Pay for Performance in Healthcare: Do We Need Less, More, or Different?

By  |  November 27, 2012 |  12 

The debate over pay for performance in healthcare gets progressively more interesting, and confusing. And, with Medicare’s recent launch of its value-based purchasing and readmission penalty programs, the debate is no longer theoretical.

Just in the past several months, we’ve seen studies showing that pay for performance works, and others showing that it doesn’t. We’ve heard from some theorists who describe P4P as sapping intrinsic motivation and doing violence to professionalism, and others who feel that its effects are as natural and predictable as water running downhill. Some commentators beg us to stop it, while others denounce P4P’s current incarnations as too wimpy to work and recommend they be turbo-charged.

If we weren’t talking about the central policy question of a field as important as healthcare, we could call this a draw and move on. But the stakes are too high, so it’s worth taking a moment to review what we know.

In the U.S., the main test of P4P has been Medicare’s Hospital Quality Incentive Demonstration (HQID) program. A recent analysis of this program, which offered relatively small performance-based bonuses to a sample of 252 hospitals in the large Premier network, found that, after 6 years, hospitals in the intervention group had no better outcomes than those (3363 hospitals) in the control arm. Prior papers from the HQID demonstrated mild improvements in adherence to some process measures, but – as in a disconcerting number of studies – this did not translate into meaningful improvements in hard outcomes such as mortality.

Contrast the HQID results with those seen in a recent publication of the results of a 24-hospital study in northwest England, in which P4P (with higher bonuses, up to 4%) was associated with significant improvements in risk-adjusted mortality rates for patients with pneumonia, acute myocardial infarction, and heart failure. In other studies, substantial bonuses to British GPs (up to 30%) have been shown to be associated with improved adherence to process measures and intermediate outcomes such as control of hypertension and cholesterol.

The competing ideologies are as interesting as the dueling p values. It has become clear that the world is sorting itself into two camps: people rooting for P4P to flourish and others hoping that it crashes and burns. In the former camp are individuals who view doctors as economic creatures, nothing more, nothing less. They see protestations by physicians that “we can’t be bought” as both unbelievable and haughty. Such individuals find succor in the history of fee-for-service medicine. “We already have pay for performance,” I’ve been told on several occasions. “We pay more for the performance of procedures, hospitalizations, and office visits, and so that’s precisely what medicine produces.” Even for those rooting for better angels, this argument is hard to ignore.

In the opposite camp are those who point to medicine’s history as a noble profession. They note that one of the defining characteristics of professions is that they place the needs of those they serve over their own. In addition to this social-good argument, they tout empirical evidence from the trendy field of behavioral economics, which highlights the tension between intrinsic (driven by purpose, altruism, mastery) and extrinsic (driven by money) motivation. This research has demonstrated that not only do financial incentives frequently not work as well as one might like, they may even “crowd out” intrinsic motivation. The ever-present physician-gadflies Steffie Woolhandler and David Himmelstein, joined by behavioral economist Dan Ariely, highlight several of these arguments in a recent Health Affairs blog. They cite one study that found that incentive payments decrease the frequency of blood donations (as compared with voluntary donations) and another that found that parents became more likely to pick up their kids after-hours when an Israeli day care center imposed fines for late pickups.(“Fines had transformed promptness from a moral duty to a market transaction governed by price,” they write.)

This camp’s bible is Daniel Pink’s book Drive, and one of its prophets is my ABIM colleague Chris Cassel, who has argued, in two fine JAMA articles (coauthored by Sachin Jain, here and here) that financial incentives can suppress motivation, turning physicians from “knights” (individuals motivated by professional values) into “pawns” (passive participants doing backflips in response to external incentives). Another prominent member of this camp is Don Berwick, who addressed this issue before he became, well, Don Berwick. Writing in 1995, he argued

I find myself an extremist and therefore suspicious of my answer. But it is, nonetheless, the best answer I have yet found regarding merit pay for doctors or any group of workers; namely, “Stop it.” [Such pay] is destructive of what we need most in our healthcare industry – teamwork, continuous improvement, innovation, learning, pride, joy, mutual respect, and a focus of all of our energies on meeting the needs of those who come to us for help. We can find better ways to decide on how we pay each other and better uses for our energies than in the study and management of carrots and sticks.

