The cost-effectiveness of using financial incentives to improve provider quality: a framework and application

Abstract: Despite growing adoption of pay-for-performance (P4P) programmes in health care, there is remarkably little evidence on the cost-effectiveness of such schemes. We review the limited number of previous studies and critique the frameworks adopted and the narrow range of costs and outcomes considered, before proposing a new more comprehensive framework which we apply to the first
P4P scheme introduced for hospitals in the UK. We emphasise that evaluations of cost-effectiveness need to consider who the residual claimant is on any cost savings, the possibility of positive and negative spillovers, and whether performance improvement is a transitory or investment activity. Our application to the Advancing Quality initiative shows that the incentive payments themselves represented less than half of the programme costs. Nonetheless, our estimates of the value of the health gains produced in the first 18 months suggest that the scheme was a cost-effective use of resources.