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P4P Background/Summary

Recent surveys suggest that the number of pay-for-performance (P4P) initiatives nationwide sponsored by health plans, employer coalitions, and public insurance programs now exceeds 100 (Baker G, Casalino L, The Leapfrog Group). Through these various programs, most physicians and hospitals in the United States currently participate in some form of pay-for-performance or are in discussions with local purchasers about participation (Steiger, B.). The sponsors of these incentive programs state that rewarding or improving quality of care is a primary goal; the other goal is usually controlling costs either directly or indirectly by reducing errors and inappropriate utilization (Baker G).

What is P4P?
Definitions of pay-for-performance vary. We define pay-for-performance broadly and include any type of performance-based provider payment arrangements, including those that target performance on cost or efficiency measures. Typically, pay-for-performance programs offer financial incentives to physicians and other healthcare providers who meet defined performance targets which tend to focus on quality, efficiency, or related areas (“AHRQ Resources”).

Recent reports published by the Institute of Medicine and the RAND Corporation have revealed that the quality of care delivered to patients in the United States is sub-optimal. The healthcare system is increasingly fragmented due to a payment system that rewards providers based on the volume and intensity of services with little regard to patient outcomes. As a result, health care purchasers developed pay-for-performance programs as a solution that could improve the healthcare system by realigning the payment structure. Realigning payments and tying reimbursement to performance may motivate providers to perform at higher levels to deliver optimal care on a more consistent basis. Ultimately, this improvement will reduce healthcare costs. Through various pay-for-performance programs and value-based purchasing programs, stakeholders have noted that there is an underlying relationship between quality and cost: high-quality care has the potential to decrease unnecessary healthcare costs. Such programs “are designed to overcome the limitations of current reimbursement arrangements by aligning financial rewards with improved outcomes. P4P incentive programs differentiate payment among providers based on performance of quality and efficiency measures so that desired outcomes occur through changed behavior” (Baker, et al). Many pay-for-performance programs use evidence-based medicine as their measurement foundation, encouraging providers to follow established measure sets or guidelines rather than relying on their personal judgment when administering care.

Who is currently implementing P4P programs?
Current P4P initiatives have been sponsored by a wide variety of stakeholders.

Public Sector Initiatives
Government purchasers, like Medicare and Medicaid, have been leaders in the P4P movement. On August 22, 2006, President Bush issued an Executive Order to “ensure that health care programs sponsored by the Federal Government promote quality and efficient delivery of health care” (“Executive Order”). Government programs, such as the Federal Employees Health Benefit Program, Medicare program, and TRICARE program, need to focus on the use of health information technology, transparency regarding health care quality and price, and better incentives for program beneficiaries, enrollees, and providers.” These four areas of focus represent the “four cornerstones of value-driven healthcare” as denoted by Department of Health and Human Services Secretary, Michael Leavitt. As a result of the Executive Order, many types of public and private purchasers have committed to participating in value-drive healthcare efforts through value-based purchasing and pay-for-performance.

The Centers for Medicare & Medicaid Services’ (CMS) Hospital Quality Incentive Demonstration (HQID) project with Premier, Inc., was a three-year pilot that started in 2003 to provide incentives to hospitals that deliver the highest quality of care to patients. The project included urban, rural, and even critical access hospitals (“Premier Hospital”). The CMS/Premier project focused on hospital quality performance in the following clinical areas: pneumonia, heart bypass, heart attack, heart failure, and hip and knee measures. In these five areas, hospitals participating in this project “raised overall quality by 11.8% in two years” (“CMS Premier”). During the second year of the project, CMS “awarded incentive payments of $8.7 million to 115 top-performing hospitals, representing the top 20% of hospitals in each of the project’s five clinical areas” (“CMS Premier”). In early 2007, CMS and Premier decided to extend the project for three more years to “allow CMS to test new ways to measure quality and new incentive models” (“CMS Premier”). The extended project rewards hospitals that meet a defined quality threshold as well as hospitals that demonstrate vast improvements to achieve these quality thresholds (“CMS/Premier Hospital”).

CMS also created the Physician Quality Reporting Initiative (PQRI), established through the Tax Relief and Health Care Act of 2006, which is a voluntary program that allows physicians to earn bonus payments of 1.5% of total allowed charges for covered Medicare physician fee schedule services if they meet quality standards. These quality measures cover clinical areas such as diabetes, heart failure, coronary artery disease, depression, stroke, heart attack, and various age-related conditions. Physicians can begin submitting claims for reimbursement for services rendered between July 1 and December 31, 2007 (“Physician Quality”).

Several individual, local Medicaid managed care organizations have also implemented P4P, including:

  • The Local Initiative Rewarding Results program in California, which offers financial rewards based on the quality of preventive services for MediCal beneficiaries. The program’s areas of focus include well-baby visits and well-adolescent visits to improve the quality and access of care.
  • Hudson Health Plan, a Medicaid managed care plan in New York that distributes rewards for childhood immunization and effective management of patients with diabetes.
  • The Neighborhood Health Plan of Rhode Island uses P4P to target asthma care.
  • In North Carolina, the Primary Care Case Management program has introduced both financial bonuses and recognition for physicians that either reach a best practice performance goal (85th percentile of baseline performance) or improve by 20% and exceed the median level of baseline performance. Performance measures in the first incentive year (through June 2006) are related to care for asthma, diabetes, and prescribing patterns.

