An Environmental Scan of Pay for Performance in the Hospital Setting: Final Report. A Series of Tiered Absolute Thresholds May Be Better Than One Absolute Threshold


An individual’s motivation and effort when faced with a goal greatly depend on that individual’s baseline performance. Economists and psychologists have described this phenomenon as a “goal gradient” (Heath, Larrick, and Wu, 1999). If baseline performance is far away from goal performance, the individual exerts little effort, because the goal is viewed as not immediately attainable. As baseline performance gets closer and closer to goal performance, the individual exerts more and more effort to succeed. However, as soon as the goal is achieved, the motivation to improve decreases significantly. This phenomenon was illustrated in a study of a coffee shop reward program in which the tenth coffee purchased was free. Participants in this experiment slowly decreased the time between purchases of a coffee as they got closer to the free coffee (Kivetz, Urminsky, and Zheng, 2006).

The notion of a goal gradient may have application in structuring a hospital P4P program. This principle implies that there would be a greater behavioral response among hospitals if there were a series of quality performance thresholds to meet (e.g., increasing dollar amounts for achieving a 50 percent, a 60 percent, a 70 percent, an 80 percent, and a 90 percent performance threshold) rather than one (e.g., a 75 percent performance threshold). If, for example, there is just one 75 percent quality threshold (rather than a series of thresholds), a hospital whose baseline performance is at 45 percent is likely to see the goal as too difficult and not likely to be achieved, and is thus less likely to devote resources to quality improvement. If there is also a 50 percent quality threshold, however, the hospital’s leadership may see reaching the threshold as feasible and thus be more likely to devote resources to improving quality. A series of quality thresholds might also lead to a different behavioral response among hospitals that are doing well. In a single-threshold system with a goal of 75 percent, a hospital that is at 80 percent would have little reason to devote more resources to improve its quality performance any further. In a graded performance threshold system, however, this hospital would have an incentive to reach the highest threshold, 90 percent, to achieve additional payment. To stimulate continual improvement, some P4P programs have elected to use relative performance targets so that the bar keeps moving upward. However, absent some gradients or some allowance for payment along the entire continuum of improvement, a single relative threshold creates a cliff effect—meaning all or nothing winners.

View full report


"PayPerform07.pdf" (pdf, 1.22Mb)

Note: Documents in PDF format require the Adobe Acrobat Reader®. If you experience problems with PDF documents, please download the latest version of the Reader®