Reflecting a widespread tendency to look for simple and plausible solution to complex and persistent problems, the idea of “Pay-for-Performance” (P4P) has gained great credibility in healthcare. It is certainly a favorite for providers, and even payers see its virtues, when “performance” means saving enough money to make paying for such gains worth the investment. But to achieve its full potential, this tool, since it is hardly enough to do solve the healthcare crisis by itself, needs to start with the right definition and measurements of both “Pay” and “Performance”.

While third-party payors expect to be the ones who both do the paying and decide who gets paid for what, providers of the performance that payors want expect to obtain enough to make that performance worth achieving. So far, most P4P schemes tend to reflect relatively modest bonuses rather than enough to make dramatic changes in how providers operate. Meanwhile, while payors want to define “performance” in terms primarily of cost savings, providers persist in their strong preference for being paid based on what they can fully control – on “doing the right thing”, which means adhering to processes of health care and management that represent proven best practices, rather than achieving cost savings.

The one arena where payors and providers may agree on how to measure and judge “performance” may be in managing the health of employees. Providers, as employers, themselves, should be interested in managing the health of their own employees in order to both minimize their labor costs and maximize their own performance, since healthy employees are known to perform better. And as the substantial economic value to employers of healthier employees is translated into substantially greater payment than would be justifiable when only sickness care cost reductions are considered, providers should be willing to include these broader measures of economic performance impact in P4P schemes.

After all, if only processes of health care and management are considered, payors are likely to continue their modest rather than enthusiastic contributions to P4P systems. When such contributions are based on demonstrated economic gains that they realize, payors can afford to be much more generous. The US federal government, for example, has offered to share as much as 80% of the cost savings achieved in one of its disease management demonstration projects with the providers that achieve those savings.

Since it the “performance” that payors most wish to achieve is measured in monetary terms, and the “payment” that providers most want to gain is measured in precisely the same terms, it should be far easier for payors and providers to agree on terms and reach an amicable arrangement when both focus on the same outcomes of care, where cost savings are at least a major component of what “performance” means, and positive ROI for both payors and providers is achieved.