THE COST‐EFFECTIVENESS OF USING FINANCIAL INCENTIVES TO IMPROVE PROVIDER QUALITY: A FRAMEWORK AND APPLICATION

Despite growing adoption of pay‐for‐performance (P4P) programmes in health care, there is remarkably little evidence on the cost‐effectiveness of such schemes. We review the limited number of previous studies and critique the frameworks adopted and the narrow range of costs and outcomes considered, before proposing a new more comprehensive framework, which we apply to the first P4P scheme introduced for hospitals in England. We emphasise that evaluations of cost‐effectiveness need to consider who the residual claimant is on any cost savings, the possibility of positive and negative spillovers, and whether performance improvement is a transitory or investment activity. Our application to the Advancing Quality initiative demonstrates that the incentive payments represented less than half of the £13m total programme costs. By generating approximately 5200 quality‐adjusted life years and £4.4m of savings in reduced length of stay, we find that the programme was a cost‐effective use of resources in its first 18 months. Copyright © 2013 John Wiley & Sons, Ltd.