Optimal Pay-for-Performance Scores: How to Incentivize Physicians to Behave Efficiently Using Episode-Based Measures

and Information (ORDI) strives to make information available to all. Nevertheless, portions of our files including charts, tables, and graphics may be difficult to read using assistive technology. Persons with disabilities experiencing pro blems accessing portions of any file should contact ORDI through e‐mail at [email protected]. and Information (ORDI) strives to make information available to all. Nevertheless, portions of our files including charts, tables, and graphics may be difficult to read using assistive technology. Persons with disabilities experiencing pro blems accessing portions of any file should contact ORDI through e‐mail at [email protected]. Implementing a pay-for-performance (P4P) program holds the promise of stemming the tide of rapidly-rising Medicare costs. By penalizing inefficient physicians and rewarding efficient ones, Medicare could potentially save millions or billions of dollars each year. The successful realization of such a system requires not only that efficiency ratings are comprehensible to both providers and policymakers, but also that they affect provider behavior as intended. Additionally, to be valid and compelling, a physician efficiency rating system should evaluate providers on factors under their direct control. To advance our understanding of the incentives created by alternative structures of P4P systems, this analysis evaluates options for how to measure efficiencies in these systems and how to translate these measures into payments. The framework considered in this report first utilizes episodes of care produced by commercial grouping software as the basis for creating condition efficiency scores. Using these episode scores, a single ―composite score‖ of relative efficiency is then calculated for each provider based on attributed episodes of care. Finally, this P4P framework develops an ―incentive factor‖ to translate these scores into meaningful financial incentives. The question addressed here is how these different elements translating a physician's cost efficiency into fee schedules interact to influence this provider's behavior. Within this general framework, policymakers should focus on designing a system that achieves two basic goals. First, physicians should be incentivized to maximize their efficiency scores by reducing episode cost. These efforts should attempt to most drastically reduce the costs of treating high-cost episodes. Second, providers should reallocate their efforts to specialize in the conditions they treat most efficiently. The remainder of this paper focuses on implementing an episode-based scoring methodology to achieve these two aims. This report finds that although composite scores can be used to incentivize some physicians to decrease resource utilization, many physicians will not engage in any cost-saving behaviors unless …