An Environmental Scan of Pay for Performance in the Hospital Setting: Final Report. Reducing the Time Lags Between Performance and Receipt of Incentive Can Help to Achieve Maximum Response

11/01/2007

In economics, the principle of discounting is based on the fact that individuals value having a sum of money now more than sometime in the future, even after accounting for inflation. The concept of discounting and the use of a discount rate are well accepted in both accounting and economics. Studies have found, however, that individuals discount in a way different than would be expected by classic economic theory. In one study, the vast majority of individuals chose to receive $10 immediately rather than $21 in one year (Loewenstein and Prelec, 1992). But when asked to choose between $10 in one year and $21 in two years, fewer individuals selected the $10. Instead of discounting in a linear fashion, the individuals in these experiments were discounting at a steeper hyperbolic curve, which led to the name of this phenomenon: hyperbolic discounting. 

The application of hyperbolic discounting to P4P program design suggests that minimizing the lag time between the performance being incentivized and receipt of the incentive may strengthen the behavioral response. Money received right away is perceived as different in value from money to be received in the future—even the near future. For example, a hospital is more likely to implement an electronic medical record (EMR) if they know the money associated with doing so will be received quickly (e.g., within the next month) rather than years after the implementation. One criticism of current performance measurement and reporting programs is that the substantial lag between the provision of care (i.e., performance) and the reporting of results renders the results not actionable (Davies, 2001). Similarly, in a P4P program, the time required to collect and validate data and make the payout determination might mean that the incentive payment comes long after actual delivery of care. Substantial time lags may cause a hospital to see the incentive as occurring so far in the future that it is not worth pursuing. Strategies that tie payment to the provision of individual services or more frequent payouts may help reduce the time lag. 

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