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What is Pay-for-Performance?

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Updated July 12, 2007

Question: What is Pay-for-Performance?
Answer:

What is pay-for-performance (a.k.a. value-based purchasing)?

Pay-for-performance and value-based purchasing are terms used to describe health care payment systems which reward doctors, hospitals, and other health care providers for their efficiency. Efficiency is usually defined as providing higher quality for a lower cost.

Pay-for-performance (P4P) is usually discussed in the context of health care reform. The federal government has begun efforts to implement P4P in its Medicare program, but these efforts are in the very early stages and have not yet yielded enough data to determine whether P4P is effective in reducing or containing healthcare costs.

Why adopt a pay-for-performance system?

Under our current healthcare system, providers are paid for each service performed. This gives healthcare providers a strong financial incentive to perform as many services as possible. This, combined with providers' understandable reluctance to expose themselves to potential lawsuits, may lead to overprescribing and overutilization of healthcare services.

Furthermore, some health policy experts believe that our current payment system is lacking because it neglects the role that preventive care can play in improving health and reducing healthcare costs. Today, providers receive more money for treating a diabetic patient who suffers kidney failure than they would for working with the patient to try to prevent the kidney failure, through better blood glucose control, in the first place. This seems backwards to many health care reformers.

A new payment system which rewards providers for maximizing the impact of preventive care may help to contain rising healthcare costs. Pay-for-performance has been proposed as such a system. It would reward doctors for providing care that has been proven to improve health outcomes and would encourage them to minimize waste whenever possible.

What are some of the challenges of implementing a pay-for-performance system?

The biggest challenge in implementing P4P is getting everyone to agree on quality standards. Quality standards are objective measures used to determine whether providers are offering high quality care. For example, one possible quality standard would be for doctors to test A1C levels in patients with diabetes four times a year. In a P4P system, doctors who meet this standard would be rewarded appropriately.

The problem is that many health care providers believe that the practice of medicine is as much an art as it is a science, and that boiling everything down to checklists and treatment algorithms would do a disservice to patients. Also, providers sometimes disagree on the proper course of treatment in patients with the same diagnosis and similar medical histories. These disagreements will have to be resolved before P4P can be fully implemented.

How will pay-for-performance affect me?

It is difficult to say what the impact of pay-for-performance will be, since it's so early in the game. However, because P4P is primarily concerned with how physicians, hospitals, and other health care providers get paid for their work, it is not likely to have a great effect on individual patients. Over the long haul, the hope is that if P4P is fully implemented, patients may enjoy better health care without having to pay more for it.

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