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Pay-for-Performance: Making it Pay Off

Originally published January 4, 2005

Pay-for-performance is a relatively simple concept, and one of the oldest concepts in most industries. Set up a scale for measuring performance of a provider of goods or services, and then a corresponding scale of pay to match each level of performance. The complexity of clinical healthcare has traditionally made measuring such performance very difficult. This complexity has in no way decreased, but the move to measure various aspects of a clinical organization’s performance, and then base pay on those measures is on a rapid rise.

The chief reason making pay-for-performance programs a critical issue for clinical organizations is they are externally driven. Payers/purchasers of healthcare services such as health plans, large employers, government agencies and even consumers, are driving them, with or without buy-in from the providers themselves. This puts the clinical provider in a defensive position. There are ways, however, to make these programs and the underlying purpose behind them pay off for your organization. But it takes information, and a structured approach to getting, storing and using this information to produce this payoff. This article describes this information and its value to your organization.

 Major Types and Issues of Performance Measures

At a high level, there are three major types of measures being used in constructing pay-for-performance programs:

  • Clinical Quality Performance Measures. Clinical quality is typically measured by the conformance to standards of best medical practice, and are indications that the right amount of medical input is being put into the situation. For example, for diabetic patients, the annual measurement of hemoglobin levels is an indicator that the right medical attention is being paid to the chronic condition. Other examples are percentage of diabetic eye exams performed, frequency of condition-focused visits, etc. This is on the disease management side. On the prevention side, clinical quality can be measured by the frequency of mammograms for women of certain age groups, the frequency of immunizations for children at specific ages or even something as simple as asking a patient if he/she smokes. These are all actions that are performed, recorded and analyzed in determining pay based on clinical quality. Increasingly, the standards being used are established using national accreditation standards such as those from the National Committee for Quality Assurance (NCQA).
  • Financial Performance Measures. Financial performance in this context means cost control. Payers for healthcare services want to know how their money is being spent, and through pay-for-performance programs want to influence that spending. Whereas clinical quality performance requires more effort put into the care of patients, financial performance requires judicious use of care activities, as well as efficiency in the overhead supporting that care. As a clinical organization, the assumption is that your performance in this area is below standard and therefore the payer’s costs should decrease. But this may not be the case. The purchaser of your services may be getting a fantastic deal for their money. Without solid business evidence, though, you as well as the purchaser may be operating blind, and making potentially disastrous decisions.
  • Economic Performance Measures. Clinical quality typically measures the activities put into care. Financial performance measures the price of those inputs. Economic performance measures the outcomes of the care provided. It is for most clinical (and for payer) organizations the hardest to measure, but the one with the most value to measure. Common examples of economic measures include worker absenteeism and worker productivity. These are measures that are vitally important to your customers, as they are related to the overall health of the payer/purchaser’s population. There are two difficulties in measuring economic performance and linking it to pay based on performance of the healthcare provider. The first is making a direct connection between, say, absenteeism of an employer’s workforce and your performance. Other factors such as culture, management styles, motivators and so on enter into the picture and muddy this direct connection. The second difficulty is normally the playing field is not level, with the clinical organization short on the very information needed to make a case for itself. In this case, payer/purchasers have the upper hand.

With issues such as these, it is in the best interests of clinical organizations to have information, or evidence to support its own performance case. You need readily accessible information on the operations as well as the outputs of your organization to respond to this increased demand for information on your clinical, financial and economic performance. It needs to be structured for use in a number of analytical applications by a variety of decision-makers within your organization if you are to ever going to get ahead of this external pressure. In short, you need information to support evidence-based business decisions. In the information technology industry, this is referred to as business intelligence.

Evidence-Based Business Decision Making

Business intelligence is the commercial equivalent of evidence-based clinical decision making. One uses clinical evidence to support diagnoses to develop care plans and to evaluate outcomes for patients. In the same way, business people use financial and operational evidence to support decisions to develop plans and monitor the progress of their businesses.

Your bank uses customer intelligence to market its products and services to you. Manufacturers use production, purchasing and quality intelligence to decide what to produce and how best to produce it. Retailers use sales intelligence to decide where to locate new stores, how to staff them cost-effectively and what products each should stock.

The clinical setting has financial and operational evidence to support business decisions, develop business plans and evaluate business performance as well. Some examples include the need to:

  • Analyze your clinical and business performance, and the effect it has on your revenue;
  • Analyze the quality of the care you provide in terms of safety, effectiveness, accessibility, etc.;
  • Find ways of continuously improving the efficiency of your operations in providing care;
  • Promoting your strengths in providing care for patients, whether for direct pay-for-performance purposes or for more general marketing purposes; and
  • Supporting decisions that have a long-term, strategic impact on your organization and how resources are allocated to achieve your goals.

The difference that business intelligence makes is in the systematic consolidation of data from various sources and the organization of that data for use in making business decisions. As you can imagine, this data is comprised of millions of bits of information spread across a number of systems (e.g., encounters, labs, claims, billing, etc.). Business intelligence extracts data from these systems and brings it into a centralized, secure, historical repository, which is organized for business users to slice, dice, sort and sum it efficiently for use in making business decisions.

With the kind of organized business evidence you can obtain from your patient registry, you can support business decisions that will make your organization stronger, more effective, more efficient and provide care with ever-increasing quality. The first step is to determine which of the myriad of potential uses for your patient registry is most appropriate for your organization.

