Unbiased Analysis of Today's Healthcare Issues

Cannon on P4P

Written By: Jason Shafrin - Aug• 22•07

“…purchasers typically reimburse health care providers on the basis of the volume and intensity of the services provided, rather than the quality or cost-effectiveness of those services. The result is a financing system akin to paying academics on the basis of the volume and intensity of footnotes.”

This website has blogged extensively on pay-for-performance schemes (see these articles). But what do other people think of P4P.

Michael Cannon of the Cato Institute gives his take in a 2007 article. Mr. Cannon speaks out against P4P in the Medicare setting since there is little room for experimentation or learning due to Medicare’s sheer size. Mr. Cannon writes:

“The current system of private P4P programs allows insurers and employers to conduct experiments and learn from each other’s successes. Competition to improve the quality of care in a cost-effective manner encourages private purchasers to experiment with P4P, and private control gives purchasers flexibility in designing and altering those experiments. As important, private P4P experiments confine any harmful failures to smaller populations.”

The author constantly mentions that errors which occur in publicly run P4P will harm many people, but avoids mentioning the flip-side that installing a successful P4P program in Medicare can also help the most people. Mr. Cannon’s point of using competition between insurers to allow each to experiment is wise assuming that insurers want the best care for their patients. As Dr. Fogoros notes in his GUTHealtcare website, patients generally do not pay for their health insurance, employers do. And for employers “As long as we don’t hear more than the average number of complaints from our employees, the health coverage we provide is, by definition, good enough.”

Still, one should take Mr. Cannon’s point seriously that at least there is some competition in the private sector health insurance while there is no competition in government run insurance plans. Competition leads to experimentation and experimentation leads to progress a la the Learning Economy model. Further, Medicare already has complex reimbursement rules and adding P4P schemes to the mix may only further increase physicians’ cost to serve Medicare patients. Finally, since Medicare is a political entity, it is inevitable that there will be significant lobbying and rent seeking in order to have Medicare’s P4P serve certain interest groups.

Another novel point the article makes is for insurance companies to focus on patient based P4P. “…Patients who receive recommended care (or who use providers known for delivering recommended care) would face lower out-of-pocket costs, while those who do not would face higher out-of-pocket costs. Patients would know sooner whether a provider was not adhering to the plan’s quality guidelines because that deviation would affect their pocketbooks.”

P4P Tradeoffs

The article also notes some tradeoffs provided by different types of P4P programs:

Quality Measure Upside Downside
Processes Captures provider actions that promote health Can encourage inappropriate care for outliers; Providers can game process measures through patient selection, data
Structural Captures whether providers use human/ physical capital known to improve health/convenience Does not measure whether capital is used optimally; Can require large investments by providers
Patient satisfaction Measures whether providers meet patient expectations; Captures intangible/subjective aspects of quality Poor performers may score well if patients are ignorant of higher quality options
Incorporating multiple types of quality measures Captures benefits of each measure used Adds complexity and cost; Can discourage physician compliance


Problems with P4P

Poorly constructed P4P measures may lead physicians to methods of patient selection (i.e.: treating only healthy patients in order to increase outcome scores) as well as data manipulation. Physicians would never manipulate data…right? According to an article by Bogardus, Geist and Bradley (2004), as many as 50% of physicians admit they have manipulated third-party reimbursement rules to secure coverage of a particular treatment for a patient.

Another problem with P4P that Cannon wisely points out is that “A treatment’s overall beneficial effects may hide different effects on subgroups, including no effect or even harmful effects. For example, patients may respond differently to a given intervention as a result of multiple illnesses or interactions with treatment regimens for such co-morbidities. Financial incentives that encourage providers to treat such outliers according to what benefits the majority of patients may inadvertently encourage low-quality or even harmful care.”

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One Comment

  1. Healthcare Economist Critiques My P4P Article…

    Thanks to Jason Shafrin for sharing his thoughts on my article, “Pay-for-Performance: Is Medicare a Good Candidate?” Shafrin points to a problem with my preference for (I must apologize in advance for all these modifiers and hyphens) privately administ…