Health plans offer rewards for quality improvement

Indicators: Patient satisfaction, preventive care

Health plans are increasingly offering modest incentive payments to reward physicians and hospitals for quality improvement, according to a study released by the Center for Studying Health System Change (HSC) in Washington, DC. The study, HSC Issue Brief No. 82, dated May 2004, reports that the quality indicators used most commonly include patient satisfaction and preventive care, while use of more sophisticated outcome and process measures is less common. Incentive payments take a variety of forms but typically involve a modest bonus.

The study was drawn from visits in 2002-2003 to 12 nationally representative U.S. communities: Boston; Cleveland, OH; Greenville, SC; Indianapolis; Lansing, MI; Little Rock, AR; Miami; northern New Jersey; Orange County, CA; Phoenix; Seattle; and Syracuse, NY. HSC researchers interviewed representatives of health plans, providers, employers, policy- makers, and other stakeholders.

What is motivating health plans to move in this direction? "At this stage, they are trying to find a way to show purchasers they are getting what they’re paying for," notes Bradley C. Strunk, one of the study’s authors. "Certainly, there are people out there who are talking about these programs as a means of cost control; if you improve quality, it will lead to lower costs. In general, however, plans are somewhat skeptical of this approach. Instead, they see [incentives] as a way to go to the purchaser client and say, "We are asking for an X percent premium increase; we are doing this to show you that you’re getting what you’re paying for."

A nascent’ trend

The authors refer to this move toward incentives as "nascent," while noting that health plan-based incentive programs exist in seven of the 12 HSC-studied communities. Does that mean there will be significant growth in the future?

"I think that right now there seems to be a willingness on the part of most players to get the ball rolling. There’s a great opportunity for them to grow in the future," says Strunk. "The challenges, however, are very real."

Among the key challenges cited are skepticism among providers regarding how quality is measured, and establishing an appropriate relationship between quality incentives and the underlying financial incentives of the base payment system.

"There certainly needs to be continuing development of the kinds of tools we need to measure quality, i.e., clinical guidelines," Strunk says. "Policy-makers have a big role to play. For example, AHRQ [the Agency for Healthcare Research and Quality] is spending a lot of time on evidence-based medicine and best practices, as are JCAHO [the Joint Commission on Accreditation of Healthcare Organizations] and the National Quality Forum [NQF]. These kinds of organizations are providers of trust; if they can develop standards and then have them incorporated into various programs the plans create, it will improve chances for success."

Even more challenging, perhaps, is arriving at an appropriate financial arrangement. The programs currently in place, normally sponsored by larger plans, take one of two forms. The first is a bonus payment paid at regular intervals, e.g., quarterly. Some other plans base a specified portion of a provider’s payment rate increase over a multiyear contract on the provider’s performance on a quality scorecard. The size of the incentives ranges from about 1% to 5% of total payments — which, plans acknowledge, may not be large enough to achieve desired changes.

The challenge here, says Strunk, is an innate conflict between an incentive structure and the base payment system. "There is a base payment methodology for the provider, i.e., fee for service," he explains. "If you have a hospital system that is paid per diem, or based on patient days, and an incentive program comes along that says, we’ll pay you a bonus if you reduce patient days,’ the hospital will do what makes sense financially. And the base pay system may give you much more [money] than any incentive."

In other words, says Strunk, "Plans will be challenged to demonstrate there’s new money on the table here."

Jury still out on future of incentives

For these and other reasons, Strunk notes, it is not yet clear that this trend toward incentives will continue. "The fact that major plans are doing this is evidence that they think they are getting something out of it," he says. "But these programs are in the early stages, and there’s still a lot of work being done to measure impact."

One of the better-established programs was launched in 2000 by Blue Cross and Blue Shield (BCBS) of Michigan. As delineated in the Issue Brief, BCBS pays incentives based on how well a hospital scores on a quality scorecard. Clinical quality accounts for 50% of the total score, patient safety accounts for 40%, and implementation of a community health project accounts for 10%. Indicators from JCAHO and NQF are incorporated in the program. Participating hospitals are eligible for incentive payments of up to 4% of inpatient payments in 2004.

"I find this plan to be really interesting and very cutting-edge," says Strunk, noting that the entire plan can be viewed on the BCBS web site (

Meanwhile, says Strunk, many providers remain reluctant to buy in to these programs. "It’s a result of the challenges these programs represent, like standardization, buying into measures, and the nature of funding," he summarizes. However, he adds, "This seems the time for [such programs] to happen."

Need More Information?

For more information, contact:

• Bradley C. Strunk, Center for Studying Health System Change, 600 Maryland Ave. SW, Suite 550, Washington, DC 20024-2512. Telephone: (202) 484-5261.

The HSC Issue Brief can be found at