The Effect of Financial Incentives on Physician Performance: Evidence from a Pay-For-Performance Program

Healthcare pay-for-performance programs use financial incentives to influence provider behavior toward improving quality of care and reducing costs. However, little is known about their efficacy. Motivated by theoretical considerations from physician agency, it is predicted larger amounts of financial incentive will be more effective in improving measureable physician performance and improving patient outcomes. Using physician and patient-level panel data, the following study evaluates financial incentive effects in several key performance areas among physicians in a provider-based, pay-for-performance program. There is suggestive evidence that financial incentives modestly improve measureable physician performance in technological infrastructure and clinical effectiveness quality domains. Also, it is suggested financial incentives improve diabetic outcomes in a primary care setting, particularly among physicians with lower baseline performance.