Cash Cow or Trojan Horse?

February 1, 2005

Are pay-for-performance plans a Trojan horse?

Joining everyone from grade-schoolers to corporate CEOs, physicians are the latest group to be measured and held accountable for their performance.

Pay for performance -- the concept of rewarding physicians monetarily for providing above-average care -- is the "idea du jour" for improving healthcare and physician compensation.

Most pay-for-performance programs base physician bonuses on easily measurable indicators: the adoption of technology, patient compliance, and patient satisfaction. But many also include more subjective "quality of care" measures, which are difficult to track.
Yet proponents insist that pay for performance is relatively easy to implement, good for physicians and consumers, and the wave of the future.

They may be right. On its face, pay for performance seems innocuous. What's wrong with paying more for better service? But unless it's implemented properly, it could be a Trojan horse for many unsuspecting physicians.

About 30 million Americans are receiving care from physicians who are part of these incentive plans, and that number is expected to double next year, according to some experts in the field. And payouts to physicians in these plans are mushrooming.

Payments from major California HMOs are expected to exceed $100 million this year. One large practice in California reported its pay-for-performance bonus went from $400,000 in 2000 to $6.7 million in 2003.

The payouts to individual physicians are noteworthy. For example, an "average-performing" doctor in north Florida will receive an annual bonus of about $3,500, according to Blue Cross. Its "highest performing physicians" should receive as much as $12,000.

It's no surprise that physicians generally approve of a system that will ostensibly increase their compensation while improving patient health.

But watch out. Pay for performance now has the attention of the federal government -- and no physician is safe when Congress tinkers with healthcare. Last year Congress increased compensation for Veterans Affairs physicians, in part based on a pay-for-performance model. Now Congress wants to use pay for performance in Medicare reimbursements.

It takes little imagination to see the first danger posed by this scheme. With deficits exploding, Congress could save money by reducing regular Medicare rates while trumpeting a pay-for-performance program, meaning a net reduction for most physicians.

And remember, many commercial payers base their rates on Medicare; they might mimic the government's reductions without adopting its pay-for-performance model.

The second problem with pay for performance has to do with the unintended consequences of tracking, recording, and sharing the data necessary to implement it. At some point this information will find its way into medical malpractice lawsuits. Unless Congress or the states keep the data away from trial lawyers, it is sure to be used as the basis for defining "community standards" for best practices. 

In the end, pay for performance may accomplish what managed care never could: transforming private-pay healthcare into an information-driven, market-based system where the best performing physicians are rewarded. For physicians on the high end of the ranking, pay for performance will be a much-needed improvement; for other physicians, however, it could be their undoing.

That means the methods used to measure quality of care will be crucial -- and those methods remain to be seen. The Centers for Medicare and Medicaid Services has asked the National Quality Forum to begin standardizing pay-for-performance principles and guidelines, recognizing that measuring quality in medicine is not easy. Many physicians' organizations are gearing up to have their say in this process.

The challenge is to prevent pay for performance from becoming the tail that wags the dog, whereby physicians are rewarded for focusing on standards and measurements that are irrelevant to a patient's health.


Pay for performance will succeed if it becomes truly innocuous and helpful to physicians and patients. In that case, it will likely become a permanent part of the increasingly complex rules affecting physicians' practices.

There is much work to be done. The jury is still out. 

Sign up for our free e-newsletter "Politics and Your Practice." E-mail me at kkarpay@physicianspractice.com with the word "subscribe" in the subject line.

Is pay for performance a boon for physicians or another way to control what you do? E-mail editor@physicianspractice.com. The views expressed in this space are the author's, and do not necessarily reflect the views of Physicians Practice.

This article originally appeared in the February 2005 issue of Physicians Practice.