Description and origins of pay for performance

A detailed description and origins of pay for performance

Pay-for-performance initiatives are designed to improve the efficiency, quality and general value of health care. Other terms used to refer to pay-for-performance include pay-for-quality, alternative payment, valued-based payment, among others. No matter the nomenclature, the main objective of pay-for-performance is to improve efficiency for optimal outcomes. (Rosenthal et al., 2005)

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During the early 1990s, many consumers opted for managed care by paying some cash to the providers for a particular set of services. Such arrangement led to compromised quality and put some strain on patients.

Come 2000, the US was experiencing serious deficiency in health care quality. The Institute of Medicine wrote a detailed report on this. Thus pay-for-performance became a valid option for quality health care. (Vogenberg & Smart, 2018)

Who is affected by pay-for-performance?

A number of studies have been conducted to evaluate adherence to medication versus medication subsidies, but no valid conclusions have yet been made. Medication adherence was shown to improve with higher drug coverage, reduction of cost-sharing and prescription cap. Poor adherence to medication was observed for patients with full medication subsidies. Such non-detailed conclusions show the need for further studies on factors influencing patients’ adherence to medication. (Rosenthal 2005)

According to Barello (2012), chronic illness patients who are required to pay for their medication are more likely to tone down their use of medication. A study conducted in the US revealed that about 25% of older patients ignore their prescribed medicines due to the high costs.

Public insurers such as Medicare have frequently used pay-for-performance in hospitals. Private health care providers have also used more than forty pay-for-performance programs. However, it is still doubtful whether they improve quality. The few studies which attempt to prove improvement in health care quality under pay-for-performance have not adequately linked the two. (Barello 2012)

Premier Inc. and CMS are two notable nationwide hospital systems which are undertaking a project to demonstrate the pay-for-performance. The participants get more cash for treating Medicare patients with conditions such as heart failure, coronary artery bypass graft, acute myocardial infarction, pneumonia, and hip and knee replacements. On 31st March, 2018, 414 Premier hospitals were allowed to enroll for the project and 267 of these agreed to participate. (Vogenberg & Smart, 2018)

Rosenthal (2005) states the importance of the lessons from the pay-for-performance project.

Legislation and/or policies related to pay-for-performance

The Affordable Care Act outlines a number of strategies to improve health care quality. Not all these are strictly pay-for-performance. An example is the Hospital Re-admissions Reduction Program by Medicare which kicked off on 1st October, 2012. This reduces hospital payments by 1% in case of extremely high rates of avoidable re-admissions for illnesses such as heart failure, heart attack or pneumonia. (Eijkenaar 2013)

The Accountable Care Organizations (ACOs) are one of the best known groups of providers who accept the role of coordinating health care and hold themselves accountable for the quality of services they render. (Barello 2012)

The Office of Personnel Management was created under the Civil Service Reform Act in 1978. Some of the functions of this office included: Overseeing the human resource management of the Merit Systems Protection Board and prevent abuse of office. (Eijkenaar 2013) The act also had provision for performance appraisal for the employees, merit pay for different levels of employment, and ways to deal with poor performance. In addition, the act specified that employees would get only half of their normal normal salary increase. The other half would be shared among the top performers. Thus some employees benefited with this new system whereas others were disadvantaged by receiving less pay. (Rosenthal 2005)

One good thing with the Act is the fact that it made clear job expectations and set the goals and objectives. The downfall of it was its failure to establish a clear relationship between performance and pay. Managers in the new system would earn less than non-managerial employees in the old system. And that is the reason why many complained how unfair it was. The public also showed their dissatisfaction with government executives receiving large paychecks. The Act was therefore not an reliable tool for civic reforms. (Eijkenaar 2013)

The year 1982 saw a significant reduction in the size and cost of many sectors of government, thanks to the president elect Ronald Reagan. This greatly limited the Service Reform Act. The Performance Management and Recognition System was put in place on 8th November, 2018 to address the shortcomings of the Civil Service Reform Act. The PMRS was able to set upper and lower limits of pay. Also, the PMRS formed Performance Standard Review Boards. Half of the members to this board were under the merit payment system, and this worked well because they had interest in solving potential problems.

PMRS was certainly better than the Civil Service Reform Act, but it only lasted for 8 years, that is from 1984 to 1991. Its ousting was attributed to insufficient performance findings, performance level discrimination, and failure to prove the system improved performance. More than half of the employees felt their reward was not enough, while more than three-quarters of the managers said that their evaluation of performance provided no guidance for them to develop. (Eijkenaar 213)

Regulatory agencies that implement policies related to pay-for-performance

President Donald J. Trump, on 20th January, 2017 ordered the repeal of the Patient Protection and Affordable Care Act of 2010 (PPACA). He urged the Secretary of Health and Human Services (HHS) and other departmental leaders to avoid imposing an economic burden on the people of the USA. (Vogenberg & Smart, 2018) Such legislation has been difficult to repeal. President Trump appended his signature to one more executive order on 12th October, 2017 to completely dismantle the ACT. (Eijkenaar 2013)

President Trump’s government has also transformed the health care sector through the Food and Drug Administration (FDA). The new FDA commissioner has put into effect some policies to to address issues such as increasing drug review efficiency, high prices for drugs, pursue digital health technology, innovate medical devices, and clearing the orphan drug request backlog.

What does the future hold for pay-for-performance?

Federal Government agencies have lately devised better systems of pay-for-performance by emphasizing on performance and not tenure. It is evident that any agency wishing to implement a successful pay-for-performance system must invest money, time and effort in the conception and implementation stage. (Barello 2012) A fair system is that which includes a thorough performance evaluation and effective supervisors who can do the implementation. Training of the implementing employees is important if the system is to accomplish its objectives. The two main objectives for such systems is to provide a pay reflecting the value of work done, and incentives to those who perform excellently. Agencies must tailor their pay-for-performance systems to suit their own objectives and staff. And that is the main item under discussion in this report, how agency leaders should make decisions on the design and implementation of such pay-for-performance systems. The report further helps agency leaders to understand how they can tailor pay-for-performance systems to suit different organizations. The leaders are also given insight on how to measure and reward performance. (McPhie & Sapin, 2006)




Barello, S., Graffigna, G., & Vegni, E. (2012). Patient engagement as an emerging challenge for healthcare services: mapping the literature. Nursing research and practice, 2012.

Eijkenaar, F., Emmert, M., Scheppach, M., & Schöffski, O. (2013). Effects of pay for performance in health care: a systematic review of systematic reviews. Health policy, 110(2-3), 115-130.

McPhie, A., & Sapin, B. J. (2006). Designing an Effective Pay for Performance Compensation System. US Merit Systems Protection Boar, 1, 56.

Rosenthal, M. B., Frank, R. G., Li, Z., & Epstein, A. M. (2005). Early experience with pay-for-performance: from concept to practice. Jama, 294(14), 1788-1793.

Vogenberg, F. R., & Smart, M. (2018). Regulatory Change Versus Legislation Impacting Health Care Decisions and Delivery. Pharmacy and Therapeutics, 43(1), 34.


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