Pay-for-Performance in Health Care

Publication Date: November 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Health

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Abstract:

In recent years, many health care industry leaders and policy makers have joined the call to pay health care providers different amounts based on variation in the quality of their services as determined through their achievement on quality performance measures. Proponents of these pay-for-performance systems in health care assert that such programs could help improve the quality of care while also helping to control the rate of growth in health care costs. Pay-for-performance systems have been implemented for some managed care plans that cover Medicaid beneficiaries, and proposals for establishing pay-for-performance systems for Medicare services continue to come before Congress.

A pay-for-performance system is a remuneration arrangement in which a portion of the payments is based on performance assessed against a defined measure. Typically, there is another component of the remuneration that is independent of the amount at risk. While most of the current discussions about pay-for-performance in the health care industry address quality-based measures, performance objectives and metrics could target any of a number of variables, including profitability, volume, or customer or patient satisfaction.

The elements common to all pay-for-performance programs are (1) a set of targets or objectives that define what will be evaluated, (2) measures and performance standards for establishing the target criteria, and (3) rewards -- typically financial incentives -- that are at risk, including the amount and the method for allocating the payments among those who meet or exceed the reward threshold.

For the pay-for-performance program to be successful, there needs to be agreement and buy-in among those being evaluated that the objectives are fair and the measures appropriate, that performance is accurately measured, and that the incentives make the effort worthwhile. Possible shortcomings and unintended consequences of a pay-for-performance program include having inappropriate measures and objectives, competing or uncoordinated efforts, insufficient or inappropriate incentives, and placing excessive focus on the reward.

There are few rigorous objective evaluations of the effect of pay-for-performance programs. Initial studies suggest that pay-for-performance programs can change performance on quality measures that are used for the basis of bonus payments, but claims that pay-for-performance programs are cost-saving in the long run are largely unsubstantiated.

In recent years, Congress has considered legislation that would implement payfor-performance in health care. Most of the efforts have centered on the Medicare program, although Medicaid and private insurers have also garnered some attention. A number of pay-for-performance demonstration projects have been authorized, and Congress issued a directive to the Secretary of Health and Human Services to develop a value-based purchasing program for hospital payment by 2009. More bills proposing the establishment of pay-for-performance programs in public programs such as Medicare are likely come before Congress. This report will be updated as needed.