PHC4 FYI - Paying for Performance: the Business Case

Adobe Acrobat Format for Distribution PDF Format

With health care premiums skyrocketing 59% since 2000, purchasers have a right to ask whether the quality of care is improving correspondingly. Studies have estimated that as much as 30 percent of all medical expenditures are wasted on poor quality care. Medical errors, hospital-acquired infections, and readmissions for complications are not only adversely affecting patients' health, but are resulting in higher costs to the health care system. Plus, there are regional variations in treatment in the nation that also impact outcomes. One way to promote health care quality is by "Paying for Performance," an innovative concept which links performance to payment and rewards health care providers that meet quality standards.

The goal of paying for performance is to "change the status quo by stimulating both immediate and long-term improvements in performance." (Epstein et al). The idea is not to reward 'good' physicians or punish 'bad' physicians, according to a January New England Journal of Medicine article. "If you remove the financial disincentives and add new rewards,provider performance may improve over time," said Dr. Karen Feinstein,Chairperson of the Pittsburgh Regional Healthcare Initiative at a PHC4-hosted meeting of purchasers in Harrisburg in 2003. Pay-for-performance incentives may include bonus programs, awards for improvement projects, fee schedules based on performance, at-risk contracting, and cost differentials (savings) for consumers, according to the American Hospital Association.

Paying for performance in health care makes both business and medical sense, said Cliff Shannon, President of SMC Business Councils and Chair of the PHC4 Education Committee, speaking to a group of business and labor leaders in Pittsburgh in September 2004 at a meeting jointly hosted by SMC and PHC4. Mr. Shannon called on purchasers to work together on needed health care reforms, including pay for performance. He advocated paying more for perfectly delivered health care, and paying less for health care services that produce poor results. Typically, providers are paid for the services they perform, regardless of the outcome of treatment.

Better Care Costs Less

Better quality care should cost less in the long run, because, theoretically, the need for higher-cost services should be reduced. Francois de Brantes, Program Leader of Health for General Electric and a leader of the "Bridges to Excellence" pay-for-performance program says, "If we eliminate inefficient care, we'll reduce costs to the entire system."

Approximately 35 health plans representing 30 million members nationwide offer some form of pay-for-performance programs (Endsley). For example, in Pennsylvania Independence Blue Cross (IBC) included performance clauses in contracts with four hospitals and health systems in 2002; additional hospitals have agreed to participate since then. These hospitals can earn bonuses based upon existing quality measures from recognized sources such as the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) and the Agency for Healthcare Research and Quality (AHRQ). IBC has used PHC4 data to incorporate recognized quality indicators such as readmission rates, mortality rates and morbidity rates. PHC4 data can also be used to examine in-hospital lengths of stay (LOS), complications, and readmissions. All of these measures can affect the bottom-line.

Minnesota's third largest health plan has announced that beginning January 1, 2005 it will stop paying for certain procedures that go wrong. The plan, HealthPartners, says it will stop paying for a list of 27 adverse events compiled by the National Quality Forum, including surgery performed on the wrong body part or on the wrong patient, and leaving a foreign object in a patient after surgery. HealthPartners has 630,000 members and a network of physicians and hospitals, including clinics.

Developing Standards for Care

Standardizing care using scientific evidence to determine the most effective treatments for improved patient outcomes could reduce or eliminate variations in care and result in increased quality, according to Dr. John Wennberg, Director, Center for Evaluative Clinical Sciences, Dartmouth Medical School, a noted expert in evidence-based medicine. The pay-for-performance concept requires purchasers, health plans and providers to develop and agree on standards for quality care. Once standards are agreed upon, paying for performance would also include measuring performance and rewarding results either financially or through other incentive systems.

Ways to Look at Paying for Performance


"The business case is a strong one; paying for performance can improve patient care and save money," remarked Marc P. Volavka, Executive Director of PHC4. He said that PHC4 data clearly makes the case that hundreds of millions of dollars can be saved each year in Pennsylvania alone.

PHC4 data is a valuable source of information on health care quality. By becoming familiar with performance-oriented measurements, i.e., readmissions from complications or infection, etc., purchasers and other stakeholders can pose informed questions to insurers during contract negotiations with hospitals and other providers.


PHC4 FYIArchives

Items with the symbol PDF Format require you to have the Adobe Acrobat Reader to view the entire document.