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Timely Topics

Pay For Performance Programs

As hospitals, health insurers and others look to cut costs and improve efficiencies, pay-for-performance programs have gained prominence as a way to achieve such goals. Pay-for-performance programs which typically link financial incentives to a physician's ability to deliver high quality, cost effective medical care are changing the way that many insurers and providers look at healthcare economics.

Although some question whether bonuses and pay incentives are appropriate in medicine, the argument that such incentives actually improve care by wringing out waste and refocusing on collective results is gradually gaining widespread acceptance.

Practical Health Solutions is working with several hospitals, one of which is a large multi-hospital system in New York City on the development and implementation of pay-for-performance type programs.

Although the end result of these projects; i.e.; the definition of the program's initial participants, the scope and breadth of the program, the components agreed upon representing the physician activities to be measured, and the manner in which results will be monitored and evaluated all vary in accordance with the goals of each organization, there are certain aspects of the development and implementation process that are common to all.

Our recommendation is that all of these types of programs should begin with an assessment and quantification of the issues that have created the problem(s) that you are trying to fix. For instance, if the focal point is ALOS, are the primary issues disease-specific, or in the treatment of certain kinds of patients? Are there certain segments of the physician population that are causing perceived problems? Is it primarily specialists or is it mostly primary care? This preliminary fact finding is critical because it enables the organization to build the business case and establish benchmarks and program goals in an objective fashion that ultimately needs to be communicated with the participating physicians.

In designing the actual program elements, the key is to ensure that the physician activities which will serve as the basis for incentive compensation are:

• Going to have the desired impact on the organization's financial performance
• Accepted by the physicians as objective and reasonable measures of performance
• Easily monitorable for compliance
• Reflective of fair market value for the services provided and equitable in relation to the savings realized by the organization

In the hospitals in which PHS has been working on pay-for-performance programs, we have strongly advocated that initial implementation be on a pilot basis and then broadened to encompass a larger segment of the physician population.

We have also found that physician interviews have produced a wealth of good ideas that have served the pay-for-performance programs in multiple ways. In a number of instances, physician input has resulted in either the inclusion of additional program elements or planned elements being modified. Physicians have also provided information valuable in the identification of the issues specific to the cause of operational bottlenecks that contribute to longer than expected ALOS. The potential for tying gain-sharing initiatives to the hospitals' interest in improving patient flow and meeting the JCAHO leadership standard is a pathway we are exploring with clients.

Finally, a number of hospitals have found that developing complimentary incentive programs either as part of the physician pay-for-performance program or as a separate stand alone program for both middle management and key staff, i.e. nurse managers, discharge planners, etc. can have a significant positive effect on cost effectiveness and better management of disease and clinical outcomes.

As an illustration of how these pay-for-performance programs can work, the following demonstrates how one small aspect of a client program has made a difference.