In pay-for-performance (P4P) or value-based purchasing (VBP) schemes, health care provider reimbursement rates depend on performance. Physicians can receive bonuses for following best practices, and hospitals can increase reimbursement rates from Medicare if they improve clinical processes and patient satisfaction. As an economist, rewarding good performance with financial payments makes perfect sense. Or does it?
…as long as the task involved only mechanical skill, bonuses worked as would be expected: the higher the pay, the better the performance. But when we included a task that required even rudimentary cognitive skill, the outcome was the same as in the India study: the offer of a higher bonus led to poorer performance.
If this empirical finding holds true, then P4P would seem to make sense for rewarding a few basic, high-value health care processes. For instance, a P4P scheme to reward physicians who provide the proper vaccinations makes sense. A P4P program that tries to identify every best practice possible and reward each one is doomed to fail because: (i) the informational burden of not only measuring best practices but updating them over time is immense, and (ii) P4P will focus providers attention only on the activities they are rewarded for and will distract their attention from the difficult cases that require more creative thinking. Doctors and hospitals have long grumbled to policymakers and payers about P4P. According to Ariely’s research, they may be right after all.