Quality-Based Financial Incentives in Health Care: Can We Improve Quality by Paying for It?

This article asks whether financial incentives can improve the quality of health care. A conceptual framework drawn from microeconomics, agency theory, behavioral economics, and cognitive psychology motivates a set of propositions about incentive effects on clinical quality These propositions are evaluated through a synthesis of extant peer- reviewed empirical evidence. Comprehensive financial incentives-balancing rewards and penalties; blending structure, process, and outcome measures; emphasizing continuous, absolute performance standards; tailoring the size of incremental rewards to increasing marginal costs of quality improvement; and assuring certainty, frequency, and sustainability of incentive payoffs-offer the prospect of significantly enhancing quality beyond the modest impacts of prevailing pay-for-performance (P4P) programs. Such organizational innovations as the primary care medical home and accountable health care organizations are expected to catalyze more powerful quality incentive models: risk-and quality-adjusted capitation, episode of care payments, and enhanced fee-for-service payments for quality dimensions (e.g., prevention) most amenable to piece-rate delivery.