Skip to main content

Advanced Search

Advanced Search

Current Filters

Filter your query

Publication Types



Newsletter Article


Medicaid Pay-for-Performance: Ongoing Challenges, New Opportunities

Please take a moment to answer this six-question survey to help us improve the States in Action newsletter. We appreciate and welcome your feedback.

Summary: With pay-for-performance (P4P) programs becoming common among private health plans, more states are considering ways to integrate both financial and non-financial incentives into their Medicaid programs. Guided by CMS, states are taking a number of different approaches toward Medicaid P4P—overcoming significant challenges along the way. This profile reviews some of those challenges, highlights a few state strategies, and describes new trends in the use of quality incentives.

As states continue to struggle with increasing health care costs and wide variation in health plan and physician performance, more and more are implementing "pay-for-performance" (P4P) incentive programs to reward care that meets evidence-based quality measures. The Centers for Medicare and Medicaid Services (CMS) defines P4P as "the use of payment methods and other incentives to encourage quality improvement and patient-focused high-value care." [1] A review of states that have implemented P4P in Medicaid managed care found that the top five goals were to: 1) reward high-quality care; 2) reduce variation in patterns of care; 3) improve performance on specific measures; 4) support broader quality strategies, including value-based purchasing; and 5) improve access to care and support for the safety net. [2]

Across the private and public sectors, there are some 115 P4P programs in the U.S., representing over 50 million lives. [3] P4P programs can take a wide variety of forms. A study conducted by the Center for Health Care Strategies identified the main approaches as either monetary (rewarding high performers with a flat bonus or premium, and/or penalizing poor performers with premium withholds or other financial penalties) or non-monetary (rewarding health plans with more enrollees through "auto-assignment—default enrollment if the individual does not specify a preference—or public reporting of comparative quality information). [4]

P4P began in the private sector but quickly crossed over to the public sector—a reflection of the growing interest in integrating quality and efficiency into health care purchasing, and reducing overuse and underuse of services. Many see P4P as a tool to improve quality by better aligning payment with performance.

Beginning in 1991 with Wisconsin, states have been utilizing P4P in Medicaid as a way to "incentivize" the health plans with whom they contract to improve their performance. More recently, models are emerging by which states are focusing the incentives directly on providers, both physician practices and hospitals. Some states are considering innovative models that would provide incentives for nursing homes and other institutional settings, as well as for providers who address racial and ethnic disparities in care.

A recent survey conducted by IPRO, a quality measurement and improvement organization, and the Kuhmerker Consulting Group found that over half of state Medicaid programs now operate one or more pay-for-performance programs. Within the next five years, more than 85 percent of states are on track to be operating such programs. Efforts thus far have focused on children, adolescents, and women's health, but there is a trend toward using incentives to promote chronic disease management.[5]

As many states have already learned, there are a number of challenges involved in establishing a P4P program. A report by the Agency for Healthcare Research and Quality (AHRQ) identified four phases of this process and related challenges for both private and public programs. [6] The phases include:

  • Contemplation: Is the community ready? How many purchasers should be involved? At what point should providers be engaged?
  • Design: Will we target hospitals or physicians? If physicians, primary care or specialists? Individual physicians or practice groups? Individual hospitals or hospital systems? Should providers be given bonuses (carrots) or penalties (sticks)? Should performance thresholds be relative or absolute? Where will the state come up with the money for bonuses? Financial or non-financial incentives? What data should be used?
  • Implementation: How will providers' concerns be addressed? Will P4P be tied to other benefit design strategies such as tiered networks?
  • Evaluation: How will we learn whether the program is working? What might be the unintended consequences?

A significant amount of time and resources go into designing a P4P program, collecting the necessary data, getting buy-in from providers and other stakeholders, and evaluating results. Additional resources are needed for these incentive payments.

Despite these challenges, by 2006, 25 states had implemented some form of Medicaid P4P in managed care, fee-for-service, or primary care case management plans. [7] A number of states got a head start on the process by deciding to use established performance measures to develop baselines and goals for providers. The National Quality Forum (NQF), the National Committee for Quality Assurance (NQCA), the Joint Commission on Accreditation of Healthcare Organizations (JCAHO), the Hospital Quality Alliance (HQA), and the Leapfrog Group are the most common sources of nationally recognized measures used in P4P programs.

