Pay for performance (healthcare)

Pay for performance is a payment model used in healthcare. Also known as P4P and value-based care, pay for performance ties payment to providers to the quality of healthcare received by patients. The measures of quality are determined by the insurance companies or government programs paying for the care. Pay for performance is intended to improve care and reduce medical costs. However, it can have unintended consequences, including encouraging physicians and hospitals to avoid caring for some very sick patients.

Background

While forms of health insurance have existed since the late nineteenth century, modern health insurance is considered to have originated in 1929. Staff at Baylor University in Texas arranged with a local hospital to provide care in exchange for a set amount paid monthly for each employee. The concept spread rapidly, in part because employers began offering health insurance as a benefit instead of increased wages. Soon, it was considered a highly desired benefit, and employees came to expect it. However, healthcare innovations and technology increased the cost of providing this benefit, causing employers and insurers to look for ways to curb rising premiums—the amount paid to provide health coverage.

During the 1980s and 1990s, these cost-control efforts led to the rise of managed healthcare. Health Management Organizations (HMOs) used various measures to reduce rising medical costs. These included having a primary care physician coordinate patient care, establishing limits on what procedures and drugs were covered, and requiring prior authorization for some services. HMOs also introduced capitation—paying healthcare providers such as doctors and hospitals a set amount for different types of care. For example, a primary physician would receive a flat amount per month for each patient assigned to their practice. The physician received the same amount regardless of how much or how little care was provided in a given month.

The measures did help cut the amount insurers paid for care, but they also had drawbacks and drew criticism. Patients did not like the limitations and the need for authorization, while providers did not like the paperwork or the financial risks incurred. For example, a hospital would receive a set amount for a procedure like an appendectomy, even if the patient developed complications and needed much more complex and expensive treatment.

These problems and the continuing increases in care costs led to the development of other payment models. One of these was the pay-for-performance model, which first appeared around 2000. The state of California began using pay for performance in 2001. By 2004, the United Kingdom’s National Health Service had adopted it as well. Pay for performance continued to spread worldwide until it was adopted by many insurers, including the US government-run Medicare plans for older adults and individuals with disabilities, and Medicaid plans for those with low incomes.

Some examples of the medical community's integration of the pay for performance model include Medicare's Hospital Value-Based Purchasing (adjusts payments based on patient experience, clinical outcomes, efficiency, and other quality measures), the Hospital Readmissions Reduction Program (which imposes monetary penalties for high thirty-day readmission rates for specific conditions), and the Hospital-Acquired Condition Reduction Program (reduces payments to hospitals with high rates of preventable condition transmissions).

Overview

The pay-for-performance model uses a series of metrics to measure the success of a medical provider. These metrics analyze the outcomes of care provided, the degree to which the provider uses accepted standards of care—also known as best practices—and patient satisfaction. The model uses a combination of incentives for good results and penalties for poor results. The amount of payment received for services is tied to how well the provider meets those metrics.

Prior to the introduction of pay for performance, providers were generally paid solely based on fee for service, or FFS. Insurers and other payers contracted with providers to pay a fixed fee for each procedure, regardless of outcomes, patient satisfaction, or other factors. The pay-for-performance method was developed to address inequities in FFS, where all providers were compensated in the same way.

The method was also intended to help curb the cost of care by encouraging providers to use best practices. These practices have been recognized by experts as consistently producing the best outcomes. Many best practices involve ways to keep patients healthier and reduce the amount of care needed. This, in turn, reduces the cost of providing care.

Health care providers who meet the metrics included in the pay-for-performance model are rewarded with bonuses above the base amount paid for the service. Those who do not meet the metrics do not receive bonuses and may be subject to other administrative penalties as well, such as removal from the provider network. Funds saved by not paying bonuses are generally either returned to the people paying for insurance in the form of lower premiums or set aside to pay for future bonuses.

The four general categories of pay-for-performance metrics include process, outcome, structure, and patient experience. Process addresses the ways providers help patients improve health, such as encouraging patients to lose weight, stop smoking, or reduce alcohol consumption. Outcome assesses how well the provider’s efforts improve patient health and includes such things as the results of laboratory tests and the need for additional procedures. Structure addresses the resources used in patient treatment, such as having adequate office staff and using up-to-date equipment and technology. Patient experience uses input from patients to determine how they perceived the care they received.

While pay for performance is seen as a way to cut healthcare costs, critics have pointed out a number of shortcomings. First, they note that many medical outcomes depend on how well patients care for themselves and fall outside provider control. Critics argue that it is unfair to penalize providers for factors beyond their control. They also charge that the practice incentivizes providers to avoid treating patients who are likely to have a poor outcome, no matter what the provider does. This disproportionately affects the sickest patients and those who, because of poverty, have a harder time complying with physician orders.

Other criticism involves research that has shown that the pay-for-performance method does not improve patient health. In addition, critics say the method encourages unethical behavior by providers seeking to increase reimbursement. For example, a medical facility may record a surgical complication under a different diagnosis, or claim a patient had an infection before hospitalization when it developed as a result of hospital care. Despite these criticisms, many insurance companies and government programs continue to use variations of the pay-for-performance model.

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