Potential Impact of Pay-for-Performance on the Financial Health of CAHs (Briefing Paper #23)


Pay-for-performance (P4P) has the potential to improve clinical quality and the patient’s experience receiving care, but it may also have a broader impact on health care infrastructure. For P4P to achieve its desired results, it must put providers at meaningful financial risk. Thus, financially struggling providers might find themselves in even worse financial condition under a P4P initiative. In this study, the Flex Monitoring Team modeled the impact of different P4P incentives on the financial health of CAHs. Through simulating the change in Medicare revenue using different exchange functions, which translate hospital quality outcomes into payments, the team modeled how P4P might impact CAHs. The analysis found that for pneumonia and heart failure, hospitals that provide higher quality of care are also more profitable (by net revenue). P4P incentives likely reduce the financial health of hospitals already in distress; however, the impact of commonly used incentive structures on CAHs is modest. CAHs are prime candidates for P4P programs to unintentionally affect the financial stability of hospitals in precarious positions, but this study suggests P4P programs would only modestly impact CAH financial stability. If such programs can induce hospitals to increase quality, those benefits should outweigh the risk of placing financially distressed CAHs in greater jeopardy. Going forward, CAHs should be included in future P4P.


Finance Financial Distress Quality