With new interest in rewarding performance at the provider level, states are also looking at the Ambulatory Quality Alliance's (AQA) set of 26 "starter" measures that can apply to all physicians, addressing care in areas including prevention, heart disease, depression, diabetes, asthma, and prenatal care as well as overuse and underuse of services. A number of the AQA measures, which were developed by an interdisciplinary team that included physicians, consumers, purchasers, health plans, and other stakeholders, are based on existing standards, such as the Health Plan Employer Data and Information Set (HEDIS) developed by NCQA. CMS has also released a new resource, The Guide to Quality Measures: A Compendium, Volume I, which sorts quality measures by target population, setting of care, disease or condition, and measure type.

State P4P Activities
The following descriptions exemplify the variation in Medicaid P4P programs. We highlight several states that are profiled in the Center for Health Care Strategies' forthcoming report, "Physician Pay-for-Performance in Medicaid: A Guide for States."

To give a sense of the diversity in Medicaid P4P programs, we include the following: a state with a long history of applying P4P to health plans; a state that has more recently developed a P4P program targeting physician practices; and, finally, a state that is taking a new approach to implement P4P among institutional settings. Not highlighted here, but gaining momentum, are programs targeting hospitals, through strategies such as putting disproportionate share hospital payments at risk.

Incentives for Health Plans: New York
New York State's P4P program, The Quality Incentive, has been in place since 2002, providing bonuses and performance-based auto-assignments to health plans contracting with Medicaid. Using HEDIS (and HEDIS-like) measures, the state compares the current year's data with data from the two previous years to come up with a quality benchmark. It also uses the Consumer Assessment of Healthcare Providers and Systems (CAHPS) survey to score the health plans on patient satisfaction and compare them using a statewide benchmark. These two scores are combined to create what is called the "quality incentive score." The highest score achievable is 150 points (10 points per measure), and there are five different incentive levels for which a plan can qualify. In 2005, the measures included breast cancer screening, postpartum visits, diabetes and high blood pressure control, use of appropriate medication for persons with asthma, and follow-up after hospitalization for mental illness. The maximum bonus payment is 3 percent of the premium.

Over the course of the four-year program, the state has paid bonuses in the amount of $71.5 million, with the bulk of that—approximately $51 million—paid in 2006. In addition, the past year saw four plans receiving the full 3 percent bonus, and one plan receiving over $10 million. Eight plans, however, received no bonus payment. In terms of the program's effect on quality, the state has seen an increase in enrollment in plans that are identified as high quality, and a number of managed care plans have created performance programs that parallel The Quality Incentive with their own providers. [8]

The Commonwealth Fund is supporting a qualitative and quantitative analysis of New York's incentive plan. Based on early results, the incentives seem to be having an effect on the quality of care. For example, the percent of women who had appropriate postpartum care rose from 49 percent of Medicaid enrollees before the quality incentives were in place to 68 percent afterward.

In April 2006, New York issued a request for applications for P4P demonstration projects that provide incentives directly to primary care providers for promoting patient safety and quality of care in Medicaid managed care.

Incentives for Physicians: Pennsylvania
When Pennsylvania established a disease management (DM) component in its "Access Plus" Medicaid primary care case management system, it decided to create incentives to encourage physicians to participate in various DM processes. The Access Plus program, which started in March 2006, covers approximately 280,000 individuals in 42 counties and provides DM services for asthma, diabetes, chronic heart failure, chronic obstructive pulmonary disease, and coronary artery disease. There are a number of incentives, each with its own goal, schedule, and payment amount:

  • Physicians receive a one-time payment of $200 just for participating in Access Plus.
  • They may receive an annual $17 per-patient bonus for each patient who takes necessary medications such as beta blockers, aspirin, and controller medications for asthma.
  • Providers who proactively contact high-risk patients who are eligible for case management and encourage them to enroll receive a one-time payment of $40 per enrollee.
  • Physicians who complete a chronic care feedback form that collects data on patients' medicines, vital signs, lab results, goals, and educational needs receive $60 per form.
  • Finally, providers who locate and provide contact information needed by chronic care patients (when requested by the DM vendor) receive a $30 per-patient fee for each instance in which the information is provided.

About 350 of the 2,767 Access Plus network primary care providers have participated in the incentive program since it was implemented.

Incentives for Nursing Homes: Oklahoma
The Oklahoma Health Care Authority (OHCA), which oversees the state's Medicaid program, has been charged with developing a tiered reimbursement system for nursing homes that contract with the program. Facilities will be measured according to quality of life, staff turnover, patient satisfaction, patient acuity, and care expenditures. This innovative program will require a set of appropriate statewide quality indicators, a formidable task on which the OHCA is working with the assistance of long-term care experts and other stakeholders.

Minnesota and Iowa are currently developing similar programs, which will award points to nursing facilities based on seven performance measure categories. Categories will include staff turnover and retention rates, immunization rates, and other quality indicators using the Minimum Data Set as well as the number of beds in single rooms.

