Pay for Performance: A Decision Guide for Purchasers


Recent surveys suggest that the number of pay-for-performance (P4P) initiatives nationwide sponsored by a variety of health plans, employer coalitions, and public insurance programs now exceeds 100.1-3 Through these various programs, most physicians and hospitals in the United States currently face or are in discussions with local purchasers about some form of pay for performance.4 The sponsors of these incentive programs state that either rewarding or improving quality of care is a primary goal; the other goal is usually controlling costs either directly or indirectly by reducing errors and inappropriate utilization.

We define "pay for performance" broadly and include any type of performance-based provider payment arrangements including those that target performance on cost measures. Despite the growing use of P4P initiatives, there is little evidence on how best to design incentive programs in the health sector.5 Perhaps as a result of the paucity of evidence, there is tremendous variety in the approaches used in existing incentive programs. 3,6 

Existing P4P initiatives are sponsored by government purchasers—Medicare and Medicaid—as well as private employers, coalitions of employers, and health plans. We use the term "purchasers" to refer to all these potential sponsors. Although this Guide is developed for a purchaser audience, we note that some P4P programs have been initiated by providers.

There are many decisions that go into the design of a P4P program, and each decision affects the likelihood that a program will achieve its goals. In this Guide, we isolate and sequence 20 questions purchasers face in considering pay for performance, review options and any available evidence—from empirical evaluations and economic theory—that may inform future decisionmaking, and discuss potential effects and unintended consequences. We group questions into one of four phases through which a purchaser considering P4P might evolve: contemplation, design, implementation, and evaluation.

We recognize that pay for performance is only one among many possible and valuable strategies that purchasers may undertake to improve the quality and affordability of health care. Purchasers contemplating P4P need to consider the appropriate role and limitations of payment incentives in comparison to other potential strategies including physician and patient education, private and public report cards, disease management, and technical assistance.

Finally, we must note that, while P4P programs create explicit incentives to reward or improve performance, the pre-existing, underlying payment system exerts its own set of (mostly implicit) incentives. For example, fee-for-service payment creates an incentive to increase utilization while capitation payment involves incentives to reduce services. Purchasers must account for the pre-existing payment system incentives when contemplating additional ones. Also, the value of a P4P program will be a function of both gains in the quality of care and the total costs of the program, including additional payments to providers (if any) and the costs of implementation and monitoring.

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Page last reviewed April 2006
Internet Citation: Pay for Performance: A Decision Guide for Purchasers: Introduction. April 2006. Agency for Healthcare Research and Quality, Rockville, MD.