1. Pay for Performance
2. Origin of Pay for Performance Programs
3. How Quality is Measured in Pay for Performance Programs
4. Notable Private Sector Pay for Performance Initiatives
5. Notable Public Sector Pay for Performance Initiatives
6. Effectiveness of Pay for Performance Programs
7. Concerns About Pay for Performance

Pay for Performance

“Pay for performance” is a broad term for programs and initiatives that seek to improve the efficiency and quality of healthcare through financial incentives for performance.  Pay for performance involves providing financial incentives to medical provides, medical groups, and hospitals for positive patient outcomes. In other words, it is a results-driven approach to health care. 

The term pay for performance is not entirely accurate.  Medical providers have always been paid for their performance even under a traditional “fee for service” approaches.  Pay for performance is better thought of as pay for outcomes or incentive pay for positive performance.

Pay for performance has permeated all aspects of healthcare in the United States in large part due to the Affordable Care Act (“ACA”) which expanded its use in public and private insurance programs.   The ACA explicitly incorporated pay for performance components into the government-run, particularly government run Medicare and Medicaid programs. 

The success of pay for performance programs in healthcare has not yet been determined.  The theory is that financial incentives will result in better patient outcomes but it is not clear if this is the reality.  Studies have shown different results and there remains much debate over the effectiveness of these programs.

Origin of Pay for Performance Programs

Legislatures and healthcare industry professionals have been concerned about the United States health care system for many years.  For decades, they worried that under the US’s traditional fee for service approach, the wrong things were incentivized. 

Under the fee for service approach, physicians and other providers could only make more money by seeing a higher volume of patients or by focusing on higher paying procedures.  This encouraged medical providers to see more patients, not provide medical care.  In many cases, it also encouraged providers to recommend more complex procedures and testing, which are costly for the patient and the medical system as a whole.  Additionally, more complex procedures are often higher risk for the patient.

Pay for performance programs began to be considered as an alternative to change these adverse incentives.  Instead of earning more for volume and complexity, under a pay for performance program, medical providers and institutions earn financial bonuses when they meet specified performance measures.  For example, a hospital might receive a bonus for reducing the percentage of infections among its patients.  As another longer-term example, a reduction in year over year in the percentage of patients that return to the hospital after their first visit might be the basis for a bonus.

Typical pay for performance bonuses also provide negative incentives – financial penalties when specified performance measures are not met.  For example, Medicare has stopped paying for the cost of treating certain common hospital conditions, like pressure sores, that it considers preventable by the hospital.

How Quality is Measured in Pay for Performance Programs

In typical public and private programs there are four categories of quality measures used in conjunction with one another: structure, patient outcome, patient experience, and care process.

Structure and process measures are aspects of quality that are largely in the control of the organization providing medical care.  They focus on incentivizing hospitals, medical groups, and other medical offices to incorporate actions that are linked to positive patient outcomes into their operating processes and to utilize effective structural components.  A simple example is a process that ensures that aspirin is promptly provided to potential heart attack patients.  Another is the use of electronic medical records and other technology into the medical facilities operations.

Patient outcome and experience measures focus more on the quality of care actually provided.  The experience of the medical facilities patients ranging from communication, speed of treatment, and to how clean the facilities are taken into account.  Patient outcomes measures focus on patients medical outcomes – did the care and treatment improve patients health?  Outcome measures are what is talked about most in the news because they are very controversial.  There is no agreement on what outcomes are within the medical provider and facilities control and which outcomes are based on the patient’s demographics and actions beyond the provider's control.  For example, a provider may talk to a patient about quitting smoking but whether the patient does or does not is outside of the provider’s control.

Notable Private Sector Pay for Performance Initiatives

There are over 40 pay for performance programs in the private medical sector.  The largest example in the US comes from California where the Integrated Health Association, a non-profit, manages the California Pay for Performance Program.  This program focuses on pay for performance incentives for medical groups. 

Another program is the Alternative Quality Contract, a program that a private Massachusetts insurance company began in 2009 with 7 provider groups.  Under the unique program, medical providers are given a per patient budget and can choose what services to provide within that budget.  This is in contrast to the traditional approach where providers are paid a specific amount for each service, with some services earning the provider more than others.  The program incorporates additional bonuses for quality of care.  The first study on the Alternative Quality Contract, performed by Harvard researchers, showed positive results in the form of improved patient outcomes.

A precursor to private pay for performance programs that is based on similar theories was the Bridges to Excellence program, that provided recognition and rewards to medical providers with a demonstrated record of quality care.  Bridges to Excellence took a scorecard approach that incorporated many different factors; no single factor was determinative.  The program remains in effect in many states and was the basis of multiple pay for performance programs including the California Pay for Performance Program and the United Kingdom’s national program. 

