Paying for Quality: Health Plans Try Carrots Instead of Sticks

Quality Incentives Gain Favor

Across the United States, health plans began experimenting with payment arrangements that offered financial rewards to providers who met quality-related goals, according to findings from HSC's 2002-03 site visits to 12 nationally representative communities. While health plans had long relied on payment policies to shape provider behavior, previous models primarily aimed to increase awareness of health care utilization and costs rather than to reward clinical excellence.

Earlier approaches tied portions of provider compensation or bonus payments to keeping patient utilization or spending below certain targets. Capitation -- the practice of paying providers a fixed per-member, per-month amount regardless of the volume of care delivered -- was widely used in the early to mid-1990s to promote cost-conscious behavior. But both utilization-based incentives and capitation fell out of favor over time. Critics argued they created perverse incentives for providers to withhold necessary care without systematically promoting quality improvement.

Two landmark Institute of Medicine reports shifted the conversation. To Err Is Human, published in 1999, and Crossing the Quality Chasm, released in 2001, placed health care quality and patient safety squarely on the public policy agenda. Together, these reports documented significant quality and safety shortcomings throughout the American health care system. Among the key recommendations in Crossing the Quality Chasm was the alignment of payment policies with quality improvement -- a call that helped catalyze the pay-for-performance movement.

Incentive Program Snapshot

Health plan-based quality incentive programs existed in seven of the 12 HSC communities studied. Most programs were sponsored by major health plans with large market share and, consequently, considerable influence over providers. Each program varied along three critical design dimensions: how quality was measured, how incentive payments were structured, and how large the incentives were.

Plans used a variety of methods to assess quality, but standardization across programs was minimal. Patient satisfaction surveys and preventive care utilization metrics were commonly employed because these data could be collected with relative ease. More sophisticated process-of-care measures -- such as tracking the specific treatments a patient received for a given diagnosis -- and health outcome metrics were less prevalent but gaining traction alongside advances in evidence-based medicine and risk adjustment methodologies. Patient safety indicators were also becoming more common in quality scorecards.

Two incentive payment designs were most common. The first involved bonus payments distributed at regular intervals, such as quarterly or annually. The second approach conditioned a portion of a provider's rate increase over a multi-year contract on the provider's performance against a quality scorecard. In nearly all cases, these incentives represented upside risk only -- providers stood to gain extra revenue but their base payment rates were not threatened by poor performance.

The dollar value of incentive payments was typically modest relative to a provider's total revenue from a given plan, generally ranging from about 1 percent to 5 percent of total payments. Plans openly acknowledged that they did not yet know how large incentives needed to be to drive meaningful changes in clinical practice.

Incentives in Action: California and Michigan

Two programs observed during HSC's site visits stood out as particularly innovative: a physician-focused initiative in California and a hospital-focused effort in Michigan.

In California, the Integrated Healthcare Association (IHA) launched its Pay for Performance (P4P) initiative in January 2002. Under P4P, six major California health plans agreed to develop individual quality incentive programs for capitated medical groups and independent practice associations within HMOs -- the dominant care delivery model in southern California -- using a shared set of performance measures. Collectively, the six plans covered approximately 8 million HMO enrollees statewide.

The IHA quality scorecard covered three broad areas. Clinical quality accounted for 40 percent of the total physician group score and included measures of preventive care -- childhood immunizations, breast cancer screening, cervical cancer screening -- as well as management of chronic conditions such as asthma and diabetes. Patient satisfaction also accounted for 40 percent and assessed satisfaction with physician communication, specialty care received, and timeliness of care. An information technology component made up the remaining 20 percent, measuring demonstrated investment in technology that enabled clinical data integration at the point of care.

The first incentive payments -- annual bonuses in most cases -- were due in mid-2004. Five of the six participating plans set maximum incentives ranging from about $2 to $4.50 per member per month, which was typically around 5 percent of total capitation rates but could reach as high as 10 percent. A sixth plan offered incentive payments of up to 3.5 percent of the capitation rate.

In Michigan, Blue Cross and Blue Shield (BCBS) of Michigan -- the dominant health plan in Lansing and across the state -- launched the Participating Hospital Agreement Incentive Program in 2000. This program paid hospitals based on their performance on a quality scorecard with three components: clinical quality (50 percent of the total score), patient safety (40 percent), and implementation of a community health project (10 percent).

The clinical quality component included process-of-care indicators for patients with acute myocardial infarction, congestive heart failure, and community-acquired pneumonia, as well as surgical infection prevention measures. Patient safety scoring was based on certification of a board-approved patient safety plan, compliance with a defined list of medication and patient safety practices, and implementation of safety-enhancing technology such as computerized physician order entry. The program was notable for its reliance on indicators developed by outside organizations with significant provider credibility, including the Joint Commission on Accreditation of Healthcare Organizations (JCAHO) and the National Quality Forum. Participating hospitals in Lansing and throughout Michigan were eligible for incentive payments of up to 4 percent of inpatient payments in 2004.

Why Plans Led the Way

Interviews with plans, providers, and purchasers made clear that health plans were the primary drivers behind incorporating quality incentives into provider payment systems. A key motivation was a broad belief in promoting evidence-based medicine and quality improvement throughout the health care system. Ideally, incentive programs could enable plans to leverage their role as payers to pursue goals shared by both purchasers and providers.

