The LSE Companion to Health Policy
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The LSE Companion to Health Policy

Edited by Alistair McGuire and Joan Costa-Font

The LSE Companion to Health Policy covers a wide range of conceptual and practical issues from a number of different perspectives introducing the reader to, and summarising, the vast literature that analyses the complexities of health policy. The Companion also assesses the current state of the art.
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Chapter 9: Providing Financial Incentives for Improved Quality and Efficiency. A Literature Review of the Effects of Payment for Performance (P4P) Policies

Irene Papanicolas


9 Providing financial incentives for improved quality and efficiency: a literature review of the effects of payment for performance (P4P) policies Irene Papanicolas 1. INTRODUCTION Recent years have seen a growing interest in payment systems that specifically reward provider performance, also know as payment for performance (P4P) systems. These types of systems offer pay, usually in the form of bonuses, to doctors who meet special performance rates or reach target levels of cost or quality. The main driver behind such systems is to offer different rewards to physicians who provide excellent care and those who provide inadequate care. Moreover, economic theory predicts that by offering financial incentives linked to performance, physicians will become more motivated to provide high-quality care (Rosenthal and Frank, 2006; Young and Conrad, 2007). There is concern that under such systems there will be increased incentives for patient selection or gaming, causing providers to drop risky patients and opt for low-risk patients to maximise their payments (Banker et al., 1996; Doran et al., 2006; Smith and York, 2004). It is also possible that the performance of untargeted areas that are not measured may experience quite limited or even distorted quality effects (Holmstrom and Milgrom, 1991; Smith and York, 2004). Moreover, much of the literature on P4P mechanisms expresses the importance of implementation and system design, which could result in ineffective (Bokhour et al., 2006; Meterko et al., 2006; Young et al., 2007a) or harmful effects on quality of care (Berwick, 1995) if not performed correctly. In the...

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