Pay for Performance Essay

Custom Student Mr. Teacher ENG 1001-04 17 November 2016

Pay for Performance

Prior to the 2000s, fee-for-service systems dominated how health care providers received payment for providing care to patients. Under the fee-for-service system, physicians received payments, according to the volume of patients and the complexity of services. Two reports written by the Institute of Medicine clearly substantiated serious deficiencies in the quality of health care in the United States. The findings prompted the need to develop initiatives to pay health care workers based on quality. The following discussion defines pay-for-performance, explains the effects of reimbursement under this approach, details the impact of system cost reductions on the quality and efficiency of health care, the effects of this model on health care providers and customers, and the effect pay-for-performance will have on the future of health care.

The Definition of Pay for Performance

Pay for performance models reward providers, such as physicians, other health care providers, hospitals, and medical groups under contract for meeting pre-established performance measures to improve quality and efficiency in health care delivery. It is popular among policy makers and private and public payers, such as Medicare and Medicaid. The first initiative adopted by one of the nation’s largest health care plans, PacifiCare Health Systems, began paying medical groups in California bonuses for meeting or exceeding 10 clinical and service quality targets in 2003 (Meredith, Richard, Zhonghe, & Arnold, 2005). Service quality targets included five patient-reported measures of service quality, five ambulatory care quality indicators, and a set of hospital quality measures for referring patients to high-quality hospitals. The criteria in the first year required medical groups to acquire a minimum of 1000 PacifiCare Commercial and 100 Secure Horizons enrollees.

Research showed the network of California medical groups, under contract to improve performance goals, outweighed the performance measure of another medical group not under contract, Pacific Northwest, for cervical cancer screening by a significance of 3.6%.

Of 163 eligible physician groups, 97 (60%) received a distribution of funds from the program related to at least 1 physician group quality performance target in the first quarter of the QIP. In the last payout based on the original set of targets (April 2004), 129 of 172 (75%) groups reached at least 1 physician group quality target. (Meredith, Richard, Zhonghe, & Arnold, 2005, para. 26)

Only 14 medical groups exceeded more than half of the performance targets. The pay-for-performance approach showed an inverse relationship where physician groups with lower performance improved the most whereas physician groups that previously achieved target goals improved the least.

The Effects of Reimbursement under Pay for Performance

The article Early Experience With Pay-For-Performance: From Concept to Practice (Meredith, Richards, Zhonghe, & Arnold, 2005) argues this approach to improving the quality of care fulfills multiple objectives. One positive impact of pay-for-performance suggests paying health care providers for meeting certain quality indicators increases performance. The authors claim low-performing health care providers improved because they viewed the landscape of health care delivery changing by the mounting pressure of payees to improve their health care systems and decided to remain in good standing. Low-performing health care providers contend they cannot achieve benchmark levels of performance because of barriers beyond their control, such as limited resources or low-socioeconomic, patient populations.

A negative impact of pay-for-performance indicates high-performing health care providers meeting target levels have no incentive to improve their performance and thus offer status quo health care services to their patients. Another reason health care providers have no incentive to produce services beyond the norm indicates low rewards paid by insurance networks. “Paying for improvement fails to reward and even penalizes providers that have already achieved high levels of health care quality at the time a pay-for-performance program is initiated” (Meredith, Richards, Zhonghe, & Arnold, 2005, para. 32). For the reasons stated above, the distribution of rewards primarily goes to the group of providers with low-performing standards and increases the impact of pay-for-performance.

Impact of System Cost Reductions on Quality and Efficiency of Health Care

Evidence of pay-for-performance shows mixed results. One study, Premier Hospital Quality Incentive Demonstration, performed by Rachel M. Werner of the University of Pennsylvania, compared the improvements in quality for hospitals paid incentives to a control group of hospitals who did not receive incentives from 2004 – 2008. The results reflected minor significance in improvement in the quality and efficiency of health care. In fact, diminishing returns occurred after the fifth year (Health Policy Brief, 2012)(See Figure 1).

Other pay-for-performance initiatives, such as the Medicare Premier Hospital Quality Incentive, rolled out at the same time as Werner’s study, which analysts profess as the reason behind the improvement in quality and efficiency of health care among hospitals. Like health care providers, hospitals did not want to endure the embarrassment of presenting an image lacking in quality care. They sought to clean up their acts in anticipation of the Centers for Medicare and Medicaid Services (CMS) implementing pay-for-performance measures in health care.