Future Challenges
Some providers question the ability of P4P to improve quality and efficiency or curb rising health care costs, noting that offering incentives to individual providers may lead to "gaming" the system. They also argue that the incentives are generally too small to make a difference, and that developing meaningful incentives is more art than science.

Yet the promise of influencing health plan and provider performance through incentives is prompting more states to adopt P4P programs. To assist in the process, The Commonwealth Fund and The Robert Wood Johnson Foundation are supporting the Center for Health Care Strategies (CHCS) in its development of a purchasing institute for states. The Pay-for-Performance Purchasing Institute will provide technical assistance from CHCS and other experts to help states design, implement, and test financial or non-financial incentives using performance measures and other strategies. The seven states currently involved—Arizona, Connecticut, Idaho, Massachusetts, Missouri, Ohio, and West Virginia—were chosen through a competitive process.

Many argue that current P4P programs focus on populations for which standardized quality measures already exist, including pregnant women, children, and those with more common chronic illnesses. A particular challenge for states will be to design incentive programs that target high-cost populations, including the elderly and/or disabled. How states devise valid quality measures for long-term care, mental health, and other high-cost populations and conditions will be followed closely by researchers and policymakers alike. Iowa, for example, developed quality measures targeted on specific areas, including follow-up after hospitalization for mental illness, rates of primary care provider turnover, and adult access to preventive care services.

The extent to which P4P can actually improve care in a state's Medicaid program is tied to the state's willingness to develop standards, measure quality, and tie performance to real consequences. For example, beginning in FY2008, Massachusetts will link hospital rate increases to reductions in racial and ethnic disparities, among other quality indicators, as mandated by the health care reform legislation passed in April 2006. Stakeholders will surely be watching how the Massachusetts Executive Office of Health and Human Services will set the benchmarks.

States can also learn from efforts to encourage and reward clinical quality and greater efficiency in the Medicare program. An Institute of Medicine report recommended that Medicare gradually phase in a pay-for-performance system.[9] In 2005, CMS initiated the Physician Group Practice Demonstration, in which participating practices can earn extra payments for improving the quality and efficiency of care delivered to Medicare fee-for-service beneficiaries. The demonstration focuses on 32 measures related to both preventive care and chronic conditions. Because the program must be budget neutral, the 10 participating physician groups receive bonus payments only if savings are elicited through improvements in care coordination—a consideration that has significant implications for Medicaid programs. A Commonwealth Fund evaluation found that the practices responded to the incentives, using them to expand data systems, care management programs, coordination-of-care efforts, and other interventions. [10] A forthcoming Fund report discusses lessons from this demonstration and other efforts to enhance value in Medicare. [11]

[1] Center for Medicaid and State Operations, CMS, State Health Official Letter #06-003. April 6, 2006.
[2] L. Duchon and V. Smith, Quality Performance Measurement in Medicaid and SCHIP: Results of a 2006 National Survey of State Officials. Health Management Associates for National Association of Children's Hospitals, September 2006.
[3] Med-Vantage, December 2005.
[4] K. Llanos and J. Rothstein, "Physician Pay-for-Performance in Medicaid: A Guide for States," Center for Health Care Strategies with M. B. Dyer, Bailit Health Purchasing, LLC. Publication forthcoming.
[5] "Pay-for-Performance in State Medicaid Programs: A Quantitative and Qualitative Survey of State Medicaid Directors and Programs," K. Kuhmerker and T. Hartman, The Commonwealth Fund and IPRO, Publication forthcoming.
[6] Pay for Performance: A Decision Guide for Purchasers. Agency for Healthcare Research and Quality, April 2006.
[7] L. Duchon and V. Smith, Health Management Associates, 2006.
[8] P. J. Roohan, "Implementation of Pay for Performance and Value Based Purchasing Programs to Improve Quality." New York State Department of Health, June 20, 2006.
[9] Institute of Medicine, Rewarding Provider Performance: Aligning Incentives in Medicare, Washington, D.C.: National Academies Press, 2006.
[10] M. Trisolini, G. Pope, J. Kautter, and J. Aggarwal, Medicare Physician Group Practices: Innovations in Quality and Efficiency, The Commonwealth Fund, December 2006
[11] S. Guterman and M. Serber, "Enhancing Value in the Medicare Program: Demonstrations and Other Initiatives to Improve Medicare," New York: The Commonwealth Fund, Publication forthcoming.

For More Information
Contact: Karen Llanos and Joanie Rothstein, Center for Health Care Strategies,, (609) 528-8400, or
Lisa Duchon, Health Management Associates,, (215) 587-4927.

Publication Details