So where does this gumbo of empirical evidence and exhortation leave us? As with most really complicated questions in life, the right answer will be as utterly unsatisfying to those rooting for their home team as it is predictable: it’ll lie somewhere between the poles. To me, while the evidence supporting P4P in healthcare is weak, it is far too early to pull the plug on a strategy with so much face validity, particularly with all that’s hanging in the balance.

But boy, do we have lots of details to sort out. How much money should be in P4P bonuses and penalties? (Medicare’s current value-based purchasing plan pegs bonuses at 1%, doubling in a few years – much lower than most experts recommend to catch the attention of doctors and hospitals.) What is the right mix of payments that go to best performers versus best improvers. (Early programs gave bonuses only to the former, but the correct answer must involve a Solomonic splitting of the baby, and Medicare’s current value-based purchasing plan does just that.) What is the best blend of process and structural vs. outcome measures? (Medicare began with process measures, but value-based purchasing and other P4P programs are increasingly combining processes with risk-adjusted outcomes.) When does transparency get you far enough along that P4P is superfluous or simply not worth the hassle? (The biggest surprise in this area has been the power of simple transparency in driving change, particularly since it has been accompanied by relatively meager consumer-based changes in behavior. This is part of the reason why it has been hard to show benefit for hospital P4P in the U.S.: all “control” hospitals are participating in a vigorous transparency program, which has been strikingly successful.) How can we align everyone’s incentives? (P4P programs to date have mostly focused on hospitals or doctors, rarely both. Future programs should try to align these forces.) And – perhaps most important of all – is there a way to implement P4P without dousing the flame of intrinsic motivation and professionalism? (I have no clever answer to that one, but I suspect someone smarter than me will figure it out.)

In the final days of the presidential campaign, we saw the hazards of reading the evidence – in this case, the polls – through an ideological lens. Even as we debated the “Is-Nate-Silver-right?” question, we knew that the final answer was forthcoming, on the evening of November 6. With P4P, it won’t be quite that simple: there will not be any singular event that tells us that we have things structured just right to maximize benefit and minimize harm. So, for now, the best stance is to keep an open mind, listen to both sides of the argument, review the research in as unbiased a way as one can muster, and pray for more and better studies.

In the end, I’m guessing that the best solution will not be one that treats physicians as purely economic animals. They’re not. But – as much as we’d wish it to be so – it is equally unlikely to be one that relies completely on the kindness of strangers.


  1. Dr. Wes November 27, 2012 at 11:33 am - Reply

    To suggest that physicians are now “strangers” dispensing “kindness” is precisely why doctors feel like (and now are) pawns. The irony, of course, is that never in the history of medicine has a single profession been more tracked, scuitinized, criticised and devalued – all in the name of the medical corporate bottom line. We are hardly “strangers” to the managers who watch our every move as we, their subservant employees, do the dirty work of trying to care for patients with fewer resources available to us as cuts are enacted further. But in the wake of this transformation of medicine that values cost over care, doctors are indeed becoming strangers to our patients.

    This is why pay-for-performance is flawed: it further divides, rather than unites, the doctor and patient. So please, take your 1% (or 2% or even 3%) and shove it where the sun never shines, since doctors won’t see the extra revenue, only their employers will. After all, any one of these trivial amounts doesn’t even keep up with the rate of inflation.

  2. Francois de Brantes November 27, 2012 at 12:41 pm - Reply

    Well said Bob. The seminal work on intrinsic and extrinsic incentives for professionals was done by Frederick Herzberg (see his brief in HBR at He postulates (and tested) that the goal of extrinsic incentives is to avoid getting in the way of intrinsic incentives. For those arguing that financial incentives need to be removed from the healthcare equation, it’s worth noting that unless all physicians and suppliers to the industry decide to perform their work for no financial compensation whatsoever, money will be part of the equation. As such, the key question is to achieve some balance where money doesn’t hinder the professional action, or put in other words, where the extrinsic incentives don’t get in the way of the intrinsic ones.
    FFS has gotten in the way, and of that there should be no doubt left (and the doubters need to realize they are simply in denial). As such, we need to move away from FFS and as we design new payment models, be mindful of the unintended consequences and attempt to minimize them as much as possible.
    Designing new payment models is actually not an exercise in optimization — i.e. optimizing intrinsic behaviors — but rather one of minimization — i.e. minimizing the negative forces that can reduce the effect of intrinsic behaviors.
    Too often, the designers of programs ignore this essential design element and much time is then wasted in useless debates.

  3. Mario A Reyes November 27, 2012 at 12:42 pm - Reply

    Agree with Dr. Wachter.

