Pay-for-Performance
in the
United States
Health Care System:
An Overview and Recent Findings
from the
Community Tracking Study
OVERVIEW:
• Definition
• Reasons for Increased Interest in Pay-forPerformance
• Examples of Pay-for-Performance
• Pay-for-Performance at the Market Level –
the Community Tracking Study
• The Future of Pay-for-Performance in the
United States: Current Debate
DEFINITION
• Pay-for-performance is:
“The use of incentives to encourage and reinforce the
delivery of evidence-based practices and health
system transformation that promote better outcomes
as efficiently as possible”
American Healthways, 2005 as quoted in Forrest,
Villagra and Pope, American Journal of Managed
Care, February, 2006
“Pay-for-performance represents the next great hopeor, in skeptics’ eyes, hype – for reforming the U.S.
health system”
Adler, Benefit News.com, October, 2005
Reasons for Increased Interest in
Pay-for-Performance in the United
States
*Managed Care “Backlash” (1993-1997)
*Decline in reliance on capitation
payments due to:
‫ ־‬concern over incentives to withhold care
‫ ־‬shift in bargaining power between health
plans and providers due to provider
consolidation
Physician Pushback
Halverson: “…pricing power has shifted back
to the consolidated, locally dominant
providers, which are doing with that power
exactly what we might expect: raising fees”
Strunk, et al: “…financial pressures, coupled
with greater sophistication in managed care
contracting strategies and tactics, have spelled
the end of a period when some providers
uncritically accepted contract terms…providers
are testing the waters to see just how far they
can push their emerging bargaining power.”
Reasons for Increased Interest in
Pay-for-Performance in the United
States
continued
• Institute of Medicine Spotlights Quality and
Safety problems (1997-2000)
– The IOM “To Err Is Human…” report underscored
system failures that expose patients to unnecessary
risks
– The IOM “Crossing the Quality Chasm…” report and
follow-up studies highlighted areas where current
approaches to treatment are inadequate and
substantial improvements in care are warranted;
identified misaligned financial incentives as important
cause of quality deficiencies
– Quality deficiencies reinforced by McGlynn, et al.
NEJM and Health Affairs articles
Reasons for Increased Interest in
Pay-for-Performance in the United
States
continued
• Rising health insurance costs cause employers to search
for new strategies to manage health care benefits
• Pay-for-performance endorsed by highly visible national
employers:
“Pay-for-performance is here to stay. It will evolve and change
over time, but already we know that it is working and we see that
quality is improving. So to retreat to the previous system makes
no sense to anyone. There is no turning back.”
Francois de Brantes, program leader for healthcare initiatives with
G.E. Corporate Healthcare and Medical Services Programs, quoted in
Conklin and Weiss, Thomson-Medstat, 2005
Key Evolutionary Steps
A Benefit Consultant Perspective
Year 2002
Year 2012
Performance Disclosure
• Comparisons of hospitals, physicians and
pharmaceuticals

Consumerism and Pay-for-Performance
• Market sensitivity to hospital and physician
performance

Chasm Crossing
• Clinical re-engineering by physicians and hospitals
Improvement
• 50 percentage points improvement in quality
measures
• 40 percentage point reduction in cost increases
_____________
Source: Adapted from A. Milstein, MD, 2004
Reasons for Increased Interest in
Pay-for-Performance in the United
States
continued
• Improvement in information technology
(1995 – present)
-Growing implementation of the electronic
medical record
-HIPAA and the standardization of reporting
cost and use of services
Reasons for Increased Interest in Payfor-Performance in the United States
continued
• Rhetoric
of Health Care Crisis
‫ ־‬Broder, Washington Post:
“The American Health Care System is urgently in need
of being overhauled”
‫ ־‬Senator Frist (R. Tennessee)
The “…status quo of health care delivery is
unacceptable today” and the health care sector needs
to be “radically transformed”
- Medicare budget pressures
Pay-for-Performance: U.S. Examples
(from 100+)
CMS
• Requires hospitals that participate in Medicare to report
selected performance data to qualify for full payment; .4%
penalty for non-reporting
• 98% of Medicare hospitals report
Integrated Healthcare Association’s P4P Initiative
(California)
• 6 plans, over 200 physician groups, 7 million commercial
HMO enrollees
• Standardized performance data and public report cards
• Total payouts to high ranking groups will be $40 million to
$100 million
U.S. Examples
Bridges to Excellence
• Physicians who earn recognition via NCQA
programs receive annual incentive payments
of $50-$100 per employee or family member
of participating employers
• Rollout sites: Louisville, Cincinnati, Albany,
Massachusetts
• Major employers: GE, Raytheon, Proctor and
Gamble, Verizon, UPS, Ford
Pacific Care Health Systems:
• In 2003, PacifiCare contracted with 300 large
multispecialty physician organizations in California with
groups providing care to an average of 10,000 enrollees
each
• PacifiCare had measured performance of groups on
quality since 1993 and first made the information public in
1998
• New quality improvement program based on a subset of
measures was announced in 2002 to become effective in
2003 contracts
• 163 groups had enough PacifiCare patients to be eligible
for the program
Pacific Care Health Systems continued
KEY COMPONENTS OF THE PROGRAM
• Performance targets set at 75th percentile of 2002
average performance of groups
• Groups received a bonus of 23 cents PMPM for each
target met or exceeded
• Overall, groups with 10,000 PacifiCare enrollees could
receive $270,000 annually for perfect performance
– This was about 5% of the professional capitation paid by
