Pay-for-Performance Incentives: Background and Current State

“Pay-for-performance” is an umbrella term for initiatives aimed at improving the quality, efficiency, and overall value of health care. These arrangements provide financial incentives to hospitals, physicians, and other health care providers to carry out such improvements and achieve optimal outcomes for patients. Pay-for-performance has become popular among policy-makers and private and public payers, including Medicare and Medicaid. The Affordable Care Act (ACA) expands the use of pay-for-performance approaches in Medicare in particular, and encourages experimentation to identify designs and programs that are most effective.

Pay-for-performance programs stand in contrast to traditional payment for medical services, which is predominantly fee-for-service or based on the volume of care provided. In traditional payment systems, moreover, providers are also paid based on the complexity of services they provide, regardless of the outcomes for patients. In theory, paying providers differently and rewarding them for achieving better outcomes for patients should improve those outcomes. But in actuality, studies of these programs have yielded mixed results.

This Health Policy Brief reviews the background and current state of public and private pay-for-performance initiatives and explores options to make these programs more effective in the future, and was published online on October 11, 2012 in Health Affairs.