    After many years of opportunities , we , docs and our organizations have failed to act as “knights” of our healthcare system and costs are seven to eight times higher than other first world countries with no better outcomes. We, Doctors are accountable somehow for this reality. The Caduceus seems to have been fitting better to the practice of medicine in USA, instead o the Staff of Aesclepius. This way someone i.e the government, have been allowed to step in and set some incentive to the ‘knights” to act as so . Nothing wrong with that.
    Furthermore, I am not sure if the outcomes measured in the HQID pilot program compared to the control group include costs. If the intervention group reaches the same quality outcomes than the rest of the hospitals and the costs are reduced this will be a big step forward meaning process standardization, error prevention and elimination of waste .

    We should embrace P4P and work harder in showing up our values as ‘Knights” , meaning, best practices, embracing evidence based medicine and leaner, standardized practices and processes

  4. Michael F. Mirochna, MD November 27, 2012 at 1:56 pm - Reply

    I unfortunately do not believe in the rhetoric of doctors always being chivalrous in their care. I feel that most do care, but doctors have already conformed to market incentives, numerous times, whether this is conspicuous or insidious. Look at FQHC’s. They are paid per patient visit, not based on time or complexity. So what do they do, crank out patients. If a ten minute visit is paid the same as an hour visit…

    Why are there so many specialists? Why do we do so many stents? Why do we do vertebro and kyphoplasty? Why has the AMA railed against so many healthcare changes in the past? Why did drug reps have to be curtailed so much? Why do doctors who own their own auxiliary testing cost the system more? Drs. Reallyvasquez and Moon in California are a great example of incentives. Why do hospital beds predicts hospitalizations better than population?

    I agree that P4P is extremely complicated and may not be a great idea, particularly when disagreement surrounds just about all the measured intentions (A1c, cancer screenings, etc…). I imagine that Dr. Wachter, you are trying to be fair and balanced to both sides even when its fairly clear, IMHO, that we respond to the market even if we care strongly about our patients.

  5. John Bulger November 27, 2012 at 2:28 pm - Reply

    An excellent review and commentary!

    The mention of the growing transparency of healthcare data is on point. A recent Harvard Business Review article on the power of social norms (peer pressure) supports this view. ( P4P (or more precisely P4R) has removed the veil from healthcare data. That veil wasn’t merely hiding the data from the public. Many providers (docs, hospitals, etc.) were not clear what was behind the mask. A noble profession driven by purpose must know the score to improve. P4P has accelerated the “knowing”.

  6. bev M.D. November 28, 2012 at 2:05 pm - Reply

    I agree with Dr. Marochna’s viewpoint, I’m afraid. One could argue the chicken and egg theory regarding which came first, the incentives or the lure of responding to them, but we are where we are now; doctors have learned to respond to financial incentives. I have to say in all this endless discussion, that salaries are beginning to seem a lot simpler and ultimately cheaper to implement, even though they too have their (dis)incentives.
    BTW, I love the Berwick quote. The man is incredibly gifted in communication, among other things.

  7. Richard Rohr December 1, 2012 at 10:12 pm - Reply

    The rules of formal logic state that if p implies q, then not q implies not p. If we accept the adage “you get what you pay for” as true, then it is also true that anything you do not pay for, you will not get. Financial incentives do work, but they produce the behaviors specifically incented, to the exclusion of all else. Hospital medicine programs try to incent for behaviors other than gross production, i.e. guideline adherence and participation in improvement activites, but it is hard to create an incentive for every desirable behavior. If you did accomplish it, the result would be incredibly complex and the incentive tied to each behavior would be so small as to have little motivation.

  8. Signaturedoc December 2, 2012 at 5:35 pm - Reply

    Great article. I think many doctors would love to be noble again if only the personal injury lawyers would let us. In the US no good deed goes unpunished; doctors gladly provided free care through ER call until our medical liability premiums increased and volume of unreimbursed care climbed to levels that were unsustainable. We are expected to be available 24/7/365, and perform perfectly at all times, and do it for free. We are also expected to adhere to the tenet that death is optional and to suggest otherwise puts doctors on the level of bureaucrats trying to save money and not lives.

