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Medical Care Research and Review
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Cost-Effectiveness of Hospital Pay-for-Performance Incentives

Tammie A. Nahra

University of Michigan

Kristin L. Reiter

University of North Carolina at Chapel Hill

Richard A. Hirth

University of Michigan

Janet E. Shermer

Blue Cross Blue Shield of Michigan

John R. C. Wheeler

University of Michigan

One increasingly popular mechanism for stimulating quality improvements is pay-for-performance, or incentive, programs. This article examines the cost-effectiveness of a hospital incentive system for heart-related care, using a principal-agent model, where the insurer is the principal and hospitals are the agents. Four-year incentive system costs for the payer were $22,059,383, composed primarily of payments to the participating hospitals, with approximately 5 percent in administrative costs. Effectiveness is measured in stages, beginning with improvements in the processes of heart care. Care process improvements are converted into quality-adjusted life years (QALYs) gained, with reference to literatures on clinical effectiveness and survival. An estimated 24,418 patients received improved care, resulting in a range of QALYs from 733 to 1,701, depending on assumptions about clinical effectiveness. Cost per QALY was found to be between $12,967 and $30,081, a level well under consensus measures of the value of a QALY.

Key Words: pay for performance • hospital quality incentives • cost-effectiveness

Medical Care Research and Review, Vol. 63, No. 1 suppl, 49S-72S (2006)
DOI: 10.1177/1077558705283629
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