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Pay for performance is emerging movement in health insurance (initially in Britain and United States). Providers under this arrangement are rewarded for quality of healthcare services. This is a fundamental change from fee for service payment.
Preliminary studies and trends
Pay for performance systems link compensation to measures of work quality or goals. As of 2005, 75 percent of all U.S. companies connect at least part of an employee's pay to measures of performance, and in healthcare, over 100 private and federal pilot programs are underway. Current methods of healthcare payment may actually reward less-safe care, since some insurance companies will not pay for new practices to reduce errors, while physicians and hospitals can bill for additional services that are needed when patients are injured by mistakes.  However, early studies showed little gain in quality for the money spent,  as well as evidence suggesting unintended consequences, like the avoidance of high-risk patients, when payment was linked to outcome improvements.   The 2006 Institute of Medicine report Preventing Medication Errors recommended "incentives...so that profitability of hospitals, clinics, pharmacies, insurance companies, and manufacturers (are) aligned with patient safety goals;...(to) strengthen the business case for quality and safety." 
In the United Kingdom, the National Health Service (NHS) began a major pay for performance initiative in 2004, known as the Quality and Outcomes Framework (QOF).  General practitioners agreed to increases in existing income according to performance with respect to 146 quality indicators covering clinical care for 10 chronic diseases, organization of care, and patient experience. Unlike proposed quality incentive programs in the United States, funding for primary care was increased 20% over previous levels. This allowed practices to invest in extra staff and technology; 90% of general practitioners use electronic prescribing, and up to 50% use electronic health records for the majority of clinical care. The first data show that substantially increasing physicians’ pay based on their success in meeting quality performance measures is effective. The 8,000 family practitioners included in the study earned an average of $40,000 more by collecting nearly 97% of the points available. 
In the United States, Medicare has various pay-for-performance ("P4P") initiatives in offices, clinics and hospitals, seeking to improving quality and avoid unnecessary health care costs.  The Centers for Medicare and Medicaid Services (CMS) has several demonstration projects underway offering compensation for improvements:
- Payments for better care coordination between home, hospital and offices for patients with chronic illnesses.
- A set of 10 hospital quality measures which, if reported to CMS, will increase the payments that hospitals receive for each discharge. By the third year of the demonstration, those hospitals that do not meet a threshold on quality will be subject to reductions in payment.
- Rewards to physicians for improving health outcomes by the use of health information technology in the care of chronically ill Medicare patients.
As a disincentive, CMS has proposed eliminating payments for negative consequences of care that results in injury, illness or death. This rule, effective October 2008, would reduce payments for medical complications such as "never events" as defined by the National Quality Forum, including hospital infections.  Other private health payers are considering similar actions; the Leapfrog Group is exploring how to provide support to its members who are interested in ensuring that their employees do not get billed for such an event, and who do not wish to reimburse for these events themselves. Physician groups involved in the management of complications, such as the Infectious Diseases Society of America, have voiced objections to these proposals, observing that "some patients develop infections despite application of all evidence-based practices known to avoid infection", and that a punitive response may discourage further study and slow the dramatic improvements that have already been made. 
References & Bibliography
- The Commonwealth Fund: Five Years After "To Err Is Human": What Have We Learned?
- Meredith B. Rosenthal, PhD; Richard G. Frank, PhD; Zhonghe Li, MA; Arnold M. Epstein, MD, MA (2005). Early Experience With Pay-for-Performance: From Concept to Practice. JAMA 294 (14): 1788-1793.
- M .B. Rosenthal and R. G. Frank (2006). What Is the Empirical Basis for Paying for Quality in Health Care?. Medical Care Research and Review 63 (2): 135-57.
- US Congress, House Committee on Employer-Employee Relations: Pay For Performance Measures and Other Trends in Employer Sponsored Healthcare, Testimony of Meredith B. Rosenthal, PhD May 17, 2005 (PDF)
- The Institute of Medicine (2006). Preventing Medication Errors. The National Academies Press.
- National Health Service: Quality and Outcomes Framework data Retrieved July 8, 2006
- Tim Doran, M.P.H., Catherine Fullwood, Ph.D., Hugh Gravelle, Ph.D., David Reeves, Ph.D., Evangelos Kontopantelis, Ph.D., Urara Hiroeh, Ph.D., and Martin Roland, D.M. (2006). Pay-for-Performance Programs in Family Practices in the United Kingdom. The New England Journal of Medicine 355 (4): 375-384.
- Medicare: "Pay For Performance (P4P) Initiatives"
- Centers for Medicare and Medicaid Services: Eliminating Serious, Costly and Preventable Medical Errors (May 18, 2006)
- IDSA, SHEA and APIC: Comment on CMS Inpatient PPS Proposed Rule 1488P: Healthcare-associated infection (June 13, 2006)