Beyond the Financial Rewards of Pay-for-Performance

Aaron DeBoer, Anita Iyenger and Tanay Dudhela, for HealthLeaders Media , January 21, 2008

Pay-for-performance is a fundamental change in payment methodology that could transform how healthcare is delivered more than the current prospective payment system and managed care plans. Pay-for-performance programs, which are designed to align healthcare payments with clinical best practices and quality thresholds, are becoming commonplace across the country. Levels of adoption suggest that pay-for-performance is likely to stay and may eventually be rolled out across most payers.

The financial incentives related to pay-for-performance programs receive the lion's share of the focus. However, other indirect strategic benefits of these programs, such as improved clinical outcomes, greater alignment of physicians and hospitals, and opportunities to influence public perception, may have a far greater impact and value for healthcare organizations. In order to compete successfully in a pay-for-performance environment, providers must understand the direct financial incentives and indirect strategic benefits of these programs in addition to re-evaluating their human resource capabilities, processes, and information technology.

More than financial incentives

Pay-for-performance programs and initiatives exist in many forms. However, the underpinnings of most models are designed to provide financial incentives to healthcare providers for complying with clinically appropriate processes. The next generation of P4P initiatives is expected to go beyond compliance to reward improved health outcomes. Today, many of these programs create a small pool of at-risk payment funded by the participants. Program winners receive both the base payment plus a portion of the at-risk pool while program losers only receive the base payment.

A recent study by Premier exhibits the correlation between high levels of compliance with best practices and lower clinical costs. Two examples from this study were pneumonia and heart bypass surgery patients. Results from both groups of patients suggest that the more compliant the care received, as measured by adherence to patient process measures, the lower the average hospital costs for treating those patients.

Hospitals achieving high compliance, as defined by meeting 75 percent to 100 percent of the patient process measures for treating patients with pneumonia, saw an 18 percent decrease in average hospital costs compared to those hospitals in low compliance, as defined as meeting 0 percent to 25 percent of patient process measures. A similar trend was observed for heart bypass surgery patients.

In addition, this study demonstrated that adhering to the patient process measures reduced costs and decreased both patient mortality rates and the average length of stay. These metrics are easily measured and make participation in the pay-for-performance program attractive.

Increased positive public awareness

Many patients now take an active role in their care decisions by seeking a variety of information from disease-specific information (e.g., WebMD) to clinical outcome scores (e.g., HealthGrades) to the purely anecdotal (e.g., blogs). While some patients may not be educated or qualified to understand the information, perception matters--and may ultimately influence their care decisions.

Under pay-for-performance programs, patients can compare the care offered at various hospitals based upon clearly defined and standardized metrics. Payers will provide clinical outcome data to customers and encourage them to use it. Some pay-for-performance programs already use tiered services where co-payments are lower for using preferred providers. Such incentives will help increase the importance of the quality information being published. Hospitals that perform well on quality indicators can leverage their scores to differentiate themselves from their competitors, thereby resulting in improved public awareness and increased patient preference to obtain their care there.

Strengthening physician-hospital alignment

Physician-hospital relationships are as strained today as they have ever been. Pay-for-performance programs may give hospitals new opportunities to more closely align with their physicians.

Positive patient outcomes require a collaborative effort on the part of doctors and hospitals. Doctors will realize that in order to provide quality and efficient care, they will need to closely work with members of the hospital staff. Likewise, hospitals will have incentives to provide physicians with the necessary information and resources to ensure the care delivered to patients meets or exceeds best practice measures. Pay-for-performance programs will help bridge the gap between physicians and hospitals to create a unified team.

Good outcomes can be used as a strong recruiting tool. Hospitals with superior outcomes should find it easier to recruit top physicians. As pay-for-performance programs proliferate, physicians will find it beneficial to align themselves with those hospitals that have superior outcomes. Pay-for-performance will enhance recruitment of physicians and improve hospital-physician alignment.

The strategic imperatives for pay-for-performance are many, with financial incentives (or penalties) being a small component. Providers that understand the implication of this new environment and embrace the necessary changes will succeed under pay-for-performance.

Aaron DeBoer and Anita Iyenger are senior advisers and Tanay Dudhela is a consultant associate with the Noblis Center for Health Innovation. They may be reached at,, and, respectively.
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