Return on investment in pay for performance: a diabetes case study

With purchasers' increasing frustration with healthcare costs, more innovative approaches to performance-based reimbursement are in demand. Establishing pay-for-performance programs has become a popular strategy for reorienting payments from rewarding volume to rewarding adherence to performance measures. However, while performance on quality measures has improved, no reports exist about the return on investment (ROI) of pay-for-performance programs. This article compares the overall costs of implementing and maintaining a pay-for-performance program with the resulting cost trend savings for diabetes care for a health maintenance organization's (HMO's) population. The program was a five-year partnership (2000-2004) between a health plan and an independent practice association (IPA) for the HMO product. It reported performance scores on quality, patient satisfaction, and practitioner efficiency at the individual physician level. Physician performance reporting began in 1999, and payment for that performance began in 2002. The cost of the program was 1,150,000 dollars yearly. Savings for diabetes alone in 2003, the first post-intervention year, were 1,894,471dollars. Second-year (2004) savings against the two-year rolling trend were 2,923,761 dollars. For 2003, the resulting ROI was 1.6:1, and for 2004, it was 2.5:1. To our knowledge, this article is the first report of a positive ROI for an HMO-based pay-for-performance program, and it begins to answer the question of whether the investment in such programs is worth the effort.