Health Plans Offer Financial Rewards for Higher Quality Care

Physicians and Hospitals Receptive but Wary of Tying Pay to Performance

News Releases
May 13, 2004

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ASHINGTON, D.C.—Health plans increasingly are dangling a carrot—higher payments—to get physicians and hospitals to improve patient care, according to a study released today by the Center for Studying Health System Change (HSC).

"Pay-for-performance initiatives are just getting off the ground in most communities, but they can provide a springboard for broader acceptance of tying physician and hospital payments to quality improvement," said Paul B. Ginsburg, Ph.D., president of HSC, a nonpartisan policy research organization funded principally by The Robert Wood Johnson Foundation.

The study’s findings are detailed in a new HSC Issue Brief—Paying for Quality: Health Plans Try Carrots Instead of Sticks. The study is based on HSC’s 2002-03 site visits to 12 nationally representative communities: Boston; Cleveland; Greenville, S.C.; Indianapolis; Lansing, Mich.; Little Rock, Ark.; Miami; northern New Jersey; Orange County, Calif.; Phoenix; Seattle; and Syracuse, N.Y.

"Health plan-based quality incentive programs exist in seven of the 12 HSC communities, and most programs are sponsored by major health plans—those with large market share and, therefore, significant influence over providers," said HSC Research Analyst Bradley C. Strunk, coauthor of the study with Robert E. Hurley, Ph.D., an HSC consulting researcher from Virginia Commonwealth University.

Two landmark Institute of Medicine reports—To Err Is Human in 1999 and Crossing the Quality Chasm in 2001—drew attention to significant quality and patient-safety shortcomings in the American health care system. A key recommendation in Crossing the Quality Chasm was to align payment policies with quality improvement. Quality incentive programs across the HSC communities varied on three key design features: quality measurement, incentive payment structure and incentive size:

• While plans use different methods to measure quality with little standardization, commonly used indicators include patient satisfaction and preventive care use, since this information can be collected easily. Use of more sophisticated outcome and process measures, such as the specific care a patient receives, is less common.
• Incentive payments can take a variety of forms but almost always represent "upside" risk to providers. In other words, the providers risk losing a bonus, but base payment rates are not threatened.
• Incentive payments typically are modest compared with a provider’s total revenue from a health plan—usually about 1 percent to 5 percent of total payments.

Interviews with plans, providers and purchasers suggest that plans have been the prime movers behind quality incentives in the 12 communities, and many of the programs focus on promoting the practice of evidence-based medicine. Other key study findings include:

• Quality incentives also are attractive to plans for other reasons. During the past few years, providers in many markets have sought to shed capitated payments, under which they received fixed monthly payments for patients, and return to payment models such as fee-for-service that involve little or no financial risk and can create incentives for overuse of services. Some plans view quality incentives as preserving some financial risk for providers in a more acceptable way than capitation.
• With a few exceptions, providers have not been driving forces behind quality incentives, and many remain cautious about incentive program designs and measures. But some are willing to participate and, like plans, view quality incentives as a way to promote the practice of evidence-based medicine.
• Plans and providers are still experimenting with quality-based financial incentives. Over the longer term, the success of these programs will be judged by their ability to attract greater provider and plan participation and alter provider behavior in a way that promotes system-wide quality improvement.
• Continuing public support for evidence-based effectiveness research and clinical guideline development will be critical to advancing best clinical practices, devising more sophisticated tools to measure quality and attracting providers to the cause of quality improvement. Investment in information technology will be equally important to enable better data collection and analysis and to promote the widespread adoption of evidence-based practice.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded principally by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.