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Could moving the health care system from a pay-for-service to a pay-for-performance model save money and improve patient outcomes? (John Bazemore/AP)

Introduction: 

Right now, health care payment is linked to services. Providers get paid, whether their outcomes are good or not. But, what if we linked pay to quality and efficiency of care? We’re about to find out. That’s because pay-for-performance programs are expanding across the United States health care system, especially under the implementation of the Affordable Care Act.

Will new financial incentives improve health care and lower costs? Northeastern University professor Gary Young explains how payment reform may be the key to the ultimate success or failure of Obamacare.

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Gary Young is director of the Center for Health Policy and Healthcare Research and professor of strategic management and healthcare systems at Northeastern University.

There’s a trend in youth sports: We don’t keep score and everyone gets the same size trophy at the end of the season.

Well, that’s also been the basic model for the health care system in the United States. We didn’t keep track of how well providers were doing their jobs and we gave them all the same size trophies.

We called it “fee-for-service” and it was the predominant approach to paying for health care in this country for decades. Doctors and hospitals got paid for each service they provided (an appendectomy, a flu shot, an MRI, etc.), regardless of the outcome.

Fee-for-service provides an economic incentive to perform more services and procedures, but with no link to quality of care. The result has been suboptimal health outcomes and escalating costs.

Pay-For-Performance

That’s why “pay-for-performance” has become a centerpiece of U.S. health policy today. There are now over 200 pay-for-performance programs in the private sector; and over half of state Medicaid programs have adopted some type of pay-for-performance system.

Most importantly, under the Affordable Care Act (ACA), Medicare — the largest purchaser of health care services in the nation — is implementing value-based purchasing.

Fee-for-service provides an economic incentive to perform more services and procedures, but with no link to quality of care. The result has been suboptimal health outcomes and escalating costs.

Last year Medicare took 1 percent — about $850 million — of its regular payments to hospitals and put it into a pool of funds that hospitals compete for based on the quality of care they provide. In 2017, that pool of funds will increase to 2 percent of Medicare’s hospital payments. Most hospitals operate on 2 to 3 percent margins, so this is significant money for them.

The performance measures already in place include things like whether the hospital routinely gives antibiotics to patients within one hour of surgery, or gives discharge instructions to patients admitted with heart failure. Starting in 2014, hospitals will be measured on patient outcomes (e.g., mortality rates of patients with heart attacks).

The ACA establishes a similar program for Accountable Care Organizations (ACO) that take both clinical and financial responsibility for a group of Medicare patients. The ACO bears financial risk for spending in excess of their Medicare budget, but profits if Medicare spending is reduced. The ACO also gets bonuses for meeting targets on health care quality measures (e.g., flu immunizations, cancer screenings).

But will pay-for-performance work?

The short answer: we don’t know. There’s limited evidence that it does. When my colleagues and I studied the impact of financial incentives on the treatment of diabetes, we found modest gains in the quality of care patients received.

For some health care providers money may not be an effective motivator in the long run, particularly if it’s perceived as a threat to their autonomy.

It’s only by experimenting that we’ll find the right mix of incentives that will allow us to control costs and improve the quality of health care for all Americans.

There’s also — as with any similar system — a danger of “teaching to the test.” Doctors (and hospitals and nursing homes) may focus on meeting their performance benchmarks at the expense of overall patient care.

Our knowledge for designing pay-for-performance programs may be inadequate. Who should receive financial incentives? How large should those incentives be? What are the best ways to structure incentives and performance measures?

Walking into the dark…but without blindfolds

How do we create incentives to keep people healthy and control costs? In many ways we are walking into the dark.

But remember, under the fee-for-service regime we had been in the dark for decades, because we were wearing blindfolds. Our overall health outcomes were poor. Our costs were soaring at unsustainable rates. And we had no good ways to assess the value of the health care we were buying.

With the shift to pay-for-performance, at least we’ve removed the blindfolds. To shed light on our pathway we need more experimentation of the kind begun by Medicare under the ACA. It’s only by experimenting that we’ll find the right mix of incentives that will allow us to control costs and improve the quality of health care for all Americans.

Policy For A Healthy America

A special series by Cognoscenti and Northeastern University.

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  • zubsha

    Pay for performance with only work when there is also an incentive for patients to live healthier lives. Doctors are not ignoring preventive medicine recommendations but it is a struggle to get the patients on board If patients enjoyed reduced copays or lower premiums for refilling their medications and meeting their goals the entire system would benefit. Doctors are only one side of the equation. Every patient should have a choice but they should also share in the consequences of that choice.

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