Unfortunately, due to constrained Medicaid budgets, provider reimbursements have remained lower compared to other P4P programs, which has resulted in concerns about participation levels. To increase participation in programs, some Medicaid organizations have created patient incentives to encourage appropriate use of services such as adolescent wellness visits and prenatal care (Verdier J). Executives at CalOptima, a Medicaid managed care program in California, believe that participants in a beneficiary incentive program in which department store gift cards are offered for adherence to preventive care recommendations are more likely to receive appropriate immunization and prenatal care (Verdier J).

Private Sector Initiatives
Existing P4P initiatives are also sponsored by private employers, coalitions of employers, health plans, and Health Information Exchange (HIE) organizations.

Employers: To actively take control of rapidly increasing healthcare costs, employer organizations have played an important role in helping to organize and implement pay-for-performance programs. One leading example is the “Bridges to Excellence” program, a physician rewards program originally started by General Electric, Verizon, UPS, and other large employers. These employers were frustrated by the failure of the health system to adequately care for their employees with chronic health conditions, and designed a program that would provide additional payments to doctors who met evidence-based standards of chronic care treatment and support. The objective of Bridges to Excellence is “to create a bridge to cross the chasm in health care quality.” Today, Bridges to Excellence has been implemented in 12 markets across the country (de Brantes “Transparency”).

Coalitions: On behalf of their member employers and their employees, business coalitions across the country have provided leadership in their efforts to improve healthcare in local communities. Coalitions’ leadership within the community brings stakeholders together to emphasize the importance of safe, effective care for consumers. In many coalition community environments, pay-for-performance and value-based purchasing programs have been implemented to improve the delivery of healthcare. For example, the Buyers’ Health Care Action Group (BCHAG) in Minneapolis, Minnesota, has made significant strides to transform healthcare throughout the state. BHCAG manages several value-driven initiatives, including hospital participation in The Leapfrog Group’s Patient Safety Survey and physician reimbursement through Bridges to Excellence, which has created awareness of the need for quality improvements across the state (

Health Plans: One of the most noted P4P programs initiated by health plans is the IHA P4P program. In 2003, the Integrated Healthcare Association (IHA) created a statewide P4P program that financially rewards physician groups for appropriate care, accountability, and transparency through public reporting. IHA is a not-for-profit collaborative of California health plans, physician groups, and healthcare systems, with input from consumers, purchasers, and pharmaceutical and IT companies that focuses on improving quality, accountability, and affordability for California residents (“California Health Plans”). Through this program, seven California health plans have collaborated to set quality measures and reward physician groups for achieving these performance measures. The participating health plans include: Aetna, Blue Cross of California, Blue Shield of California, CIGNA, Health Net of California, PacifiCare, and Western Health Advantage. In addition, Kaiser Permanente participates in the public reporting component of the IHA P4P program. For the 2006 year, these health plans paid $55 million to participating physician groups (“California Health Plans”). Moreover, these health plans rewarded physician groups with additional rewards totaling $89.5 million in 2006 (“California Health Plans”).

Health Information Exchange (HIE) Organizations: More recently, health information exchange organizations have emerged as leaders in healthcare transformation and improvement. An HIE organization facilitates the mobilization of healthcare information electronically across organizations and disparate information systems within a region or community (“Second Annual”). This information-sharing helps health care providers to be more efficient and effective. For example, the Indiana Health Information Exchange (IHIE) launched a pay-for-performance program in September 2006 called Quality Health First of Indiana. The P4P initiative “combines medical and drug claims data from participating health plans with patient prescription drug data, lab and test results from the Indiana Network for Patient Care (INPC) database to create reports that physicians can use to better monitor and improve the health of their patients” (“Quality Health First”). IHIE aims to improve the quality, safety, and efficiency of healthcare throughout the state of Indiana. Health plans in Indianapolis participating in the program include Anthem Blue Cross and Blue Shield, M-Plan, MDwise, and Medicare, and these health plans will pay rewards to physicians based on specific quality measures and patient improvement.

How does P4P fit into the current healthcare system?
P4P is only one among many possible and valuable strategies that purchasers may undertake to improve the quality and affordability of healthcare. Purchasers contemplating P4P need to consider the appropriate role and limitations of payment incentives in comparison to other potential strategies, including physician and patient education, private and public report cards, disease management, and technical assistance. P4P programs have been implemented in the context of health maintenance organizations (HMOs), point-of-service plans, preferred provider organizations, indemnity plans, and consumer-directed health plans.1 In principle, provider incentives can be established independently of benefit design, but in practice there will be important interactions to consider, including assignment of accountability and alignment of physicians and patient incentives.

Finally, note that while P4P programs create explicit incentives to reward or improve performance, the pre-existing, underlying payment system exerts its own set of (mostly implicit) incentives. For example, fee-for-service payment creates an incentive to increase utilization while capitation payment involves incentives to reduce services. Purchasers must account for the pre-existing payment system incentives when contemplating additional ones. Also, the value of a P4P program will be a function of both gains in the quality of care and the total costs of the program, including additional payments to providers (if any) and the costs of implementation and monitoring.

What are the benefits of P4P?
Pay-for-performance programs offer numerous benefits to stakeholder participants. Many P4P programs have developed individualized Return on Investment (ROI) calculators, such as Bridges to Excellence’s ROI calculator for its programs and the Leapfrog Hospital Rewards Program ROI calculator. ROI calculators demonstrate the obvious financial benefits (dollars saved) of participating in these programs, and they can predict associated benefits (lives saved or program outcomes). In addition to financial benefits, organizations participating in P4P programs will experience improved health outcomes for consumers, which entails improved productivity and better attendance for employers. The ultimate goal of P4P programs is to properly align incentive payments to providers in order to produce better health outcomes, which will likely decrease overall healthcare costs.


© 2006 Leapfrog. Developed by Discern Consulting with support from
The Agency for Health Care Research and Quality