Using Penalties to Improve Performance in Hospital Care
Pay for performance schemes that link health care providers’ incomes to performance have been the preferred instrument for payers wishing to incentivize higher quality care for more than a decade. An increasing number of payment reforms in the health care sector deviate from this trend by relying on penalties rather than, or as a supplement to, bonuses to incentivize performance improvements. Examples of this type of incentive scheme (termed nonpayment for performance), can be found in Medicare and include the Hospital Readmission Reduction Program, the Hospital Acquired Condition scheme, and the Hospital Value Based Purchasing program. Similar schemes are found in other health care systems including the English National Health Service. In expected utility terms, bonuses and fines are indistinguishable as any bonus contract can be rewritten as an economically equivalent penalty scheme. However, prospect theory and lab experiments suggest that individuals respond more strongly to incentives framed as penalties rather than bonuses. Yet, little is known about the behavioral effects of reimbursement schemes that rely on penalties to incentivize performance when used at the organizational level. This session explores the evidence for the intended and unintended effects of penalty based performance schemes on hospital behavior with three papers analyzing recent Medicare payment reforms.