Pay-for-Performance

The linkage of financial incentives to quality and performance is a relatively new concept in healthcare. Pay-for-performance is a way to reward healthcare providers for higher-quality healthcare. In most industries, lower costs are achieved through greater production efficiency, and financial rewards accrue to firms that produce high-quality products more efficiently. In contrast, most physicians and hospitals are paid the same regardless of the quality of the healthcare they provide, producing no financial incentives for quality and, in some cases, disincentives for quality.

In its 2001 report Cross the Quality Chasm: A New Health System for the 21st Century, the National Academy of Sciences, Institute of Medicine (IOM) drew attention to the poor quality of the nation's healthcare as well as factors contributing to poor quality, including the structure of the present healthcare payment system. The IOM noted that, for certain types of clinical situations, healthcare payment arrangements may actually produce disincentives for quality care. For example, in general, patients cared for under fee-for-service reimbursement systems receive more services that are under the discretion of the provider. The incentives result in overuse of services without regard to efficiency; services of high cost that are technically complex tend to be rewarded over those that are labor and time intensive, such as counseling regarding self-care of diabetes or care coordination among subspecialists. hightechnology, -volume, and -cost services are preferentially rewarded over low-technology, -volume, cost preventive healthcare services.

Under fee-for-service, this imbalance in incentives for hightechnology, -volume, -cost services is further compounded. When providers invest in improving outcomes of chronic diseases (such as diabetes), their income may eventually drop, as patients with excellent control of their diabetes require fewer office visits and hospital stays in the longer term, resulting in fewer opportunities to bill for services.

Other payment methods do not reimburse for services provided but pay healthcare providers prospectively. These types of payment methods may also provide disincentives for quality. For example, capitation payment methods result in lower use of healthcare services overall and may result in underuse of essential services. Furthermore, while preventive care is more likely to be rewarded under capitation than it is under fee-for-service, when patients switch healthcare plans, investments in preventive care are less likely to result in financial savings for the payer who provided and made the up-front investments in such care.

In recognition of these issues, there are increasing numbers of programs in the United Kingdom and the United States that link payment to performance. In 2004, the United Kingdom's National Health Service (NHS) began a pay-for-performance initiative. General practitioners agreed to participate in a performance program encompassing 146 quality indicators reflecting clinical care for 10 chronic diseases, organization of care, and patient experience. In return, funding for primary care was increased 20% over previous levels, permitting [Page 909]practices to invest in technology and staff. A startling 90% of general practitioners now use electronic prescribing, and general practitioners increased their income by $40,000 through the program.

In the United States, given the disincentives for high quality healthcare that exist in current payment methods such as fee-for-service and capitation, the objectives of pay-for-performance include rapid performance improvement to address ongoing quality deficits, innovation, structural changes in care delivery, and, ultimately, better outcomes of care. A number of issues are critical to the success of pay-for-performance programs in achieving these objectives and improving the quality of healthcare.

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