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Solucient, part of Thomson Healthcare

It is unlikely that current pay-for-performance models will have a lasting impact — given patients haveconsistently shown equal interest in knowledge, outcomes and compassion.

Pay-for-performance seems to be part of every healthcare pundit’s prediction of emerging trends. Yet there is cynicism about the persistence of current models.[1] In large part, this stems from the fact that the words “pay for performance” mean everything, and yet nothing, at the same time.[2]

More importantly, the term performance is often used synonymously with clinically correct care, and the associated best possible outcomes. There is an implicit belief that payment will be tied to clinical competency. The inference is that you will get paid more if your clinical performance is ideal, or less if it is not ideal. Hence a number of schemes have been deployed that tie a doctor’s or hospital’s payment to some aspect of care outcomes (did the patient survive?), process (was the right test or drug ordered?) or structure (did the hospital have a computerized order entry system?). These experiments are noteworthy, but not likely to become widespread or permanent until the current dialogue shifts to a pay-for-value concept.

From Performance to Value

Pay-for-performance in its current iteration is inherently provider-centric. It assumes that providers or other experts are in the best position to know if a care experience was valuable to a patient. The current model suggests that the provider, such as doctors or hospitals, will get more money if they perform better. In reality, payment is determined primarily by the patient or those that pay bills on their behalf, such as health insurers, not the provider. Payment is based primarily on the purchaser’s concept of value for services. In an imperfect market such as healthcare, the price of services is influenced by a variety of external factors. These factors include introduction of a third party that pays the majority of the bills, the politics of federal entitlement programs and the role of the employer as a health insurance sponsor. It is quite plausible that a hospital delivering patient care in a technically flawless manner, following the most up-to-date guidelines, best practices and evidence-based medicine will not receive any higher level of payment than it would if its quality of care was less exceptional.

One of the challenges of the current indirect system of payment is that value to the ultimate consumer of healthcare — the patient may not be the same thing or have the same value to the intermediary who pays the bills. However, the recent demise of mandatory primary care “gatekeepers” as a cost containment strategy architected by third-party payers, shows how the thirdparty payer ultimately acquiesces to the thing most important to their real client — the patient.

Think about what you will pay today for housing or education. How much more would you pay for the promise of perfect performance? It depends on how much you make and what else you spend your money on. Alternatively consider airline tickets. How much more (or less) would you be willing to pay for the airline that promises “fewer plane crashes than before?”

This issue is particularly relevant in light of the analysis of Anderson and Reinhardt in 2003. They demonstrated that the primary reason U.S. per capita healthcare costs are substantially higher than the rest of the developed world is due to the price of services in the U.S., not the number of services.[3] That analysis is reflected in a thoughtful commentary by Bruce Vladeck that suggests that the national concern with cost will not really be addressed by focusing on eliminating unexplained variations in utilization of services.[4] Perfect quality is not likely to change the dynamics that ultimately set prices. Therefore providers should not expect that better clinical performance will result in improved (“higher”) prices.

What Is Value?

What do patients pay for? They pay for what they value. A patient’s perception of a good care experience includes, but is more comprehensive than, clinical performance or quality.

Significant research has been conducted on what patients want from their healthcare providers. It appears they want both competence and compassion.[5,6]

Competence alone is not enough. This is corroborated by the fact that hospitals that excel at empiric measures of performance, such as outcomes, may not be considered the best by referring doctors or patients and vice versa. One only needs to compare the Solucient 100 Top Hospitals multiyear winners, with U.S. News and World Report’s Best Hospital Honor Roll winners and J.D. Powers’ Distinguished Hospital Program winners.

Further research on patient attitudes on healthcare supports this information. Patients are interested in how well doctors explain alternatives, how well healthcare providers listen to them and the quality of the environment in which they receive their healthcare. Patients equate cleanliness and order in the environment with quality, suspecting that if a provider doesn’t care about keeping their office or hospital hallways clean, then they may be just as lax in their care of the patient.

Assuming all these variables enter the equation, the next question is, which variable is most important? Contrary to expectation, clinical outcome may not be the most important variable in determining quality of care. Particularly for office-based care, the perception of quality is correlated to how well the physician answers a patient’s questions and explains the patient’s illness.[7,8] For hospital care, the dominant factors seem to be responsiveness of staff and cleanliness of the environment.[9,10]

What Does This Mean for Providers?

