in Canada and New Zealand have a multi-faceted approach that includes the use of financial incentives along with prudent recruitment strategies.

Bolduc et al. (1996) provide a theoretical framework of physician’s choice of location. They develop a model to assess the effect of various incentive measures introduced in Quebec (Canada) on the geographical distribution of physicians across 18 regions during 1976-1988. The study specifically examines general practitioners’ choice of initial practice locations in Quebec. The utility of a particular alternative depends on, among other things, a measure of expected discounted value of lifetime earnings associated with this alternative. It is through changes in this variable that the impact of various income-based physician-location programs is simulated. Before 1982 there were substantial variations in the population to general practitioner (GP) ratio across different regions of Quebec. In order to redress geographic imbalances in the distribution of physicians the Quebec government introduced the Differential Remuneration Program (DRP) in 1982 that raised the fees (relative to the base fees to general practitioners in underserved regions compared to the regions with relatively lower population to GP ratios. Among other incentive measures, annual study grants of $10,000 have been offered (since 1982), tied to a commitment to work in these underserved regions during a number of years equal to the number of grants received. A settlement grant program has also been available, since 1984, for physicians who choose to practice in these regions. This program provides an annual allowance for a maximum of 4 years. It varies from $5,000 to $10,000 (nontaxable) for a physician paid by unit of service, depending on the shortage of physicians in the locality. Whereas the differential remuneration program influences location choices through differential pricing of physicians’ services by location, the grant program affects location choices through a lump sum increase in income for a short duration (4 years).

Bolduc et al. (1996) find that on average, a 10 percent increase in the general practitioner fees for medical services in a region increases the propensity of a beginning GP to work in this region by 7 percent. Thus the implied elasticity of location choice probability with respect to fee increases is about 0.7. However, this elasticity varies across regions: it is higher in remote regions (with a maximum of 1.28). On the other hand, on average, the elasticity of location choice probability with respect to non-labor incomes, such as study grants, is estimated to be about 1.11. In other words, a 10 percent increase in the study grants tied to a commitment to work in the underserved regions, leads to an 11.1 percent increase in the probability of GPs choosing these underserved regions as their starting practice location. However, their findings largely depict redistribution of GPs across regions within Quebec rather than showing any increase in the total number of GPs in Quebec.

Despite differences in the institutional framework between the US and Canada, the findings from Bolduc et al. (1996) provide some valuable insights into the potential effects of financial incentives that vary across locations. The remaining important issue is to identify how bonus payments affect the annual earnings of physicians in HPSAs. Only then, based on findings from the literature, can one assess the potential impact of the earnings shock in HPSAs on primary care physicians’ choice of practice location. Holmes (2005) addresses this question directly. Using a database containing the location of physicians at 5-year intervals the author compares the locations chosen by alumni and non-alumni of programs within the United States charged with increasing physician supply in underserved areas. This analysis provides insight into the types of students that choose to enroll in programs such as the National Health Service Corps (NHSC). The author notes that participation in this program consists disproportionately of minorities from private, expensive schools. This suggests that scholarships (and hence the lack of debt burden) may be an influential factor in participation in the NHSC. The multinomial logit model employed by Holmes (2005) shows that students which graduate from an institution with a focus on primary care are also more likely to enroll in the NHSC. Using this model, Holmes (2005) concludes that the elimination of the NHSC program would lead to a 10-11 percent decrease in the supply of recent graduates in underserved communities.

Rabinowitz et al. (2001) examine the history and results of The Physician Shortage Area Program (PSAP) of Jefferson Medical College (Philadelphia, PA). The PSAP is intended to address the shortage of primary care physicians in rural Pennsylvania. The authors’ analysis uses a cross section of Jefferson Medical College Graduates from 1978 to 1993 to determine which characteristics are predictive of becoming a rural primary care physician (PCP). Of the characteristic variables collected in the data, freshman year plans for family practice, being in PSAP, having a NHSC scholarship, male sex, and taking elective senior family practice rural preceptorship were independently predictive of primary care in a rural area. However, among non-PSAP graduates with two key selection characteristics of PSAP students (having grown up in a rural area and freshman year plans for family practice) were 78 percent as likely as PSAP graduates to be a rural primary care physician, and 75 percent to remain rural PCPs. The authors note that this result suggests the most influential area of the program is the admissions component, not the financial component. Supporting evidence for this conclusion is provided by Brooks (2002) who found that rural upbringing and specialty preference were most strongly correlated with recruitment of physicians to rural areas. Growing up in a rural area along with the student’s expressed plan to become a primary care physician were associated with a 36 percent likelihood of a graduate practicing in a rural area compared with 7 percent for individuals without these preferences.

Although most studies found that there was no correlation with age, gender, race, or marital status (Horner, 1993; Looney, 1998; Rabinowitz, 1999) a few studies determined that men have a greater likelihood of rural practice than women (Fryer, 1997; West, 1996). However, women PSAP graduates were more than twice as likely as non-PSAP women to practice in rural areas (31.7 percent versus 12.3 percent) (Rabinowitz, 2011). Importantly, none of these articles list financial incentives as an important factor in recruitment and retention of primary care physicians in rural areas.

View full report


"FinalReport_HealthPractitionerBonuses_8_13_15 (v2).pdf" (pdf, 2.1Mb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®