    It is also so much easier to do things to patients than to try and explain why you are not doing something and risk the threat of a lawsuit. That is the ultimate “pay for performance (and punish for non-performance)”

  9. Russ Johnson December 3, 2012 at 6:26 pm - Reply

    It seems to me important that we don’t overly reinforce the idea that P4P is an either/or proposition. No matter what the incentive, without some level of “knightly” good intent, P4P or any other program is likely doomed. And, if we have excellent chivalrous and ethical behavior but incentives that encourage actions to the counter, or at the very least, not in parallel, than we will likely have mixed or poor results. As we know, healthcare is a complex and, usually, non-exacting science. We have the annoying feature of having to deal with individuals with different family structures, behaviors, community supports, beliefs, habits and physiology. The result is a complex process and, often, uncertain outcomes. That’s the reality (and beauty) of healthcare. The idea that physicians; highly trained individuals, who by nature are bright, motivated and determined, and who’s economic status are well above average (if not all being in the 1%) are “pawns”, is preposterous. They’re only pawns if they want to be. And that’s the heart of the matter. P4P is not an either or question about the success of redesigning/incentivizing care models/practices. In fact, as Dr. Wachter point out, the answer is in the middle. The answer lies in our ability to create a collective sense of mission and purpose among providers and organizations (hospitals, medical schools, integrated practices, health plans). I believe the best answer, if not the “Holy Grail”, lies in the work of “integrated” organizations creating common purpose and a culture that nourishes Knighthood and the economic incentives that we collectively agree, reward those most worthy of clinical, behavioral and economic actions. P4P is not something that doctors or administrators have “done to them”, it is something we can and should collectively lead and create. And, if we choose not to, it will be done by someone else and we’ll be left to complain about how unfair, misaligned or ineffective it is. And while the Holy Grail may be an elusive outcome, the search for it is certainly a worthy quest.

  10. Scott Emmert January 2, 2013 at 4:42 pm - Reply

    Dr. Wachter,
    Not being a physician I really enjoy hearing the physician’s viewpoint. I really appreciate you well written article pointing out the various challenges with physician incentives.

    While I believe there is value in P4P programs the real motivation to improve outcomes has to come from an internal desire to implement difficult changes in legecy processes while maintaining an appropriate profit margin.

    From my experience in the healthcare industry it seems some physicians focus on the incentives which probably aren’t sufficient enough to offset the cost of the necessary changes while others would like to make the changes but their current operations don’t provide enough financial cover to take the risk. Still others take the risk and are rewarded in many ways that go beyond the financials.

    To me everyone (especially consumer/patients) need to work harder and collaboratively to raise the quality of care in the US. Articles like yours help to focus the discussion on key aspects that still need to be addressed. Thanks!

  11. […] Pay for Performance in Healthcare: Do We Need Less, More, or Different? […]

  12. Eric Reines, MD March 5, 2013 at 2:24 am - Reply

    Pay-for-performance statistics should include only those patients sharing characteristics with a majority of subjects studied on which the pay-for-performance measure was based. Going by the rules of Evidence-Based Medicine, the level of evidence should be at least 2 and the grade of recommendation at least B. There is a dearth of studies on elders, especially those over 75 and with multiple co-morbidities. Thus, while the concept of P4P may have some merit, practically speaking, P4P cannot be applied to the Medicare population.

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About the Author:

Robert M. Wachter, MD is Professor and Interim Chairman of the Department of Medicine at the University of California, San Francisco, where he holds the Lynne and Marc Benioff Endowed Chair in Hospital Medicine. He is also Chief of the Division of Hospital Medicine. He has published 250 articles and 6 books in the fields of quality, safety, and health policy. He coined the term hospitalist” in a 1996 New England Journal of Medicine article and is past-president of the Society of Hospital Medicine. He is generally considered the academic leader of the hospitalist movement, the fastest growing specialty in the history of modern medicine. He is also a national leader in the fields of patient safety and healthcare quality. He is editor of AHRQ WebM&M, a case-based patient safety journal on the Web, and AHRQ Patient Safety Network, the leading federal patient safety portal. Together, the sites receive nearly one million unique visits each year. He received one of the 2004 John M. Eisenberg Awards, the nation’s top honor in patient safety and quality. He has been selected as one of the 50 most influential physician-executives in the U.S. by Modern Healthcare magazine for the past eight years, the only academic physician to achieve this distinction; in 2015 he was #1 on the list. He is a former chair of the American Board of Internal Medicine, and has served on the healthcare advisory boards of several companies, including Google. His 2015 book, The Digital Doctor: Hope, Hype, and Harm at the Dawn of Medicine’s Computer Age, was a New York Times science bestseller.


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