Plans also perceived a business case for paying for quality, though the arguments varied. Some contended that quality incentives could reduce unnecessary follow-up care and improve efficiency, producing cost savings passed along to purchasers through lower premium increases. Others viewed the incentives as a mechanism to deliver better performance for a given level of spending, demonstrating added value. A few plans saw quality incentives as a way to preserve some element of financial risk for providers in a more palatable form than capitation. Others adopted them to ease tense contract negotiations and repair relationships strained during the contentious contracting environment of the preceding years.

Providers, with a few exceptions, were not leading the charge. Many remained cautious about program designs and measurement methods. But some were willing to participate and, like plans, viewed quality incentives as a way to advance evidence-based practice. Providers also valued the recognition and financial support tied to performance improvement, noting that incentive payments helped offset infrastructure investments needed to support quality initiatives. Additionally, some providers were motivated by sensitivity to community perceptions -- publicly opposing credible quality improvement efforts could damage their reputation.

Purchasers, by and large, had played limited roles in leading quality incentive efforts across most of the 12 communities. One notable exception was the Bridges to Excellence program, spearheaded by a coalition of purchasers, plans, and providers. Operating in Boston and a few other markets, Bridges to Excellence made direct incentive payments to physicians who demonstrated improvements in diabetic and cardiac care and invested in information systems and care management tools. This approach allowed purchasers to make direct investments in quality improvement rather than relying solely on health plans as agents of change.

Prospects for Success

Plans and providers were still experimenting with quality-based financial incentives, and the long-term success of these programs would ultimately be measured by their ability to attract broader participation and meaningfully alter provider behavior in ways that promoted system-wide quality improvement. Several factors stood to shape the trajectory of these efforts.

Incentive design mattered greatly. The size of incentives, combined with the share of a provider's patient panel enrolled in the sponsoring plan, determined the total extra revenue a provider could earn. Although most initiatives started with modest incentive amounts, plans expected to increase them over time. At the same time, some providers worried that incentive programs would ultimately be financed by shifting dollars from some providers to others, creating winners and losers. Plans faced pressure to demonstrate adequate long-term funding commitments.

Bigger incentives alone would not guarantee results. Plans also needed to consider how quality incentives interacted with the underlying base payment system. If the two systems rewarded opposing behaviors, even generous quality bonuses were unlikely to have much effect. Alignment between base payment structures and quality incentives was critical.

Support from major plans carried outsized importance. Programs from plans with large market share were more likely to succeed because they accounted for a larger share of any given provider's total revenue, making even modest per-unit incentive payments add up to meaningful sums. Moreover, programs from dominant plans could help accelerate standardization of incentive criteria, reducing providers' reporting burden. In markets with several major plans, collaborative efforts like California's P4P initiative could achieve this. In markets dominated by a single plan, that plan's criteria could become the de facto standard.

Quality measurement was another hurdle. For incentive programs to gain provider buy-in, they needed to overcome significant skepticism about how quality was defined and measured. Some programs had made progress by incorporating more rigorous process-of-care and outcome measures, particularly those developed by reputable organizations that providers trusted. Equally important was building the permanent infrastructure to support such measurement -- clinical guidelines and best practices grounded in evidence-based research.

Purchasers would ultimately play a decisive role. Many plans had limited confidence that quality incentives alone would prove effective in controlling health care costs. Plans were largely betting that purchasers would value quality improvement enough to pay for it. Efforts by large and proactive purchasers involved with The Leapfrog Group and Bridges to Excellence suggested some appetite for this investment. But a broader set of purchasers frequently revealed that quality improvement ranked below cost control as a priority, especially amid rapidly rising insurance premiums. Without wider purchaser willingness to invest in quality, plans would struggle to sustain a business case for their efforts.

Policy Implications

The Institute of Medicine presented extensive evidence in Crossing the Quality Chasm that the American health care system was plagued by a serious quality gap. Quality improvement had to be addressed on multiple fronts, and building financial rewards for quality into health care financing was one essential piece. Many plans and providers showed willingness to pursue such changes, but their efforts depended on the support and commitment of government and private employers -- the ultimate financiers of health care.

Policy makers could play a constructive role in the development of private-sector quality initiatives. Continuing support for effectiveness research and clinical guideline development would be critical to advancing best practices, creating more sophisticated measurement tools, and attracting providers to the quality improvement cause. Investment in information technology was equally important for enabling better data collection, analysis, and adoption of evidence-based practice.

Policy makers could also act through Medicare and Medicaid to promote standardization of incentive criteria and, more broadly, establish quality incentives as a customary method for paying providers. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 included several quality incentive programs and demonstrations, signaling that federal policy makers were serious about paying for improved quality.

Sources and Further Reading

This Issue Brief (No. 82, May 2004) was authored by Bradley C. Strunk and Robert E. Hurley and published by the Center for Studying Health System Change (HSC). Data was drawn from 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.

Berwick, Donald M., et al. "Paying for Performance: Medicare Should Lead." Health Affairs, Vol. 22, No. 6 (November/December 2003). Institute of Medicine. To Err Is Human: Building a Safer Health System. National Academy Press (1999). Institute of Medicine. Crossing the Quality Chasm. National Academy Press (2001).

Agency for Healthcare Research and Quality — Federal agency for health care quality research.

CMS — Quality Initiatives — Federal quality measurement and improvement programs.

Health Affairs — Peer-reviewed health policy research.

Robert Wood Johnson Foundation — Health policy research and programs.

Commonwealth Fund — Research on health care quality and system performance.