The most common approach to value-based payment has been “pay for performance” (P4P). Under this approach, a healthcare provider may receive bonus payments if it performs better than other providers on a set of payer-defined measures of quality, utilization, or spending, and it may have to pay penalties or have its payments reduced if its performance is lower than what other providers achieve on these measures. Most physicians, hospitals, and other healthcare providers now participate in at least one pay-for-performance system because of the P4P programs created in Medicare, such as the Merit-Based Incentive Payment System (MIPS) for physicians, the Hospital Value-Based Purchasing Program, and the Skilled Nursing Facility Value-Based Purchasing program. The Centers for Medicare and Medicaid Services (CMS) describes this as “Category 2: Fee for Service with a Link to Quality and Value” (in contrast to “Category 1: Fee for Service - No Link to Quality & Value”).
This approach has been unsuccessful in improving the quality of care for a number of reasons:
- There are no new fees for services that could improve the quality of care. Physicians, hospitals, and other healthcare providers are still paid only for the same types of services they are paid for under the standard fee-for-service system, and they still lose money if they deliver care in different ways or help patients stay healthier.
- Payments fall short of the cost of delivering quality care. Even if a healthcare provider qualifies for a performance-based payment, the amount is typically too small to make up the shortfall between fee-for-service payments and the cost of delivering high-quality care. Moreover, the administrative burdens associated with quality measurement can cause a provider’s costs to increase more than the additional revenue it receives from performance-based payments.
- The measures used do not accurately or completely assess the quality of care delivered. Quality is assessed based on whether the care for a patient met a general standard of quality, even if meeting the standard would have been undesirable or harmful for that particular patient. Moreover, because quality measures are only applicable to a narrow range of health conditions and services, there is no measure of quality at all for many types of health problems and patients.
- A healthcare provider can be penalized for reasons outside of the provider’s control. For example, if a patient is unable or unwilling to use all of the services needed to achieve a good result on the quality measure (e.g., the patient cannot afford the medications needed to treat their diabetes), the provider will be scored as having failed on the measure for that patient and the provider’s payments may be reduced, even though the provider had no control over the factors affecting that patient’s adherence. In many cases, a provider who treats a patient for one health problem can be penalized based on the quality of care that unrelated providers deliver for completely different health problems.
- There is no assurance that each patient will receive high quality care. A healthcare provider is paid for delivering an inappropriate or poor quality service to a patient regardless of how the provider scores on quality measures. In fact, since performance-based payments are based on the percentage of patients whose care met the standard in the quality measure, a provider would be paid more for delivering poor-quality care to an individual patient if the provider has higher-than-average quality scores for its other patients.
- The payments discourage collaboration in care improvement. In many P4P programs, such as Medicare’s Merit-Based Incentive Payment System (MIPS), a provider can only receive a bonus payment for good performance if other providers have been penalized for poor performance. This discourages collaborative efforts to improve care, because if a high-performing provider helps other providers to improve, the high-performer will receive a smaller bonus.
It is often suggested that P4P systems have been unsuccessful because the “incentives aren’t large enough,” but the real problem is that P4P doesn’t actually solve the problems with fee-for-service payment. Moreover, the simplistic quality measures used in these systems can discourage providers from delivering care to disadvantaged patients who have complex needs or difficulty adhering to standard approaches to treatment.
Fortunately, there is a better approach to value-based payment: Patient-Centered Payment.