The objective of aligning incentives through pay for performance—paying providers for higher-quality care as measured by selected standards and procedures—is to create payment incentives that will:

  • Encourage the most rapid feasible performance improvement by all providers.

  • Support innovation and constructive change throughout the health care system.

  • Promote better outcomes of care, especially through coordination of care across provider settings and time.

Pay for performance is not simply a mechanism to reward those who perform well or to reduce costs. Its purpose is to align payment incentives to encourage ongoing improvement in a way that will ensure high-quality care for all. Pay for performance will not necessarily reduce the cost of care, but it will help ensure that what is paid for will be more beneficial to patients. In theory, payment incentives induce certain predictable responses or behaviors. The notion that paying more for some attribute of a good or service will stimulate further production of that attribute is fundamental in most sectors of the economy, but the explicit linkage of incentives to quality and performance in health care markets is a relatively new concept. Therefore, introducing payment incentives to reward high quality in a national health care program requires attention to effects on providers, purchasers, health plans, and consumers.

More than 100 reward and incentive payment programs have been launched in the private health care sector. Most of these efforts have not yet been fully evaluated. The Centers for Medicare and Medicaid Services (CMS) in the U.S. Department of Health and Human Services (DHHS) has also initiated a series of demonstration projects to explore the potential of pay for performance to achieve quality improvement in Medicare. Some of these programs have begun to show that providers respond positively to payment incentives that promote and reward quality improvement practices, but it remains unknown whether the improvements seen will be significant and sustained. The literature evaluating the effectiveness of pay for performance consists of fewer than 20 studies, yielding mixed conclusions on overall impact. Some studies have shown a positive effect on the quality of care, but others have not demonstrated this relationship. In general, the effect of most of these programs has not been examined sufficiently. Despite these uncertainties, however, Medicare payment systems, if left unchanged, will pose a barrier to improved health care quality.

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