Advantages And Disadvantages Of Pay For Performance In Healthcare

4 years ago

The healthcare law of Patient Protection and Affordable Care, as well as increased transparency and access to patient information on the quality of care providers, has transformed the whole system. Such a shift has paved the path for pay for performance program. What is the incentive of enrolling in the programs, why should there be such a policy shift and what are pay for performance healthcare pros and cons?

What is pay for performance in healthcare?

Pay for performance including bonus schemes or salary increases for healthcare providers and their teams when they perform well:

  • Provide the best possible results given the patient’s condition
  • Minimize the occurrence of an adverse event
  • Minimize mortality and health care costs

It is possible to set a target and incentivize a particular clinic or practice. Terminal measures are not frequent in the healthcare system, and the hospitals receive the bonus for doing better than the expected. If a healthcare provider does not meet the set goals, special measures are taken. Usually, healthcare providers, who fall short of the requirements, should either improve their service quality or revise the goals to realistic ones.

In regard to the performance in nursing homes, there are different standards of care in accordance to the medical condition of the residents, the ages, and the severity. Incentive is the main purpose of the pay for performance healthcare systems:

  • Make the system more efficient
  • Receive more profit when the healthcare provider makes the right decisions
  • Follow the rules and operate smoothly

Some healthcare experts think that the outsourcing of the healthcare services to the private sector is likely to increase the quality of the service and make the healthcare system more efficient than any government entities can. But healthcare systems still have a risk of negative incentives which can lead to decrease in quality.

Why should pay for performance policy shift be introduced in healthcare?

Incentivizing healthcare providers, particularly in the private sector, to follow the certain regulations and rules of the policy is a good idea. Modern healthcare providers are individuals or companies that take care of patients, but at the same time, they own the property and the assets and make the decisions on their own. The managers in the private sector have to make the decisions regarding the future of a practice and the outcome of the practice. The managers usually have the personal interest in the business, and the practice’s growth and profits are vital to such business.

This means that when the government or the physician contract is removed and the doctors are left to their own, they pursue their profit maximization. This way of thinking has to be changed from time to time to make the efficient use of this resource. As the origin of the pay for performance concept suggests, the healthcare providers’ profit can be increased by better satisfying the consumers and government requirements.

Pay for performance cons compared to traditional healthcare

The main disadvantage of a pay for performance system is negative incentives.

If a healthcare provider receives a bonus for doing a worse job than expected, the current state (or the government) saves the money, but the patients’ health condition gets worse.

The reason is that the healthcare provider will likely take advantage of the situation and the patients’ inattentiveness in the government or the physician contract.

The healthcare provider may cut services to people with the less chance to get better. They can also do the opposite and provide better and unnecessary care. This way they improve their financial situation.

When the healthcare practice receives negative feedback regarding its quality of care, it is likely that all the patients leave, which in turn leads to the hospital’s bankruptcy.

Getting profits in healthcare is difficult, a profit of 5 percent is high. Therefore, achieving the government’s goals is very intensive, and if you do not understand it exactly, you may lose all your patients. This way you save a lot of money; however, this is not the main incentive of the pay for performance program.

In healthcare, many terms, tools, and metrics are not well-defined yet, and it is difficult to measure the process or the outcome. For example, the outcome of work that a healthcare provider performs is not well-defined. A doctor or a nurse takes care of a patient. If that patient becomes healthy and takes the treatment, it means that the healthcare provider has done their job. Therefore, there is a difference between the healthcare outcomes, such as 95 percent of the patients get better and 95 percent of the patients get better, and 10 percent becomes worse.

The healthcare providers may focus on 85 percent, which is better than 90 percent.

The ways to overcome negative incentives of pay for performance system are as follows:

The healthcare providers’ profit and performance are separate from the bonuses and salaries. The main business of the healthcare providers is to provide health care for the patients, and the profit and the subject of the payment should be separated.

The healthcare providers usually have the contribution of their team in the healthcare process. It is very difficult to reward everyone in the team equally, so the healthcare provider should reward a few key members of the team for their efforts and proper functioning.

Healthcare providers should be given measurable metrics and the same metrics for all practices to reach the goals. This way people will know the baseline for the given metrics and will be able to improve the quality of service or should know the outcome of their own actions.

It is also important to note that a healthcare provider determines the appropriate quality of the services for the given patient. For example, a patient with very mild health issues might get a different type of care than a patient with severe health issues.

Types of pay for performance programs

Healthcare providers can use one or more types of pay for performance systems.

Merit pay usually means the same bonus for the employees without differentiating the employee contribution to the team performance. It is usually linked to the salary and performance bonuses are usually linked to the salary.

Group incentive usually includes the bonus system of pay for performance healthcare company to improve the overall performance of the practice. It depends on the provider or the team’s performance and takes a number of important metrics into the account, such as the compliance with certain quality of care metrics (such as MRSA or other types of infections) and mortality.

