Everything Sounded Great Until… The Down Side of Pay-For-Performance


Growing public scrutiny of executive compensation means that for many companies today, it’s a matter of when- and not if- they will eventually be required to defend the design and administration of executive compensation programs. I believe with the right kind of dynamic pay model that breaks free of the static, point-in-time constraints of current pay analysis tools to provide a more far-reaching line of sight into specifically what an executive could even under varying scenarios we can accomplish a more fluid approach. In other words, whether our program in place has the appropriate performance-orientation should tell us if the focus on company performance and stock price performance is balanced or weighted more heavily in one direction or the other. If incentive opportunities for payouts are appropriately aligned to the right performance achievement level, the appropriateness of the current compensation mix will sound great. Whether the emphasis on time-based awards is too heavy and how the current design of the incentive program supports or doesn’t support the business strategy and time timeline sounds not so great. Whether total payouts for executives are aligned with incremental shareholder returns can take everything from sounding great to bad very quickly.

I believe we must ask ourselves, can health care rationing ever be rational?  Many Americans have come to expect that modern medicine will continually increase both the quality and the quantity of their lives.  In reality, while pay-for-performance is becoming widely adopted, in the federal affordable care act, under Medicare and part of the new Massachusetts cost-cutting law, there’s little evidence that the practice is effective and it may in fact do harm. For example, doctors and nurses say perceive detailed, overly prescriptive financial Pay-For-Performance contracts are controlling, which can cause them to dissociate from their work, lose their intrinsic motivation to do their very best for the patient, and engage in gaming. Such gaming includes for example, upcoding a diagnosis to another condition that yields a higher payment is already rife or labeling a pneumonia patient’s condition as complex rather than simply can increase the hospital’s payment by 42 percent.  When it comes to their health care, many Americans living today feel there should be no boundaries or limitations on their access to the best providers and the latest technologies.  Nevertheless, increasing limitations on health care expenditure are likely to occur sooner rather than later. The United States spends over 16% of its GDP on health care, 2.5 times more per person than any other industrialized country. And the percentage of GDP allocated to health care is increasing at the expense of other social needs such as education, public safety, and environmental protection. If costs continue to increase at the current rate, a fifth of GDP will go to health care by 2018.

Pay for performance inverts medical priorities, making care an instrument for generating money, rather than vice versa. While performance-based rewards can increase output for straightforward manual tasks, they can undermine motivation and actually worsen performance on complex cognitive tasks, such as those required in medicine. The unintended consequence is likely a worsening of care, not its improvement.  Some physicians in safety-net hospitals may score poorly because of circumstances beyond their control, such as their institution’s financial distress. In such situation, penalizing low-scores can make matters worse, effectively punishing patients who have nowhere else to go. Pay for performance simply may not work because it changes the mindset for good doctoring. However, if pay for performance schemes must be envisaged then rigorous consideration seems essential. I believe we need to adopt our own theory of functional fixedness when attaching the candle (pay for performance) to the wall (our lives) with savings versus losses.  We need to come up with another function for the candle. 

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Functional fixedness we learned from psychology class in college is a cognitive bias that limits a person to using an object in the way it is traditionally used. The concept of functional fixedness[i] originated in Gestalt Psychology specifically, a movement in psychology that emphasizes holistic processing.  I believe pay for performance is currently not a holistic process.  Federal Reserve Chairman Ben Bernake warned in 2008 that health care spending was eroding the nation’s overall economic health. Over the last 10 years, health care insurance premiums have increased by 131%, while wages have growth 38% and inflation has increased by 28%. With a projected massive increase in the population of older people who are the heaviest users of health care, a shrinking base of younger taxpayers, continually rising expectations for living longer and better, enormous expenditures of national capital to rescue the financial system and fund wars, and global resource limits, our current health care spending trajectory is simply unsustainable. Although many people accept the necessity of explicit rationing in theory, they tend to reject rationing when it comes to their own health care or the care of people they are concerned about. By comparison to explicit rationing, implicit rationing based on inability today seems attractive because no responsibility or blame can be attached to any particular person or organization, but at the same time is unpredictable and discriminatory. Although most Americans have some choice in the selection of public or private health plans, for many poor, near-poor, and self-employed people, their choices we must remember, may be limited or non-existent. The consequences of implicit rationing by inability to pay have been disastrous for many of the 46 million Americans who have no health insurance; specifically, 15%[ii] of the population and the 25 million who have inadequate coverage. Health outcomes for uninsured people are even significantly worse than for insured people. Uninsured adults have a 25%[iii] greater chance of dying than uninsured adults.  That is why we should consider age as a basis for health care rationing simply because explicit age-based health care rationing is required to control costs. After all, people over age 85 are the nation’s fastest growing age group and are the heaviest users of health care services.


About a third of Medicare expenditures are spent in the last year of life, much of it for aggressive life-sustaining care. There are ethical arguments for age-based rationing of health care including priority for scarce health care resources that should be given to younger people who deserve the opportunity to live as many years as older people who have already lived most of their anticipated lifespan. This argument is intuitively appealing: if only one ICU bed were available and two people of differing ages with similar capacity to benefit and equal need were being considered for the bed, the it would seem fair to give the bed to the younger person who as ad less opportunity to live as many years. Another argument is that using expensive medical technology to prolong the lives of older people harms the health needs of other groups and harms social needs other than heal care.

A more common payment models in place today Pay for Performance. Pay for performance has benefits and these include the potential to improve the quality of care delivered particularly for care that is measured. Enhancing the efficiency of care if measured, encouraging collaboration and promoting accountability among providers, and encouraging improvement by emphasizing outcomes of care.  The weaknesses to pay-for-performance are that it uses only single condition-focused measures that do not reflect the complexity of caring for patients with multiple conditions.  Although pay-for-performance programs may drive improvements in care that can be measured, such care may be inconsistent with patient preferences. Programs with rigid measures and standards could create incentives for physicians to avoid high-risk patients and fire noncompliant ones. In addition, the administrative work associated with data collection and reporting may take time that otherwise could be devoted to direct patient care.  The best places where you see pay for performance working are services for which metrics already exist including management of some chronic conditions. For example, diabetes, asthma, heart failure and certain surgeries.

Finally, interest in payment reform is likely to intensify as new models of care delivery are tested and refined. Additional demonstrations and evaluations of the various models are needed to fully understand their relative advantages, disadvantages, and operational feasibility. However, we need to remember that no single payment is appropriate for all types of care or applicable in all settings, practice types, and geographic locations. As physicians, policy makers, and others like us search for improvements in how care is paid for the work group needs to follow our lead.

[i] E-Study Guide For: Experience Psychology. King, Laura. 2012.

[ii] Can Health Care Rationing Be Rational?  Gruenewalk A., David. 2012.

[iii] Can Health Care Rationing Be Rational?  Gruenewalk A., David.  2012.


 The Guest Column is our readers' opportunity to write about a given issue or topic in an in-depth and educational manner.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

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