The Origins of and Economic Momentum Behind "Pay for Performance" Reimbursement

Abstract "Pay for performance," a reimbursement method under which some physicians and hospitals are paid more than others for the same services because they have been deemed to deliver better quality care and their patients appear to have better outcomes, is enormously controversial. Disputes invariably arise over how "quality" should (or even can) be measured. Nevertheless, differentiating between medical providers, financially, lies at the heart of this new reimbursement innovation developed by insurance companies and employers. Its two main objectives are: (1) to increase the overall quality of health care that patients receive, and (2) to encourage behavioral change on the part of physicians and hospitals that leads to increased efficiency. This article attempts to explain where the momentum for "pay for performance" reimbursement has come from, why its advocates consider it an improvement upon existing payment systems, and how it can both positively and negatively affect medical providers. The majority of health care spending in the U.S., argues health economist David Cutler, is good. Rather than pay less, he maintains that we as a nation should pay for more medical care, albeit wisely. (1) Unfortunately, getting additional value from increased medical spending is difficult under the current models of reimbursement. The three worst payment mechanisms for rewarding quality and performance, jokes health economist Jamie Robinson, are: (a) fee-for-service, (b) capitation, and (c) salary. (2) What all three of these models have in common is that, financially, they generally treat most physicians and hospitals the same regardless of their patients' outcomes. (3) "Pay for performance," then, is principally an effort by a growing number of employers and insurers to find new ways to pay medical providers that increases the value and quality of the health care that they purchase, as well as the efficiency with which it is provided. (4) Two landmark reports by the Institute of Medicine [IOM]--To Err is Human (2000) and Crossing the Quality Chasm (2001)--put health care quality and patient safety issues squarely on the public policy agenda. (5) The 2000 report estimated that as many as 98,000 patients die annually in U.S. hospitals due to preventable medical errors. The statistic was made more visceral when the report's authors noted that this was equivalent to a 300-passenger airplane crashing almost daily in the U.S. (6) The IOM reports raised the profile of an initiative closely related to "pay for performance" reimbursement, which goes far beyond just improving hospital safety. It is critical for medical providers to understand what this initiative is and how accumulating evidence over the last three decades have shaped its development. The initiative is to reduce unwarranted geographic variation in both the volume and variety of medical care provided, while at the same time increasing the kinds of care that clearly work and improve patients' health. (7) Economic & Epidemiological Origins Key to understanding why efforts to reduce unwarranted medical variation and "pay for performance" reimbursement are closely inter-connected is to recognize that there is no one single American health care system. There are, instead, hundreds of regional health care systems across the country; and each one has its own unique approache to patient care and medical spending. Where you live has a significant effect on which (and how many) physicians you see, how many days you spend in the hospital (if any), and what drugs you are (or are not) prescribed. (8) The realization of this fact, like so many other discoveries in the field of medicine, had a serendipitous quality to it. In rural Vermont in the early 1970s, a Dartmouth physician by the name of John Wennberg discovered a medical peculiarity. In a very homogenous part of the country, doctors in two nearby towns with similar characteristics appeared to have adopted wildly different practice styles. …