PacifiCare to average group and 0.8% of overall group revenue
• Performance assessed on rolling year of data and
payments made quarterly
• Groups anticipated that other plans soon would
implement similar programs
Pacific Care Health Systems continued
OUTCOMES
• Improvement occurred in all three quality measures
studied but this also was true for PacifiCare provider
groups in a comparison area (Pacific Northwest)
– For only one measure, there was a significant
difference in the rate of improvement
• In the first year, PacifiCare awarded $3.4 million out of
$12.9 million in potential bonus payments
• 60% of groups received payments initially and this
increased to 75% after one year; only 14 groups received
payment for 5 or more (out of ten) measures
• High performing groups, prior to the program, received
most of the bonus money but improved the least
__________
Source: Rosenthal, JAMA, October 12, 2005
Pay-for-Performance at the Market Level –
The Community Tracking Study
• Background
– Goal of CTS: Better understanding of how health systems
change over time at the community level and how marketspecific factors influence change across different communities
– Design:
• 12 randomly selected communities (1996)
• Surveys of providers and consumers
• Site visits for collection of interview data every two years
– Most recent site visits:
• January – June 2005
• Over 1,000 interviews using structured protocols
• Representatives of provider organizations, health plans, large
employers, third party administrators, benefit consultants,
health insurance brokers
• Multiple interviews with the three largest health plans in each
community
– Funding: The Robert Wood Johnson Foundation
(Principal)
Employer
(Agent)
Health Plan
(Principal)
(Principal)
Medical Group
(Agent)
(Agent)
Physician
Pay-for-Performance at the Market Level –
The Community Tracking Study
• Employers
– Local benefit managers had limited interest in health
plan pay-for-performance efforts
• Saw these efforts as a normal part of “network maintenance”
• More focused on shifting costs to consumers, implementing
disease management and wellness programs
– Benefit managers who were aware of pay-forperformance efforts were often skeptical
– Some employer involvement in community efforts to
encourage collaboration among plans in defining
performance measures (eq Phoenix, Seattle)
Pay-for-Performance at the Market Level –
The Community Tracking Study (continued)
• Health Plans
– 27 of 34 Plans had pay-for-performance programs,
pilot efforts or planning stage efforts
– Plans not developing pay-for-performance initiatives:
• Were focusing instead on changing consumer
behavior
• Didn’t have resources necessary to mount
program
• Were waiting for direction from corporate offices
Pay-for-Performance at the Market Level –
The Community Tracking Study (continued)
• Health Plans (continued)
– Broad range of measures in use, including many that
are efficiency-related
– Local market relations between providers and plans
shape pay-for-performance implementation
– Money at stake ranges from small to substantial sums
• Miami plan: $4,000 per physician is average award with
maximum award of $12,000
• Growing consensus that plans need to have at least 10% of
provider compensation tied to pay-for-performance to get a
response
– Substantial variation across programs in percent of
providers receiving bonuses
– Few plans risk adjust or have a strategy for evaluating
impact
Pay-for-Performance at the Market Level –
The Community Tracking Study (continued)
• Providers
– Gaining provider acceptance of pay-for-performance
is major health plan challenge
– Providers voice support in theory but negotiating
details has gone slowly
– Local plans have emphasized a collaborative
approach
– Provider concerns include:
•
•
•
•
Choice of measures
Administrative burden
In-consistencies across health plan approaches
Sample size on which measures are calculated (for
physicians)
Pay-for-Performance at the Market Level –
The Community Tracking Study (continued)
• Providers
continued
– Communities where most physicians practice in organized medical
groups are further along in implementing pay-for-performance for
physicians
– Orange County
• Integrated Health Care Association has developed pay-for-performance for
HMO patients
• California Blue Cross has developed pay-for-performance for its PPO
patients
• Health plans’ pay-for-performance money is added to medical group bonus
pools for physicians with distribution to frontline physicians being highly
variable
– Boston
•
•
•
•
The three largest plans include Pay-for-performance in physician contracts
About half of pay-for-performance dollars reward cost containment
Frontline physician awareness of pay-for-performance is minima\
New money or “withheld” dollars?
Pay-for-Performance at the Market Level –
The Community Tracking Study (continued)
• Summary
– Implementation of pay-for-performance is highly
variable across communities depending on local
market characteristics
– No consensus has emerged on key issues:
• Measures to be used
• Dollars needed to stimulate behavior change
– Medical groups play an important role in
implementation of physician pay-for-performance
programs and their subsequent impact
– Disconnect between public support expressed for
pay-for-performance by large, national employers and
awareness and support on part of local employers
– Pay-for-performance further along for hospitals than
physicians
– Evaluation of effectiveness is generally missing
The Future if Pay-for-Performance in
the United States: Current Debate
• Standardization of measures at the national
level versus negotiated solutions at the local
level
• The role of organized medicine
– AMA “pact” with Congress on Medicare pay-forperformance
– specialty society response
• Medicare support for pay-for-performance
– de-facto standardization?
-- will health plans mimic Medicare?