Early Experience with Pay-for-Performance from Concept to Practice

Abstract

The adoption of pay-for-performance mechanisms for quality improvement is growing rapidly. While there is intense interest in and optimism about pay-for-performance programs, there is little published research on pay-for-performance in health care. In this study, we examine the impact of a prototypical physician pay-for-performance program on quality of care. We evaluate a natural experiment with pay-for-performance using administrative reports of physician group quality from PacifiCare Health Systems for both an intervention group (California physician groups) and a contemporaneous comparison group (Pacific Northwest physician groups). Compared to physician groups in the Pacific Northwest, PacifiCare’s California network demonstrated greater quality improvement after the pay-for-performance intervention only in cervical cancer screening (a 3.6 percentage point difference in improvement (p<.05)). In total, PacifiCare awarded $3.4 million (27% of the amount set aside) in bonus payments between July 2003 and April 2004, the first year of the program. For all three measures, physician groups with baseline performance at or above the performance threshold for receipt of a bonus improved the least but garnered the largest share of the bonus payments. We conclude that paying providers to reach a common, fixed performance target may produce little gain in quality for the money spent and will largely reward those with higher performance at baseline. Paying explicitly for quality improvement may be a more effective means to induce accelerated improvement in quality. This evaluation is developed from and is informed by a decade-long collaboration between the researchers (affiliates of Harvard’s Sloan Center for Managed Care Industry Research) and PacifiCare that began with a series of in-depth site visits to the physician groups in PacifiCare’s network, followed by a survey of those groups that examined the use of organizational and financial mechanisms for managing care.