Notable Public Sector Pay for Performance Initiatives

The public sector has been the space where most pay for performance initiatives have and continue to be tested.  Programs have been implemented and tested by the federal government through Medicare and Medicaid Services (CMS), the agency that administers federal healthcare programs and on the state level by individual states,

CMS has a value-based program designed to incentivize providers to improve care.  It also continues to test different pay for performance approaches. Its most notable program was a joint initiative with Premier Hospital.  Over a 6-year period, CMS and Premier tested the effectiveness of bonuses on care improvement.  The test focused on certain conditions that are common to Medicare patients like heart conditions and pneumonia.  In another large initiative, CMS permitted qualifying group medical practices to share in Medicare’s cost savings.  Groups qualified by meeting patient care quality measures.

States for their part have tended to try their pay for performance initiatives within their Medicaid and children’s health insurance programs.  Massachusetts’ pay for performance program, initiated in 2008, is the most well-known and considered to be one of the more successful programs.  Under the Massachusetts program, hospitals were scored on quality measures related to pneumonia and infection prevention.  Hospitals with a sufficient score received financial incentives.

Initially, pay for performance programs did not give much consideration to program cost so long as quality was improved.  Programs now consider cost when evaluating and designing programs.  The ACA even requires CMS to incorporate cost considerations when designing programs.

Effectiveness of Pay for Performance Programs

Studies on the effects of pay-for-performance have reported mixed results. 

Lack of Evidence of Effectiveness

The Medicare and Premier hospital initiative, showed promising improvements in health care quality initially but by year five of the program there was virtually no difference between care from the participating hospitals and those hospitals not in the program.  Evaluation of the program did not reveal any impact on 30-day mortality rates.  Nor was the program shown to have cut spending.  In 2005, changes were made to the program to help lower performing hospitals improve.  The targeted hospitals improved but at a rate on par with hospitals nationally that were not in the program.

A similar lack of difference was found when comparing quality of care at medical groups in Massachusetts’ pay for performance program with those outside of it over a two year period.  All the groups improved at a rate consistent with one another and national averages.

Researcher’s evaluating Medicare's Hospital Value-Based Purchasing Program determined that the program will have less than 1 percent impact on payments for over 60 percent of the program hospitals. A study of a California program that sought to improve children's’ medical care through financial incentives showed no major impact of the program.

Results of pay for performance initiatives outside of hospitals have been even more disappointing.

Explanations for Results

Despite limited evidence of effectiveness, there remain many pay for performance supporters among legislatures, health insurance companies, and the public as a whole.  Supporters note that there are possible explanations for studies show lack of greater improvement among pay for performance participant hospitals and groups than by their non-participating counterparts.

For example, some believe that the lack of a difference between hospitals in the pay for performance initiative with Premier and those not participating hospitals may be attributable to the fact that CMS had around the same time begun to publish reports on Medicare-certified hospitals’ performance.  The ratings performance reports were published online and allowed consumers to compare over 4,000 hospitals.  The theory is that this publication prompted hospitals to improve their services out of fear of having a negative public rating.  Hospitals did in fact report concerns about public humiliation if their reports showed substandard care.

Another explanation for the lack of differences between program and non-program hospitals is that according to a RAND Corporation survey, hospitals began to voluntarily adopt aspects of the CMS-Premier initiative.

Concerns About Pay for Performance

While the underlying theory of pay for performance programs make sense, the reality is it is not that easy.  There are a number of serious concerns about the use of pay for performance programs system-wide in the United States.  Some of the most pressing concerns are:

  • It is difficult to change medical providers’ behavior and obtain buy-in from them.  Medical providers believe that the decisions they are making are for the good of the patient and because many were trained under a system that focused on aggressive testing and treatment, they often proceed under this same approach because they believe it is in the patient’s best interests.
  • The failures of pay for performance measures outweigh its successes, which would require longer term continuation to be significant. 
  • There is no consensus on what “quality healthcare” means which makes it very difficult to develop and measure the success of pay for performance programs.
  • Gathering the data required to determine whether providers and medical institutions are meeting the incentivized objectives can be very expensive and time consuming, perhaps outweighing any cost savings.
  • Some of the incentivized measures in early stage pay for performance programs have been shown by the neutral, nonprofit, The National Quality Forum to be outside of the medical provider’s control.
  • Hospitals and providers who provide service in more impoverished areas or who provide a lot of charitable medical service to those who cannot afford it might end up being penalized for their good work because of factors beyond their control.  For example, a hospitalized diabetic patient with few financial resources may not be able to afford their insulin and may in turn end up with many readmissions that could otherwise be avoided but which are not the fault of any provider. 
  • Financial incentives are considered by some to be inconsistent with the goal of healthcare – to care for others.

At this stage, none of the concerns warrant completely abandoning pay for performance measures, only continuing to reassess them to ensure that medicine continues to improve the health and wellbeing of patients, not harm it.                                                                  

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