An Environmental Scan of Pay for Performance in the Hospital Setting: Final Report. Defining Value-Based Purchasing


VBP is a strategy that strengthens the link between quality and provider payments by rewarding providers that deliver high-quality, cost-efficient care. VBP encompasses a number of activities that can be used individually or as a mutually supportive set to engender provider behavior change. One activity that falls under the VBP umbrella and has garnered much attention and interest in recent years is P4P. P4P explicitly links health care providers’ pay to their performance on a set of specified measures such that better-performing providers receive higher payments than do lower-performing providers. The term provider, which we use throughout this report, encompasses a broad spectrum of health care providers: hospitals, individual physicians, physician practices, medical groups, and integrated delivery systems. 

P4P programs seek to align measurement of and payments to providers with a program sponsor’s goals, such as the delivery of high-quality, cost-efficient, patient-centered care. For example, if a program sponsor is seeking to improve patient outcomes, the program will include either measures of risk-adjusted mortality or complications rates or clinical measures, such as the provision of disease-specific services. If that program sponsor also seeks to improve the cost efficiency of care, the program may also include readmission rates or risk-adjusted length of stay. P4P programs are designed to financially reward those providers whose performance is consistent with the program sponsor’s identified goals.

Three other mechanisms that use financial and non-financial incentives also seek to incentivize changes in provider and/or consumer behavior as means to improve quality and efficiency in health care delivery. These three mechanisms were excluded from our environmental scan of P4P in the hospital setting per se, although public reporting is often a component of P4P programs and is a core quality improvement strategy that CMS is currently implementing through the RHQDAPU program. The mechanisms are as follows:

  • Provider profiling (or report cards) is an internal activity through which a health plan or other organization distributes comparative performance information to providers in either a blinded or an unblended fashion. This information may be used as the basis for structuring tiered or high-performance networks, for P4P programs, or for quality improvement.
  • Public reporting makes provider performance information available to consumers and the public more broadly to help inform decisionmaking and to hold providers publicly accountable as a means to incentivize providers to improve. 
  • Tiered provider networks separate providers into categories on the basis of costs and/or quality performance and provide financial incentives to consumers (i.e., lower co-payments or deductibles) to use providers placed in the high-performing tier.

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