Why Pay-for-Performance Falls Short of Impacting Cost Savings for the Healthcare System

Medicare is continually looking at developing approaches to reduce the rising cost of healthcare through demonstration programs or pilot projects. The goal is to find the right formula that reduces the cost of healthcare while improving the quality and accessibility of services. Achieving this goal is mission critical to our country’s future and is a daunting challenge. The national healthcare expenditure is forecast to grow at a compound annual growth rate of [1]6.8% over the next eight years (2011 – 2019) from $2.7 trillion in aggregate healthcare expenditures to $4.6 trillion over this period. To address this issue, creative solutions need to be developed that substantially move the country to reducing the cost of healthcare services.

One of these approaches to reducing the cost of healthcare while preserving the quality of services is Pay for Performance. The Pay for Performance model reimburses healthcare providers for following prescribed best practices clinical process guidelines (for example an antibiotic given to a patient before surgery), clinical outcomes (an example would be no infections after an operative procedure). The premise is that through the delivery of higher quality healthcare the benefit realized is the reduction of costs. Therefore, by creating financial incentives for the delivery of high quality care, the objective of lower healthcare costs is derived. Pay for Performance incentive compensation ties the measurement of quality scores relative to either improvement growth or higher performance of an organization relative to its peers (e.g. top 10% performing organizations). This incentive payment is a percentage bonus in reimbursement for the medical services delivered. As a penalty, Pay for Performance is used to withhold a percentage of reimbursement due to declining or poor performing quality scores.

The recently published findings of the Premier Hospital Quality Incentive Pay for Performance demonstration project showed that this initiative fell short in reducing the cost of healthcare services. Historically we have seen that none of the Medicare Pay for Performance demonstration projects has reduced[2] the costs of healthcare. The reason for the lackluster results is the design of the program. It rewards healthcare providers for following a prescribed set of practices in delivering more care. Thus, the cost of services is being increased and the result is not a notable reduction in overall healthcare costs services due to higher quality scores. What is missing from this program is the lack of aligned incentives with healthcare providers to reduce the cost of care by changing their practices. The variation and cost between physicians to treat the same type of clinical condition is significant. Most physicians do not know the practice patterns of their colleagues because they focus on the delivery of care for their patients. To move the dial and substantially reduce the cost of healthcare, physicians, hospitals, and post-acute care providers need to have an incentive program that changes the behavior of care delivery without reducing the quality of care. By aligning the proper incentives with the appropriate checks and balances, the healthcare delivery system will behave differently and in lockstep to reduce of cost of care.


[1] Source – The US Healthcare Formula Cost Control and True Innovation, Morgan Stanley, June 16,2011, pg 10

[2] Source – Lessons from Medicare’s Demonstration Projects on Value-Based Payment, Lyle Nelson, Health and Human Resources Division Congressional Budget Office Working Paper 2012-02, January 2012, pg 3

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