Using Your Information to Improve Your Performance

For the past four years I have worked with executives, physicians, clinicians, managers, researchers, informaticians, and analysts on business intelligence strategy and business intelligence development projects. These people work in clinical practice networks, hospitals, health plans, specialty clinics, government agencies, research labs and a host of other settings. The consensus is that use of pay-for-performance programs to influence clinical performance is going to increase dramatically. What is today a novel idea will shortly become the norm.

There are several ways in which clinical organizations can respond to this increase. One is with direct response to externally driven programs. This is the most obvious. There are other ways that clinical organizations can use the information required by such programs to improve their own position in the healthcare field, and in many cases before it is required by payers/purchasers of their healthcare services. A sampling of these are described below.

Direct Response to External Pay-for-Performance Programs. When presented with a pay-for-performance program by a major purchaser, it is obvious that you need to respond with the information required, or suffer a wholesale reduction in your revenue. For many clinical organizations, this is simply not an option. Having information ahead of time, however, can make your response not just satisfactory, but can actually give you the upper hand. First of all, many organizations must scramble to gather this information under pressure-filled situations. This increases the internal cost of assembling the information, as well as introduces the risk of responding with bad information. Neither of these situations improves your bargaining position. On the other hand, having this information readily available reduces the scramble, reduces the cost, and reduces this risk.

In addition, the assumption is that your performance measures are currently below standard, resulting in revenue decreases. This may or may not be the case. You could very well find that some (or all) of your performance measures are above standard, resulting in revenue increases.

The chief difficulty is predicting the measures that payers/purchasers will demand and the information needed to calculate these measures. This difficulty is reduced by the fact that many of the measures being demanded fall in line with the national accreditation measures described earlier.

Improving Clinical Quality and Clinical Outcomes. The performance that is important to payers/purchasers is the same performance that is important to providers and patients. We all want to receive safe, effective and reliable care, and to feel the positive outcomes of that care. This leads to improved patient functionality and subsequently improved worker performance and lower economic costs. By using your information, you can focus your efforts on quality and positive outcomes, making what you do more effective overall.

Improving Efficiency and Cost Effectiveness. Continuous improvement of the processes occurring in your clinical settings is essential to survival and success in the healthcare industry, just as it is in other industries such as manufacturing, financial services, retail, etc. Since quality, effectiveness and efficiency in healthcare has come into the spotlight over the past decade, it seems as if every participant in the industry (employers, payers, patients, government officials, etc.) is demanding evidence of improvement. Information, or business evidence on the patients you serve, the care activities you provide (and those you don’t), is necessary to find and correct inefficiencies, and to support reporting of your efficiency to these other participants in the field. Pay-for-performance information provides a rich source of this information, and it is in your best interest to make use of this information to better your operations proactively, instead of passively responding to demand for this information.

Marketing Support. Marketing your strengths proactively is another way to use the information you collect to support pay-for-performance programs. Key forms of marketing clinical effectiveness include awards such as accreditation by organizations like the NCQA described above, promotion of differentiating organizational capabilities such as prowess in a clinical specialty (e.g., superior heart specialists), service superiority (“be seen by a doctor in 33 minutes or the visit is free”), etc. In addition, marketing your abilities can extend beyond your four walls to the effect you have on patients themselves in terms of increased patient functionality, increased feeling of overall wellness, reduced workplace absenteeism, etc. These claims are possible with a well-designed and well-managed repository of information, designed to support pay-for-performance programs. Essentially, you are making known what you are already being rewarded for.

Strategic Priorities Guidance. Finally, and perhaps most importantly, is the effect that responding to what is important to your customers has on your strategic decisions. This is taken for granted in other industries. That is organizing around your market drivers. Decisions such as concentration of your “product lines,” justification of new specialties and/or facilities, new markets, etc. can be supported with the data supporting your pay-for-performance programs, and have a long-range impact on your organization. Having the information ahead of time allows you to make better decisions based on evidence about your organization, your patients and your environment, instead of based on reactions to outside influences.

A Better Way to Manage Your Performance Information

Pay-for-performance programs are fast becoming the norm in the healthcare industry. Their allure is obvious for payers/purchasers of the services provided by clinical organizations. Everybody wants to get their money’s worth for the services they need. Each day we are finding ourselves in the healthcare field with more demand for information on our performance and how it stacks up against standards. This will only intensify. We need to make use of all of the information and intelligence we have, our business evidence, to meet this rising demand. Proactively gathering, storing and using information both externally and internally, especially the wealth of clinical, financial, demographic and other information we already own, is essential to the success of our clinical organizations.

Thanks for reading. I look forward to your comments.

  • Scott WanlessScott Wanless

    Scott is the Healthcare Analytics Director for Cipe Consulting Group. He has more than 30 years of experience in business intelligence strategic planning, analytics application development and business analysis across numerous industries including hospitals, physician groups, healthcare payers, laboratory research, insurance, lending, manufacturing, retail and state government. Scott can be reached at scott.wanless@cipeconsulting.com.

    Editor's note: More healthcare articles, resources, news and events are available in the BeyeNETWORK's Healthcare Channel featuring Scott Wanless and Laura Madsen.

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