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Researchers examine the effects of financial and nonfinancial incentives on health care use, costs, and quality

A supplement to the September 2004 issue of Medical Care Research and Review (volume 61, number 3) presents a series of commissioned papers and commentaries focusing on the analytic, conceptual, managerial, and policy challenges associated with the simultaneous and sometimes conflicting goals of delivering health care that is high in quality, safe, effective, and cost effective. The papers and commentaries were presented at an October 2002 conference, "Penetrating the Black Box: Mechanisms for Enhancing Healthcare Efficiency and Clinical Effectiveness," which was held in Seattle, WA.

The conference was developed by Douglas A. Conrad, Ph.D., Professor, Department of Health Services and Director, Center for Health Management Research, University of Washington, and Jon B. Christianson, Ph.D., the James A. Hamilton Chair in Health Policy and Management, Carlson School of Management, University of Minnesota, and cosponsored by the Agency for Healthcare Research and Quality (HS12076), the Robert Wood Johnson Foundation, and the California HealthCare Foundation.

The conference goal was to provide a venue for researchers, executives, and clinical leaders to examine not only the direct effects of financial incentives on quality but also the interactions between financial and nonfinancial incentives and the role of market and environmental conditions, organizational factors, and the characteristics of providers and consumers in shaping health care quality.

Some of the important conceptual, empirical, and policy questions considered by conference presenters and participants include:

  • What is known regarding the effects of financial incentives on physician behavior?
  • What are the resulting effects on quality? What are the effects on cost and resource use?
  • What incentive arrangements are currently in place and emerging in the health care marketplace?
  • In an era of complex health care organizations, what conceptual frameworks provide useful insights into the links between health care decisionmaking and its consequences for both efficiency and effectiveness?
  • What are the major gaps in empirical evidence about the impact of physician incentives on quality and cost.

In addition to a foreword by Gloria Bazzoli and a preface by Drs. Conrad and Christianson, the supplement presents the following papers and commentaries.

Shortell, S.M. "Increasing value: A research agenda for addressing the managerial and organizational challenges facing health care delivery in the United States," pp. 12S-30S.

This author proposes a framework for a set of management questions about financial incentives for quality. For example, what size of incentive is needed to influence physician organization behavior and, in turn, individual physician behavior? Can "threshold effects" (a "tipping point") be identified? How will incentive money earned by the physician organization be used to improve care for patients with chronic illness? How might financial incentives be structured to account for the differences between early and later adopters of innovations and of practices to improve quality, outcomes, and clinical efficiency?

Wilensky, G.R. "Framing the public policy questions: Financial incentives for efficiency and effectiveness," pp. 31S-36S.

This author issues a set of challenges for public policy researchers. To hit the mark, research must consider both the intended and unintended consequences of particular policy interventions addressing efficiency, cost, effectiveness, access, and quality. Alternative means of achieving policy goals and the intended and unintended effects of these alternate means are important topics for research. To significantly inform the public policy process, research on incentives must address relevant policy levers, specifically structures and payment levels, but also the mechanisms for updating reimbursement, case mix classification, risk adjustment, private contracting rules, conditions of participation, and antitrust policies. Timely and actionable policy research on financial incentives by necessity will confront the tensions between restraining spending and maintaining access and between establishing the "right price" and rewarding quality. For policymakers, this often translates into trying to approximate the competitive price.

Conrad, D.A. and Christianson, J.B. "Penetrating the 'black box': Financial incentives for enhancing the quality of physician services," pp. 37S-68S.

A review of the available literature (through June 2004) by these authors found very few empirical studies of the direct effects of quality-based financial incentives on clinical quality. They did find some evidence that fee-for-service payment is related to increased patient compliance with physician recommendations concerning number of provider visits and to improved continuity of the patient-physician relationship compared with capitation or salary methods of physician payment. There was no evidence of a consistent, significant difference between the incentive effects of salary and capitation modes of payment. Very few empirical studies have examined the effects of direct quality incentives, such as physician compensation bonuses that are based on clinical performance or patient satisfaction. The few studies of direct quality incentives are cross-sectional, generally focus exclusively on preventive services, and do not allow policymakers to infer cause and effect. The authors also developed a formalized model of physician choice of quality and quantity and a more extended qualitative model of the determinants of quality.


  • Landon, B.E. "Commentary on penetrating the black box," pp. 69S-75S.
  • Gray, B.H. "Individual incentives to fix organizational problems," pp. 76S-79S.

Town, R., Wholey, D.R., Kralewski, J., and Dowd, B. "Assessing the influence of incentives on physicians and medical groups," pp. 80S-118S.

These authors discuss behavioral economics as an alternate framework for decisionmaking. This framework emphasizes two key dimensions: (1) the importance of how people subjectively perceive a given situation; and (2) the role of choice rules, heuristics, or "rules of thumb" (in contrast to optimizing behavior). The authors challenge the research community to investigate how these factors—including physician preferences, the organization of daily work, and rules and routines—influence clinical decisionmaking.


  • Escarce, J.J. "Assessing the influence of incentives on physician and medical groups: A comment," pp. 119S-123S.

Fishman, P.A., Hornbrook, M.C., Meenan, R.T., and Goodman, M.J. "Opportunities and challenges for measuring cost, quality, and clinical effectiveness in health care," pp. 124S-143S.

These authors describe a new research paradigm for health services analyses of production and cost relationships in managed care. Most of the previous research on health care production in managed care settings has focused on single dimensions of output (e.g., visits, relative value units), probably for analytical convenience given the complex nature of health care consumption and production. However, numerous studies have established that output in a managed care setting is multidimensional. Thus, health outcomes and quality of life measures must be incorporated as measures of health system output. In addition, the authors discuss the opportunities and major implications of recent and likely future changes in the health care system, such as electronic medical records and greater use of electronic data capture.


  • Luft, H.S. "Focusing on the dependent variable," pp. 144S-150S.
  • Saver, B.G. "The fault lies not in our stars but in our system," pp. 151S-160S.

Editor's Note: A public Web site has been established by the University of Washington to host the papers and commentaries from the conference, as well as a digest of the conference proceedings and a list of conference participants and their affiliations. Go to to find these materials, as well as one paper and set of commentaries not described here and not included in the journal supplement. The paper by Robert Santos and Paula Diehr addresses the methodological challenges inherent in the research agenda proposed by conference presenters and participants and is accompanied by two commentaries, one by Danna Moore and Don Dillman, and another by Doug Roblin.

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