If value ultimately influences how much money people will pay relative to everything else they can do with their money, then providers must seek to maximize a patient’s perception of value. In addition to improving clinical performance, providers must strive to optimize all aspects and channels of delivery of value. In many cases, value may not be significantly affected by maximizing clinical care alone. Even large change may not confer much incremental value. This is a sign that the other elements of the equation must not be overlooked.

Healthcare providers should begin to think equally about strategies that improve all aspects of the healthcare experience. The popularity of entrepreneurial “concierge” medicine and ultra-fast CT cardiac screening tests support the hypothesis that non-clinical factors can have dramatic influence on a patient’s willingness to pay for services not measured by traditional approaches to quality. Said another way, being a good doctor may not be good enough to win and keep your patient’s business.

What if There Is No Money to Pay Anyway?

The American healthcare system may have a price structure so out of line with the rest of the world that it is unlikely that prices received by providers will go up substantially even if care or performance improved. That does not mean there will not be pressure on providers to maximize value. There is likely to be some price difference within geographic markets — at least at the margin for privately insured patients — so that providers may be able to gain by being a high-value provider. Market share is likely to continue as a significant competitive issue in most urban areas.

In addition, as technology allows providers to be physically separated from patients, provider competition may become more regional and national in nature, raising the bar for rural providers as well. Finally, as patients pay more out of pocket — particularly for discretionary services — competition may emerge for their “retail” healthcare expenditure that will be driven by value as defined by the patient.[11]

What About Efficiency?

Payers often speak in terms of rewarding efficiency. This is an artifact of our disconnected third-party payment system. Ordinarily purchasers don’t pay for efficiency; they pay for value realized.

For healthcare providers, this means if you are efficient, you can do more with what patients (or their insurers) are willing to pay. In this way, you provide your services with more value relative to their dollar spent on care. This notion fits well with the broader concept of value. The investment needed to increase the quality and compassion of an organization — whether it is new diagnostic technology or better-trained staff — will be funded out of efficiency. In the meantime, expect third-party payers to define performance in terms of efficiency if for no other reason than to stimulate efficient business practices. Either way, providers will need to focus on doing better with less.

Where Do We Go From Here?

To date, pay-for-performance has been limited to a very providercentric notion of technical quality and competence. In the short term, this narrow view is helpful in that it will help transform a qualitative and highly opaque care system into a more quantitative and therefore more transparent one. This will begin to give patients some tools with which to measure the clinical competence aspect of their healthcare experiences. Patients and payers that respond are much more likely to be persuaded to pay based on value received. This much broader notion will require providers that want to succeed to go beyond the facts they learned in medical school and pay equal attention to other aspects of the healthcare experience.

Endnotes

1. Wessel D. “Rx for Healthcare May Include Carrots.” Wall Street Journal. Feb. 3, 2005, A2.
2. Safavi, K. “Pay for Performance: Fad or Forever?” Available at: www.HCTProject.com. 2004.
3. Anderson G.F., Reinhardt U.E., Hussey P.S., Petrosyan V. “It’s the Prices Stupid: Why the United States is so different from other countries.” Health Affairs. May/June 2003; 22(3):89-105.
4. Vladeck B.C. “Everything New is Old Again.” Health Affairs Web exclusive, Oct. 7, 2004.
5. Schneider C.E. The Practice of Autonomy: Patients, Doctors, and Medical Decisions. Oxford University Press. 1998;195-206.
6. Smith T. “Can Patient Choice Shape Organizational Behaviors to Provide Patients with What They Want. Qual Saf Healthcare.” 2003;12:473-476.
7. Laine C., Davidoff F., Lewis C.E., Nelson E.C., Nelson E., Kessla R.C., Delbanco T.L. “Important Elements of Outpatient Care: A Comparison of Patients’ and Physicians, Opinions.” Ann Intern Med. 1996;125:640-645.
8. Mangione-Smith R., McGlynn E.A., Elliot M.N., Krugstad P., Brook R.H. “The Relationship Between Perceived Parental Expectations and Pediatrician Antimicrobial Prescribing Behavior.” Pediatrics. 1999; 103:711-718.
9. CAHPS II Investigators and AHRQ. HCAP + PS Three-State Pilot Study Analysis Results. Dec. 22, 2003. www.cms.hhs.gov/ quality/hospital/3State_Pilot_Analysis_Final.pdf.
10. American Hospital Association and Picker Institute. “Eye on Patients Report” Jan. 27, 1997. www.amhpi.com/ eyeonpatients
11. Herzlinger R. Market-Driven Health Care: Who Wins,Who Loses in the Transformation of Americas’ Largest Service Industry. Addison-Wesley, 1997.