Pay for Performance is Difficult to Implement

HealthcareIn the current debate on healthcare I’ve started hearing something that is quite familiar – pay for performance. The notion is simple – doctors should be paid based on patient outcomes not on the volume of work (fee-for-service). Its intent is easy to agree upon, but terribly difficult to implement.

In the Consulting and IT Services we have seen performance or outcome based pricing go through the entire hype cycle without getting any adoption to speak of. It’s not that customers didn’t want it enough or that vendors dragged their feet. It is just too hard to do. As a result, whenever I have seen pay for performance in contracts they have been in the form of bonuses that have never been big enough to impact vendor profitability seriously.

Pay for performance will be difficult to achieve in US healthcare as well. For reasons that are not very different from why they didn’t work in the IT industry. Here are the challenges:

Can you measure the outcome?
This is actually two problems in one. First you have to identify the outcome parameters and then measure it. Is it fewer visits to the doctor? Is it a lower cholesterol? Longer life? You might say that the real outcome you desire is better health, but then how do you define “better health” let alone getting around to measuring it. And isn’t improvement in health a different thing for different people?

Is the outcome driven largely by provider care?
If the outcome can improve or worsen by factors external to the care provided then is it fair to reward or penalize the doctor for it. A simple example could be a patient that does not heed his doctor’s advice to reduce his weight. There could be factors that impact health that are patient related or complete externalities, like say increased pollution in the area.

Can the outcome be gamed by the provider?
Insurance companies’ business models depend upon keeping very sick people out of their network by making insurance unaffordable for them. Will pay for performance transfer all these practices from insurance companies to the providers? Will doctors start preferring patients who are likely to remain healthy because its better for their pocketbooks?

In a healthcare system like America’s with health insurance companies and employer paid insurance I don’t believe this will work out. The place to start would be Medicare, which is a single payer system and thus less complex. If we could even make a small beginning in the form of a performance bonus for better outcomes, it would be allow us to learn more and perhaps take better, bolder decisions in time. But then physicians need to be willing participants in this experiment. But will the American Medical Association play ball?

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