A project conducted between 2005 and 2010, the Medicare

Physician Group Practice Demonstration, focused on quality and cost. Researchers of Dartmouth College and the National Bureau for Economic Research analyzed doctors, who would receive bonuses for achieving lower cost growth and meeting quality targets, in 10 large physician group practices. They found improvement in the quality of care but little reduction in the growth of spending for most Medicare patients (Health Policy Brief, 2012).

Effects on Health Care Providers and Customers

Health care providers agree with the need to improve quality of care but have concerns with pay-for performance. It takes money to implement, maintain, and document quality measures. They reason if payees give modest payments as incentives, they cannot recoup additional administrative costs and provide quality care simultaneously. Others fear the implementation of health information technology for data collection and reporting will close the doors of their practices. The American Medical Association (AMA) believes providers should have the choice to volunteer in incentive programs, review, comment, and appeal performance data, and receive payment for participating (Health Policy Brief, 2012).

Another issue health care providers have with this cost containment model lies on the premise that hospitals that care for patients from low-income backgrounds bear the burden of lower improvement scores compared to hospitals that care for patients from mid-level to high-level incomes. Lower improvement scores result from low-income patients’ lack of transportation, language barriers, and childcare among other barriers to access health care services. Limited access to care halts the prevention and treatment of chronic illnesses and increases readmission rates of patients to hospitals. As a result, hospitals incur penalties.

Health care providers concerned with the impact these arrangements have on patients, oppose these programs because they think patient care will weaken at the expense of cost containment. Physicians have the power to control their pay by hand-picking the best patients to maintain or increase their performance measures. By selecting healthier patients, physicians widen the gap for racial and ethnic disparities in health care delivery.

A study by Jha and colleagues of costs and quality in US hospitals found a group that consistently performed worse on both quality and cost metrics and that cares for proportionally greater numbers of elderly black and Medicaid patients than other institutions. (Health Policy Brief, 2012, para. 42)

In comparison, a Yale study showed safety-net hospitals outperformed hospitals that treated less proportionate numbers of low-income patients.

Effects on the Future of Health Care

The implementation of the Affordable Care Act (ACA) will increase the need for pay-for-performance programs and incentives. The Affordable Care Act promises to increase the enrollment of Medicaid and Medicare patients. Health care workers will find challenges with a large generation of Baby Boomers who will need long-term care. Under the ACA health care providers’ scores will include indicators, which measure patient-centered care, family engagement, and the ability to address disparities in health care delivery.

As well, under the ‘Value-Based Purchasing Incentive’ mandates of the ACA, the Centers for Medicare [and] Medicaid Services have not only proposed additional process-of-care quality and mortality outcome measures on which to base future payments but also an integration of patient experience scores, representing up to 30% of hospital incentive payments, financially penalizing those with low scores. (Liang & Mackey, 2011, p. 1427)

Not only that but also hospitals will have to report efficiency measures to include Medicare spending per beneficiary. Mandates will not only require quality but also focus on reducing costs. New programs will measure the reduction of costly hospital readmissions, restrict Medicaid
payments for hospital-acquired conditions, and reduce Medicare payments to hospitals with the highest rates of medical harm.


Reports and studies support evidence, which shows pay-for-performance does not improve the quality of care nor reduce the costs of health care. Researchers must find ways to improve quality of care over a substantial period, close racial and economic disparity gaps, and increase health care worker acceptance of pay-for-performance programs, and incentives, which motivate providers to produce more positive health outcomes. Developers of program incentives should use tools, which help monitor and evaluate health care outcomes aside from other factors with variations in health care markets. By collecting data, researchers can design programs that improve quality of care and reduce costs.

Health Policy Brief: Pay-for-Performance. (2012, October 11). Health Affairs. Retrieved from
Liang, B. A., & Mackey, T. (2011). Quality and Safety in Medical Care: What Does the Future Hold?. Archives Of Pathology & Laboratory Medicine, 135(11), 1425-1431. doi:10.5858/arpa.2011-0154-OA

Meredith, B. R., PhD, Richard, G. F., PhD, Zhonghe, L., MA, & Arnold, M. E., MD, MA. (2005). Early experience with pay-for-performance: From concept to practice. The Journal of the American Medical Association, 294(14), 1788–1793. Retrieved from

Shaman, H. (2008). What you need to know about pay for performance. Hfm
(Healthcare Financial Management), 62(10), 92-96.

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