• Article

Financial gains and risks in pay-for-performance bonus algorithms

Considerable attention has been given to evidence-based process indicators associated with quality of care, while much less attention has been given to the structure and key parameters of the various pay-for-performance (P4P) bonus and penalty arrangements using such measures. In this article we develop a general model of quality payment arrangements and discuss the advantages and disadvantages of the key parameters. We then conduct simulation analyses of four general P4P payment algorithms by varying seven parameters, including indicator weights, indicator intercorrelation, degree of uncertainty regarding intervention effectiveness, and initial baseline rates. Bonuses averaged over several indicators appear insensitive to weighting, correlation, and the number of indicators. The bonuses are sensitive to disease manager perceptions of intervention effectiveness, facing challenging targets, and the use of actual-to-target quality levels versus rates of improvement over baseline.


Cromwell, J., Drozd, E., Smith, K., & Trisolini, M. (2007). Financial gains and risks in pay-for-performance bonus algorithms. Health Care Financing Review, 29(1), 5-14.