Overview of Physician Pay for Performance

What is it?

Substantial deficiencies exist in the quality of health care provided to consumers of health care services in the United States (McGlynn et al., 2003; Mangione-Smith et al., 2007). Existing payment mechanisms (such as fee for service) reward quantity rather than quality because they do not differentiate payments to health care providers based on whether the right care is delivered. Concerns about deficits in the quality of care have led private insurers and policymakers at both the federal and state levels to consider various policy options that would better align financial incentives for health care providers with quality goals. More recently, purchasers have become interested in using this approach to improve the efficiency of care delivery. Thus pay-for-performance (P4P) programs are being tested widely in an effort to simultaneously encourage improvements in the quality, safety, and efficiency of delivered health care by measuring performance, making information about quality transparent, and paying differentially for performance (Institute of Medicine, 2006).

P4P programs use financial incentives to stimulate improvements in the quality of care and, in some cases, reductions in costs. To achieve these goals, P4P programs use a variety of performance measures, including clinical processes of care and health outcomes, patient safety, patient experience with receiving care, resource use (i.e., efficiency), and structural indicators such as the investment and use of health information technology. The financial incentives are funded through withholding a portion of current payments (or future payment increases), adding new money to existing payments, or sharing savings that accrue through reductions in expenditures. The financial incentives may take the form of an increased payment for each service delivered or a bonus. Payments are made based on a provider (i.e., physician, practice site, or medical group) having attained relative or absolute performance thresholds, the provision of a targeted service regardless of performance level, improvement over the prior year's performance, or some combination thereof.

How would it work?

This policy option would significantly expand the number of physicians participating in P4P programs and may increase the scope of performance that is measured. For public purchasers, Congress and the Centers for Medicare & Medicaid Services (CMS) could implement P4P in Medicare and, together with the states, in Medicaid. Private purchasers have already been building P4P incentives into their contracts with providers.

Has it been tried before?

More than half of all private sector health plans in the United States are applying P4P in their contracts, and more than 100 of these programs target physicians or medical groups (Rosenthal et al., 2007; Sorbero et al., 2006). Public purchasers also have begun to move toward adoption of P4P in both the Medicare and Medicaid programs.

In January 2006, CMS initiated a pay-for-reporting program for physicians—the Physician Quality Reporting Initiative (PQRI). Through PQRI, the 500,000 physicians participating in the Medicare program who voluntarily reported their performance on a set of clinical measures for the period July 1 to December 31, 2007, can receive up to a 1.5 percent bonus payment for covered Medicare physician services.

On July 15, 2008, Congress enacted the Medicare Improvements for Patients and Providers Act of 2008. Section 131(d) of the act requires the secretary of the U.S. Department of Health and Human Services to develop a plan for the transition to a value-based purchasing program for physician and other professional services. This plan must be submitted to Congress no later than May 1, 2010.

Both PQRI and the value-based purchasing plan for physicians are viewed as likely precursors of P4P programs in Medicare. These actions respond to recommendations from Medicare Payment Advisory Commission (MedPAC) and Institute of Medicine reports in 2006 that called for CMS to implement P4P across all provider settings and work to align payment policy with the provision of high quality care. Given the broad use of physician and physician group-level P4P programs in the private sector, it is anticipated that CMS can implement a physician P4P program.