Health plans, healthcare purchasers, and provider organizations throughout the United States are crafting pay-for-performance programs with the intent of improving the quality of care and with recognition of the need to restrain rapidly rising costs. Health plans and large, self-insured employers have typically led the movement toward using quality scorecards with which to gauge hospital and physician performance, coupled with the use of financial incentives directed at hospitals, physician group practices, and individual physicians and practice teams. In this article we provide a conceptual perspective for understanding the objectives and constraints of payers and providers as they wrestle with the next generation of pay-for-quality (P4Q) programs. We identify a set of practical issues that must be addressed in developing and conducting P4Q programs in different market environments. Those issues include specific strategies for choosing quality metrics, units of accountability, size of incentive, data and measurement systems, payout formulas, and collaboration among payers. We illuminate these issues by considering different approaches in light of real-world P4Q demonstrations underway in the Rewarding Results program, in Bridges to Excellence program, and in specific provider organizations we interviewed over the years. The discussion of practical issues highlights principles and examples directly relevant to hospitals and physician organizations that are considering participation in P4Q as well as to those reexamining their physician compensation mechanisms.
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