Pay-for-performance initiatives have begun to emerge in the health care industry as a mechanism for improving quality of care for patients. At a recent Quality of Care Research Seminar at the Harvard School of Public Health, Dr. Thomas Lee detailed how pay-for-quality incentive structures can impact the health care system, ultimately resulting in improved outcomes for patients and more affordable health care.
Lee, who serves as the Chief Medical Officer for Partners Community Healthcare, Inc., indicated the need for better performance by reflecting on his own organization: "We’re not a system that was designed by a single engineer with the goal of performance in terms of quality and efficiency." While he certainly believes that Partners is above average for the region on many quality measures, it is not doing as well as "tighter" organizations such as the Department of Veterans Affairs (VA).
Why pay for performance?
Lee maintains that other models, such as capitation and fee-for-service, have not been successful in controlling costs or improving the quality of care. While cost shifting to patients has been employed in an attempt to control costs, this strategy has limited long-run potential, Lee contends, as "about 3 percent of patients account for 50 percent of health care costs." Only so much financial burden can be pushed to that small segment of the population.
Rewarding physicians and hospitals for better quality (which implies punishing those with worse quality) may be an effective way to improve quality. The usual framework for these rewards is the payment of bonuses through the cost savings garnered by focused efficiency goals. Lee offers the caveat, "It’s one thing to have the incentive; it’s another thing to perform." Consequently, a major part of his role at Partners is to create systems that enable physicians and hospitals to succeed under these incentives.
Delayering
Large purchasers of health care are increasingly seeking a limited range of services from payers. Many large corporations have been experimenting with payers as third party administrators which serve simply to pay for their employees’ claims and the buck stops there. By cutting out the middle men, they are decreasing both costs and delays.
Lee says, "Purchasers are trying to go directly to the office practice—directly to the providers of care—and reward them for doing it right the first time." The measures may not always be explicitly performance-based; some purchasers reward providers for implementing systems that increase quality and efficiency, such as electronic medical records.
This new approach has purchasers rewarding doctors directly for investing in systems that improve care, with a co-benefit going to patients who choose these high-quality providers. One payer has recently introduced a product in some markets based upon a network of physicians who score well on an efficiency index; this payer is offering a lower-cost PPO product to employees who choose network physicians. While the employees give up some choice of physicians, they benefit from lower-priced health coverage.
Prospect Theory
Lee evokes Prospect Theory, a Nobel Prize-winning concept in economics, which helps explain the psychology behind incentives. Prospect Theory indicates that, on average, people place more value on losses than equivalent gains (someone receiving $20 feels pretty good, but someone losing $20 feels miserable), certainty rather than equivalent probability (a person would rather receive $100 than a 50 percent chance of receiving $200), and percent difference rather than dollar difference (a person will drive an extra 2 miles to save $1 on a gallon of milk but not to save $1 on a television set).
According to Prospect Theory physicians will give disproportionate value to incentive dollars (small bonuses or rewards) and will prefer a lower fee with bonus potential versus higher fee with withhold, even if the economic value is same. While withholds may actually better serve to drive performance improvement than rewards, they are not as easy to implement contractually—and nobody wants to deal with a grumpy doctor.
Correlation Between Perceived Loss or Gain and Actual Loss or Gain
Prospect Theory, Kahneman and Tversky, Econometria 1979
What the future holds
Dr. Lee asserts that we will be seeing a lot more pay for performance contracting of provider services in the near future. The focus will be on individual doctors and their ability to meet tough quality criteria in their practices. Of course, this will require collaboration among purchasers, not only to pool data but also to develop more refined methods for evaluating individual doctors. The payoff, he hopes, will be increased quality of care and lower costs.
