Pay-for-performance: the case for trying something different

7 minute read

Business as usual won’t address the problems in Australian healthcare. Pay-for-performance won’t fix everything, but it might be a place to start.

Several health policy challenges including patient harm, inappropriate care and overservicing recently entered the national discourse, chiefly through a series of Four Corners investigations of Australian healthcare.  

But these problems have been evident across all medical specialties both here and overseas for well over a decade.  

One in 10 patients experiences unnecessary harm during a medical intervention. Treating the effects of these harms consumes at least 12% of the nation’s healthcare expenditure (more than $29 billion a year).

Access to affordable care has dropped.

Meanwhile, a resident of Dubbo is 56 times more likely to undergo a heart perfusion scan than someone residing in Mitcham, South Australia, even after adjusting for demographic differences between the two.

The best predictor of undergoing cardiac angiography is not disease severity but private health insurance status.

And over 40% of adult and paediatric patients presenting with common medical conditions have been found to receive inappropriate care. 

Little wonder that a fifth of the money we spend on healthcare is said to deliver zero additional health benefits. 

Fee-for-service medicine 

These problems are complex and have many causes. But most policy experts agree that how we pay for healthcare services plays a major role, with fee-for-service (FFS) a key offender.  

Under FFS every intervention, test and procedure that forms part of a patient’s care is invoiced separately. It is easy to administer. Billing triggers payment with not many questions asked. The more expensive the intervention, the greater the payment.  

Hence its three major drawbacks:

  • it incentivises interventions over conservative management, which is inherently safer (and cheaper);
  • it promotes fragmentation of care, which is inefficient, expensive and not patient friendly; and
  • it separates financial risk from clinical risk, quality and patient outcomes.  

Practically all services provided in the private sector — just under half of Australia’s health expenditure – are funded through FFS, the dominant funding model globally. For obvious reasons, Australian medical professionals are very reluctant to change the current arrangements. 


Given the ongoing concerns over quality, safety and value of care, policymakers have in recent times experimented with alternative models to replace, or at least complement, FFS. These include bundled payments, capitation and pay-for-performance (p4p). 

P4p distributes a modest financial incentive for achieving agreed benchmarks. These can be any process or outcome, such as performing desirable interventions (e.g. vaccination), or adhering to best-practice protocols, or documented reductions in harms (e.g. hospital-acquired infections). It can be structured as a bonus payment, a penalty or a combination of the two. 

The idea is that the financial incentive will motivate practitioners, providers and organisations to change their practice behaviour, and that this will translate to improved outcomes. 

In other words, it seeks to redress the misalignment of clinical and corporate risk under FFS. 

Does p4p work? 

The evidence for p4p improving patient outcomes is inconclusive. Some success is reported in primary care but less so in the hospital setting

This makes intuitive sense. Single practitioners are more likely to respond to financial signals than those providing care in larger, more complex organisations. If nothing else, precisely where is the incentive disbursed within the hospital hierarchy?   

A recent systematic review of p4p focusing on patient safety in hospital care conducted by a team of Australian researchers (including me) found just one out of five systemwide initiatives that have been evaluated demonstrated sustained improvement in outcomes: the Best Practice Tariff (BPT) for hip fracture care in England – a relatively simple scheme where hospitals receive additional payment when a hip fracture admission fulfils six best-practice criteria, and data are entered into the national hip fracture database (NHFD).  

According to the evidence, the hip fracture BPT has resulted in sustained, significant reductions in patient mortality, improved functional status as well as reduced length of hospital stay.  

We were surprised by this given the hitherto unimpressive track record of p4p in acute care

We also saw no evidence of unintended negative consequences, such as neglecting non-incentivised conditions and deleterious effect on patients belonging to minority groups. In fact, examples of positive spillover of p4p to non-participating hospitals and conditions have been observed. 

Minuscule financial impact … but does that matter? 

We were struck by the minuscule financial impact of all the initiatives on total hospital revenue, ranging from 0.01% to 1.2%. The BPTs’ impact was about 1% … not an amount that would give hospital managers sleepless nights. 

Why was the hip fracture BPT effective while the other initiatives weren’t? 

Two features distinguished the BPT: its’ simple design, and its’ thoughtful implementation, including an incremental rollout that emphasised ownership and engagement of the relevant clinical specialties: geriatricians and orthopaedic surgeons.  

Implementation science would suggest that how schemes are implemented across complex, adaptive organisations like hospitals systems plays a crucial role. In fact, the financial aspect of p4p may be a red herring, designed to focus attention on key practices and, crucially, formalise continuous data feedback to the relevant clinical teams. 

We concluded that, although the evidence was equivocal, the success of the hip fracture BPT suggested that it may be too soon to jettison p4p as a way to improve quality in hospital care.  

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P4p in Australia 

The main p4p initiative in Australian primary care is the Practice Incentives Program (PIP), introduced in 1998 and offering 13 incentives promoting various activities such as care quality prescribing, indigenous health, practice nursing, after-hours care and care in rural settings.  

A 2010 audit assessing procedural aspects of the PIP reported that $2.7 billion had been disbursed over the 12 years it had been operating. An evaluation of the initiative’s effectiveness is currently underway.   

Australia has three national p4p schemes covering hospital care. All three are administered by the Independent Hospital and Aged Care Pricing Authority (IHACPA) and cover public hospitals.  

  1. Withholding funding for episodes of care that includes one of 10 sentinel events (introduced in July 2017). 
  2. A funding reduction for episodes that include a hospital-acquired complication (HAC), adjusted for patient complexity (July 2018).   
  3. A funding reduction for avoidable hospital readmissions, also adjusted for episode complexity (July 2021). 

Independent evaluations of these policies are yet to be conducted (a study examining the HAC policy is currently underway).  

Modest funding reform 

It’s clear that business as usual won’t address the problems in Australian healthcare.  

It’s also clear that FFS isn’t going anywhere. The provider-dominated Strengthening Medicare Taskforce recommended exploring “blended funding models integrated with FFS” for general practice. It’s highly doubtful that other specialties would support a shift away from a remuneration model that serves their interests.  

The best we can hope for is policies that complement FFS. 

There’s a strong case for testing variants of the BPT approach. This would preserve FFS while encouraging better practice. It suits elective as well as non-elective services. It can be added to activity-based funding in the public system, where hospitals are paid based on a patient’s diagnosis, not individual services provided to treat that diagnosis.  

More importantly, with some design tweaks it could promote better practice and service integration in the private sector, especially if health insurance funds were to get on board. Initially the conditions targeted could include chronic low back pain, osteoarthritis, and cardiovascular problems such as acute coronary syndrome, stroke and angina. 

Implemented thoughtfully, and coupled with other arrangements such as the systematic collection of patient-reported outcomes, BPTs provide a modest, politically viable option to offset the problematic aspects of the current funding approach.  

It wouldn’t solve all the problems, but it might be a place to start.

Luke Slawomirski is a health economist and former clinician. He is a visiting lecturer in health policy at Imperial College London and has worked in health policy at state, Commonwealth and international levels – most recently for the Organisation for Economic Cooperation and Development (OECD). Currently he is completing a PhD with the Menzies Institute for Medical Research, University of Tasmania.  

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