An Environmental Scan of Pay for Performance in the Hospital Setting: Final Report. Conclusions


Together, the economic and management theories that we reviewed suggest that the way in which P4P incentives are structured, or framed, may influence whether they achieve the desired behavioral response. Incentives that are framed as withholdings, paid out in small and frequent payments, and paid out close to the time that care is delivered might drive the greatest behavioral response among targeted hospitals. Furthermore, in comparison to relative thresholds or one absolute threshold, a stepped number of absolute thresholds may be more likely to induce hospitals to devote resources to quality improvement. The two potential unintended consequences discussed serve as a helpful counterpoint to the economic theories. They emphasize that P4P incentives could lead to the neglect of other important, but unmeasured outputs in a hospital and that P4P programs could even have a negative impact on quality. Therefore, any program should closely monitor for these unintended consequences.

There are several important limitations and caveats to this interpretation of these theories. First, as noted above, the theories were developed to describe the behavior of individuals, not institutions; and it is possible that institutions may behave differently. Researchers have, however, applied theories of individual behavior to organizations and there is some anecdotal evidence that organizations respond similarly (Bazerman, Baron, and Skonk, 2001). Another caveat is that there are often practical reasons for not choosing the options suggested by these economic theories. For example, it was noted above that a more frequent payout might lead to a greater behavioral response. Yet this result might be outweighed by the higher administrative costs to the program sponsor of more frequent processing of data and payouts. An absolute threshold with an associated incentive with a fixed dollar amount might lead to a greater behavioral response than a relative threshold with an associated uncertain incentive. Yet such an approach leads to greater risk for the payer, which could face the prospect of paying out much more in incentives than was budgeted if providers outperform the predicted improvement. In the United Kingdom’s primary care physician P4P program, provider performance greatly exceeded the 75 percent predicted when the scheme was negotiated, so the cost to taxpayers was considerably more than expected (Doran et al., 2006). This could be avoided by setting a fixed incentive budget.

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