Blog Post

Past, Present, and Possibility: The Progression of Pay-for-Performance

Pay-for-performance has emerged as a front-runner in driving down healthcare costs. But what, exactly, does this buzz term mean?

Brooke Andrus
5 min read
May 7, 2015
image representing past, present, and possibility: the progression of pay-for-performance
Share this post:


Get the latest news and tips directly in your inbox by subscribing to our monthly newsletter

For decades, healthcare leaders have searched for a way to balance the interests of providers, patients, and payers. The pay-for-performance paradigm has emerged as a front-runner in the race to drive down healthcare costs while simultaneously raising the quality of care and increasing patient satisfaction. But what, exactly, does this buzz term mean?

Defining Pay-for-Performance

As this Health Affairs article explains, the pay-for-performance umbrella encompasses any “initiatives aimed at improving the quality, efficiency, and overall value of health care.” This concept has taken on a variety of aliases—pay-for-quality, value-based payment, and alternative payment, to name a few—but regardless of nomenclature, the basic idea behind pay-for-performance structures is that they incentivize efficiency and optimal outcomes. Typically, those incentives come in the form of:

  • bonuses for meeting or exceeding certain quality benchmarks, and
  • penalties for failing to meet those benchmarks.

Such structures represent a major departure from the status quo—that is, the fee-for-service payment structures that have dominated the healthcare field for several decades. So, why rock the boat? Well, with skyrocketing costs threatening to bring the entire US healthcare system to its knees, it’s clear that something has to change. And because fee-for-service structures reward providers who perform and bill for a large quantity procedures and services—no matter how much patients actually benefit from those services—moving to a pay-for-performance payment environment seems like a logical solution to America’s healthcare cost woes.


Making Moves: A Brief History of Pay-for-Performance

Managed Care Madness

Scrunchies and flannel weren’t the only major trends of the ’90s: this decade also saw a huge payer-led push for managed care arrangements. As the Health Affairs piece notes, such structures aimed to “reduce excessive or unnecessary care, for example, by paying providers by capitation, or a lump sum per patient to cover a given set of services.” This idea, however, had some pretty big flaws: namely, it left patients vulnerable to receiving sub-par care and limited their ability to freely choose their providers. By the time the new millenium rolled around, many payers and providers were abandoning managed care—just as the rest of the country was abandoning portable CD players.

Progress in the Private Sector

According to Health Affairs, private health organizations have introduced more than 40 pay-for-performance programs, including the California Pay for Performance Program—which is the largest physician incentive program in the US—and the Blue Cross Blue Shield of Massachusetts-led Alternative Quality Contract, which, in addition to incentive bonuses, features patient-care budgets rather than separate payments for individual services.

Policy Pushes in the Public Sector

The federal government has introduced a number of initiatives to strengthen the pay-for-performance presence in publicly-funded health programs like Medicare and Medicaid. The Affordable Care Act also includes provisions to support quality and value-based payment structures. Examples of such policies include:

  • Value-based purchasing, a program that rewards hospitals based on how well they perform on a select set of quality measures. CMS is set to introduce similar programs in other settings, including home health agencies, skilled nursing facilities, and long-term care facilities.
  • Physician Quality Reporting System (PQRS), a program that requires eligible professionals to satisfactorily report certain quality data measures. In the program’s early years, those who satisfactorily reported were eligible to receive a bonus payment. Today, the only financial implication associated with the program is a penalty for failing to satisfy the reporting requirements.
  • Medicare Advantage bonuses, which reward plans that obtain a satisfactory rating on a quality rating scale.

Gazing into the Crystal Ball: The Future of Pay-for-Performance

Healthcare leaders, providers, and legislators have already invested considerable resources into making pay-for-performance the dominant payment paradigm in the US healthcare system. So clearly, it isn’t going away anytime soon. That said, finding a perfect out-of-the-box solution to a problem as big as America’s healthcare cost crisis would be darn near impossible. Thus, no answer is going to totally satisfy all stakeholders, and those stakeholders have raised a number of concerns regarding the trend toward pay-for-performance. For example:

  • Will emphasis on quality measures and incentives actually lead to better outcomes? Studies have shown that in some cases, the answer is no.
  • Will pay-for-performance initiatives compromise care quality in the pursuit of cost containment—much like managed care setups once did?
  • Will the incentives available to care providers be enough to justify the cost of tracking outcomes and other quality measures? For example, participation in many programs would require implementation of specialized software or EMR technology.

Still, despite all the skepticism surrounding pay-for-performance, it is undeniably the way of the future, and that means all private practice healthcare providers—physical therapists included—must account for this change as they develop plans and strategies for their practices. All signs point to pay-for-performance holding the lead in the payment reform race, and providers and practice owners who fail to react will be left in the dust.

Losing sleep over \u003cspan class=\u0022unbreakable\u0022\u003ehealthcare reform?

Enter your email address below, and we'll send you our free healthcare executive's guide to maximizing both clinical and financial results—whatever regulatory curveballs come your way.


KLAS award logo for 2024 Best-in-KLAS Outpatient Therapy/Rehab
Best in KLAS  2024
G2 rating official logo
Leader Spring 2024
Capterra logo
Most Loved Workplace 2023
TrustRadius logo
Most Loved 2024
Join the PXM revolution!

Learn how WebPT’s PXM platform can catapult your practice to new heights.

Get Started
two patients holding a physical therapist on their shoulders