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Pay for Performance

Individual purchasers and health plans have increasingly implemented pay for performance systems designed to reward providers for delivering high quality care and to motivate quality improvement.1 Numerous State Medicaid offices have implemented some form of state-level pay for performance, value-based purchasing, or performance contracting contingency in their contracts with health plans.2 The two demonstration projects highlighted below provide support for the positive influence of financial incentives and penalties on improving healthcare quality.

Centers for Medicare and Medicaid Services (CMS)/Premier Hospital Quality Incentive Demonstration Project

In 2003 the Centers for Medicare and Medicaid Services (CMS) and Premier Inc., a nationwide organization of not-for-profit hospitals, began a pay for performance demonstration project involving over 260 hospitals. The demonstration project tracked process and outcome measures in five clinical areas critical to Medicare’s elderly population: heart attack, heart failure, pneumonia, coronary artery bypass graft surgery, and hip and knee replacements. Hospitals demonstrating high quality performance received financial incentives and public recognition while hospitals failing to improve above a pre-defined quality measure threshold by the third year of the project received financial penalties. Specifically, hospitals were scored and ranked by condition, and any hospital in the top 10 percent for a given condition received a 2 percent bonus on its Medicare payments; hospitals in the next decile received a bonus of 1 percent. In the third and final year of the demonstration, hospitals with the worst performance would be financially penalized. Results from 2 years of data indicate significant improvement in the quality of care in all measured clinical areas.3

Delaware Division of Substance Abuse and Mental Health

In 2002 the Delaware Division of Substance Abuse and Mental Health moved to performance-based contracting for all of its outpatient addiction treatment programs. The goal was to improve the accountability and effectiveness of addiction clinical services by providing financial incentives (bonus dollars) and penalties (loss of base dollars) to providers contingent on their ability to attract and engage patients through all phases of outpatient treatment.4 Key performance criteria included:

Capacity utilization – Programs were required to maintain a monthly utilization rate (admission into the outpatient program) of 80% in the first implementation year and 90% thereafter.

Treatment Engagement – Programs could earn an additional 1% for each participation target (defined as engaging admitted patients into adequate levels of participation in clinical activities) with an additional 1% bonus if all targets are met.

Program Completion –Providers earned $100 for each client that completed the program. Successful completion of the program was defined as active participation in treatment for a minimum of 60 days, achievement of the major goals of his/her treatment plan; and submitting a minimum of four consecutive weekly urine samples that were free from illegal drugs and alcohol.

The Delaware demonstration program saw significant and continuing improvements in a number of performance criteria including capacity utilization increasing from 54% in 2001 to 95% in 2006 and an increase in the proportion of patients’ meeting active participation criteria in all four stages of care. The program also demonstrated that performance contracting not require significant training in new clinical or administrative techniques and did not interfere with system adoption of new, evidence-based clinical interventions such as motivational interviewing and cognitive behavioral therapy.


  1. Rosenthal, M.B., Fernandopulle, R., Ryu Song, H., Landon, B. (2004). Paying for Quality: Providers’ Incentives for Quality Improvement. Health Affairs, 23 (2), 127-141. [back]
  2. McLellan, A.T., Kemp, J., Brooks, A., Carise, D. (2008). Improving Public Addiction Treatment Through Performance Contracting: The Delaware Experiment. Health Policy, 87, 296-308. [back]
  3. CMS/Premier Hospital Quality incentive Demonstration Project: Project Findings from Year 2. [back]
  4. McLellan et al. (2008). [back]