Pay for performance programs can also be combined with billable hour standards. It means that the provider will get the bonus, and also part of the salary, in accordance with the number of the money they brought to the company. This way it will try to bring more revenue to the company.

Pay for performance success stories

Such incentives are used in the medical profession since the beginning of the twentieth century. One of the most important pay for performance healthcare success stories is the case of Dr. Hill, who wanted to motivate his physicians to keep track of their patients’ health and offer their good practices. He offered large rewards to the medical team when their patient’s survival reached 50 percent for one year and 60 percent for two years. The researchers found that 61 percent patients with chronic illnesses were in better shape and had fewer complications after two years, and the company that employs the doctors reached the average profit of 25%.

Another success is the story of Medicare. One of the positive effects of the pay for performance program of Medicare is the decrease in the number of hospital admission. As Medicare pays the extra money to the hospitals for each day that the old person spends in hospital, the hospitals had to discharge their patients more rapidly. The previous discharge rate made the patients stay about one day longer after the operation, which is the main source of profit for one day. The patients could also go to the same hospital and the physician would receive additional money for the visit. As the Medicare did not pay the extra money for the same patient within the same hospital, it affected the standard of care in America, and surgeons had to spend more time with each patient to do better work.

The third success story is about a hospital in New Mexico. This hospital had a chronic bed shortage because the paying patients stayed there in the hospital for three days instead of one day, which led to the facility’s bankruptcy. The hospital received a participation in the program to identify the providers of high-quality care, and it received an incentive of $40,000 for five consecutive quarters. Another $500,000 was available for the side bar of the selected hospitals, as well as the 3,000 patients they have treated, the hospital got a total of $2.5 million for higher-quality care of the patients. For this achievement, the hospital received the additional incentives of $500,000 every year for five years, leading to total of $2 million.

Success stories of the pay for performance incentive programs can be found in all professions, accounting, marketing, management, and retail. It seems that this type of regulation improves the professionalism in every business. Another reason why pay for performance programs are so effective is that the employees want to achieve the goals we set for them. They want to get the positive results of their work and improve their careers. The system creates competition between the employees as well as the departments, and it motivates the employees more than bonuses or rewards. If the employee is not motivated to get better, it does not matter how much you pay him, as long as he does their job.

As in every situation, there are disadvantages and advantages. I can point out some cases where these programs may not work as the main incentive.


In 2009, the study found that the pay for performance programs may discourage the healthcare providers to make their best efforts for the patient. The study points out that caring for patients is very important to the healthcare provider, and it is the biggest value that they take into consideration. If the provider knows that the patient will get better, it may not be necessary for them to provide the best care to the patient. If the provider knows that their best efforts will not make a difference, they will not be motivated to do better. The provider will just do what they know how to do, and the quality of the care will not improve.

Another study in 2010 shows the same results. The study states that there also may be a motivation in healthcare providers to provide the best care for those patients who are most likely to have a better outcome. In this way, the healthcare providers receive more money for taking care of patients with the best chance of living. This way, healthcare providers may be motivated to choose the easiest patient.

That means that healthcare providers can’t care about the patient in an honest and kind way. Pay for performance programs may eliminate the intrinsic motivation for high-quality care for the providers.

Another disadvantage for health care practitioners can be the emphasis on the length of the visit and not the quality of care, as it is rare for the visit shorter than 15 minutes, it may be a relatively good indicator for the amount of health care provider’s time that goes to the patient without taking into account the major differences in quality.

Another disadvantage for the practices that use the pay for performance healthcare systems is that in some cases, the providers can be punished for providing an essential service free of charge to everyone. It can negatively affect the loyalty of the healthcare providers to the company.

The biggest disadvantage of the pay for performance healthcare system is the difficulty in changing the system during implementation. In one case, the insurance provider changed the system without notifying the providers and changed the metrics that the provider were previously rewarded for, without providing the compensation for the extra work. It created an atmosphere of distrust in the providers, and the providers started to protest.

Another example of the same kind can be when the provider changes the system without the previous agreement. The provider can get a full reimbursement for the extra cost as long as it meets the previous contract. As the new management comes to a different opinion and wants to change the system, it can have a negative impact on the morale of employees and deprive them of good rewards for their work.

The last disadvantage of the pay for performance healthcare system is the risks that the providers might choose to abandon a practice. If the provider can’t make the goal that will gain him the bonus, the provider can just leave the practice. In this way, the practice will lose experience and lose good employees. In worst case, the provider will develop a bad attitude to the company and share it with the existing employees who will prevent the company from getting the new employees. As a result, the practice will not be able to reach the goals of increased efficiency and better care.

In summary, pay for performance healthcare systems are the most effective and efficient way of getting the desired quality and efficiency of medical professionals for the patients. The pay for performance healthcare systems are very new, and there are very few systems that are used in the medical profession, but it will take a place in the medical community as it provides the motivation and rewards to the healthcare providers for a better care.

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