By Ashish Jha, MD

Over the past decade, there has been yet another debate about whether pay-for-performance, the notion that the amount you get paid is tied to some measure of how you perform, “works” or not. It’s a silly debate, with proponents pointing to the logic that “you get what you pay for” and critics arguing that the evidence is not very encouraging. Both sides are right.

In really simple terms, pay-for-performance, or P4P, can be thought about in two buckets: the “pay” part (how much money is at stake) and the “performance” part (what are we paying for?). So, in this light, the proponents of P4P are right: you get what you pay for. The U.S. healthcare system has had a grand experiment with P4P: we currently pay based on volume of care and guess what? We get a lot of volume. Or, thinking about those two buckets, the current fee-for-service structure puts essentially 100% of the payments at risk (pay) and the performance part is simple: how much stuff can you do? When you put 100% of payments at risk and the performance measure is “stuff”, we end up with a healthcare system that does a tremendous amount of stuff to patients, whether they need it or not.

Against these incentives, new P4P programs have come in to alter the landscape. They suggest putting as much as 1% (though functionally much less than that) on a series of process measures. So, in this new world, 99%+ of the incentives are to do “stuff” to patients and a little less than 1% of the incentives are focused on adherence to “evidence-based care” (though the measures are often not very evidence-based, but let’s not get caught up in trivial details). There are other efforts that are even weaker. None of them seem to be working and the critics of P4P have seized on their failure, calling the entire approach of tying incentives to performance misguided.

The debate has been heightened by the new national “value-based purchasing” program that Congress authorized as part of the Affordable Care Act. Based on the best of intentions, Congress asked Medicare to run a program where 1% of a hospital’s payments (rising to 2% over several years) is tied to a series of process measures, patient experience measures, and eventually, mortality rates and efficiency measures. We tried a version of this for six years (the Premier Hospital Quality Incentives Demonstration) and it didn’t work. We will try again, with modest tweaks and changes. I really hope it improves patient outcomes, though one can understand why the skeptics aren’t convinced.So what to do? In a recent issue of JAMA, I outline three principles that are really simple, not all that original or creative, and may be one way to think about correctly structuring P4P programs. First – focus on the “pay” part – if you really want hospitals and other provider organizations to change behavior, put real money at risk. I know that large incentives can have the perverse effect of reducing internal motivation, but that primarily happens to human beings (who have internal motivation), not organizations. In this case, organizations and corporations are not people. Large organizations focus primarily on incentives. If the incentives for meeting a performance goal are small, organizations will make small changes. Their Chief Quality Officer might put it on his “to do” list. If the incentives are large enough, it will get the attention of the CEO, who will make it her mission to get it done. Size of incentives matter.

Second, get the right metrics. Here, I think that we have to stop playing around with process measures. P4P programs can be way too prescriptive, and focusing on a small number of processes, no matter how “evidence-based” they might be, is not going to get us where we want to be. We need to focus on a small set of high value outcomes. Who choses? In the ideal world, if patients actually influenced the healthcare system, providers would figure out what mattered to patients. Right now, the payers (government through CMS, private insurance companies) get to choose and I think they should focus on what likely matters most to patients. When patients are hospitalized, they generally prioritize walking out alive, not picking up a new infection along the way, and being treated with respect. Those sound like good metrics. Patients would also like, after they are discharged, to not come back to the hospital soon, though I suspect that that’s a lower priority than being alive.

Finally, we need transparency in the way we structure the incentives. Many of the P4P programs to date have been un-necessarily complicated. The VBP program, for instance, is quite complex. For instance, on patient experience measures, your financial reward depends on a combination of achievement (how well did you do), improvement (how much have you gotten better) and persistence (how often did you do well across a range of measures). For most hospitals, it’s very hard for them to know how well they will do. My take is a simpler approach: pick a goal (let’s say the 90th percentile of performance across the nation) and then, set up a simple scheme. The closer you are to the goal, the bigger your payments. So, if the best (90th percentile) hospitals have a mortality rate for pneumonia of 12%, then hospitals that are at 12.2% will get paid more than the hospital at 13% who will get paid more than the hospital at 14%. I know it sounds too simple – but it makes sense, avoids game playing, and rewards hospitals purely on performance.

At the end of the day, P4P has to be a tool we use to drive improvements in care. It’s intuitive, and we already have it in healthcare: we pay more to doctors and hospitals who do more stuff. It’s time to pay more for providers that achieve better outcomes. And the key to success? Don’t be overly prescriptive about the details of what people should do. Focus on high level metrics (outcomes), put real money on the table, and then, get out of the way and let providers innovate. How low can they drive infection rates? Let’s find out. Let’s make sure there’s enough money for providers and hospitals to innovate the way they deliver care so that they can do well when they do good.

Ashish Jha, MD, MPH is the C. Boyden Gray Associate Professor of Health Policy and Management at the Harvard School of Public Health. He blogs at An Ounce of Evidence.He will serve as a Senior Editor-in-Chief for Healthcare: The Journal of Delivery Science and Innovation. Submission is open now, and the first issue will be released in late spring 2013.