The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Design and Impact of Physician Payment Incentives: Theory and Evidence

  • Douglas A. Conrad
Reference work entry


This article delineates a broad conceptual framework for predicting physician behavioral response to financial incentives. The framework views incentives within a two-tiered hierarchy: (1) private health plan or public program payments to the provider organization, e.g., the medical group practice, or integrated delivery system (external incentives); (2) method of compensation to the individual within the provider organization (internal incentives.

Within that framework several dimensions of physician behavior and outcomes are examined – total per capita payments for the physician’s panel of patients, quality of services, and physician productivity, in order to provide an integrated view of physician response to financial incentives. Next, a set of propositions are derived broadly from the conceptual framework. Those propositions are evaluated broadly by comparison to the extant empirical evidence. The article concludes by discussing the implications of the empirical evidence for theory and practice pertaining to physicians’ response to payment incentives.

In order to fundamentally move payment models from the dominant fee-for-service structure, public policymakers and private health plans must create a “burning platform”, in which neither providers nor health insurers perceive that continued reliance on FFS is an option. To catalyze this revolution in incentives, purchasers (public programs, employers, and other sponsors of health plans) must insist on disruptive change toward value-based, rather than volume-based, payment. Payment incentive design will influence care delivery – precisely because different delivery models (e.g., small independent practices, independent practice associations, multi-specialty medical groups, and integrated delivery systems) have distinct capabilities for assuming and managing population health risk. Those differences highlight the importance of adjusting payment levels for differences in population health risk, but should not be used as a reason to delay implementation of value-based payment reform.


Incentives Payment reform Pay-for-performance programs Value-based payment 

JEL Classification

I1 I11 I13 
This is a preview of subscription content, log in to check access.


  1. Amundson, G., L.I. Solberg, M. Reed, E.M. Martini, and R. Carlson. 2003. Paying for quality: Compliance with tobacco cessation guidelines. Joint Commission Journal on Quality and Safety 29: 59–65.CrossRefGoogle Scholar
  2. Arrow, K., A. Auerbach, J. Bertko, M.S. Brownlee, et al. 2009. Toward a 21st century health care system: Recommendations for health care reform. Annals of Internal Medicine 150: 493–495.CrossRefGoogle Scholar
  3. Avery, G., and J. Schultz. 2007. Regulation, financial incentives, and the production of quality. American Journal of Medical Quality 22(4): 265–273.CrossRefGoogle Scholar
  4. Baker, L., K. Bundorf, A. Royalty, C. Galvin, and K. McDonald. 2007. Consumer-oriented strategies for improving health benefit design: An overview. Agency for Healthcare Research and Quality Report, No. 07–0067. Rockville.Google Scholar
  5. Beaulieu, N.D., and D.R. Horrigan. 2005. Putting smart money to work for quality improvement. Health Services Research 40: 1318–1334.CrossRefGoogle Scholar
  6. Berwick, D.M. 2011. Launching accountable care organizations: The proposed rule for the medicare shared savings program. New England Journal of Medicine 364(16), e32.CrossRefGoogle Scholar
  7. Burns, M.E. and M.H. Bailit. 2012. Bundled payment across the U.S. today: status of implementation and operational findings. HCI3 Improving Incentives Issue Brief, April, 1–16. Available at Accessed 20 Nov 2012.
  8. Campbell, S., D. Reeves, E. Kontopantelis, E. Middleton, B. Sibbald, and M. Roland. 2007. Quality of primary care in England with the introduction of pay for performance. New England Journal of Medicine 357(2): 181–190.CrossRefGoogle Scholar
  9. Campbell, S.M., D. Reeves, E. Kontopantelis, B. Sibbald, and M. Roland. 2009. Effects of pay for performance on the quality of primary care in England. New England Journal of Medicine 361: 368–378.CrossRefGoogle Scholar
  10. Chaix-Couturier, C., I. Durand-Zaleski, D. Jolly, and P. Durieux. 2000. Effects of financial incentives on medical practice: Results from a systematic review of the literature and methodological issues. International Journal for Quality in Health Care 12(2): 133–142.CrossRefGoogle Scholar
  11. Chernew, M. 2010. Editorial: Bundled payment systems: Can they be more successful this time? Health Services Research 45(5, Part I): 1141–1147.CrossRefGoogle Scholar
  12. Christianson, J.B. and D. Conrad. 2011. Provider payment and incentives. In The oxford handbook of health economics, eds. S. Glied and P.C. Smith, pp. 624–648. Oxford and New York: Oxford University Press.Google Scholar
  13. Christianson, J.B., S. Leatherman, and K. Sutherland. 2008. Lessons from evaluations of purchaser pay-for-performance programs: A review of the evidence. Medical Care Research and Review 65(6 Suppl.): 5S–35S.CrossRefGoogle Scholar
  14. Chung, R.S., H.O. Chernicoff, K.A. Nakao, R.C. Nickel, and A.P. Legorreta. 2003. A quality-driven physician compensation model: Four-year follow-up study. Journal for Healthcare Quality 25: 31–37.CrossRefGoogle Scholar
  15. Chung, S., L.P. Palaniappan, L.M. Trujillo, H.R. Rubin, and H.S. Luft. 2010a. Effect of physician-specific pay-for-performance incentives in a large group practice. American Journal of Managed Care 16: E35–E42.Google Scholar
  16. Chung, S., L. Palaniappan, E. Wong, H. Rubin, and H. Luft. 2010b. Does the frequency of pay-for-performance payment matter? Experience from a randomized trial. Health Services Research 45: 553–564.CrossRefGoogle Scholar
  17. Colla, C.H., D.E. Wennberg, E. Meara, J.S. Skinner, D. Gottlieb, V.A. Lewis, C.M. Snyder, and E.S. Fisher. 2012. Spending differences associated with the medicare physician group practice demonstration. Journal of the American Medical Association 308(10): 1015–1023.CrossRefGoogle Scholar
  18. Congleton, R.D. 1991. The economic role of a work ethic. Journal of Economic Behavior and Organization 15: 365–385.CrossRefGoogle Scholar
  19. Conrad, D.A. 2009. Incentives for health care improvement. In Performance measurement for health system improvement: Experience, challenges, and prospects, eds. P.C. Smith, E. Mossialos, I. Papinicolas and S. Leatherman, pp. 582–612. The cambridge health economics, policy, and management series. London: Cambridge University Press.Google Scholar
  20. Conrad, D.A. and J.B. Christianson. 2004. Penetrating the ‘black box’: Financial incentives for enhancing the quality of physician services. Medical Care Research and Review, 61(3, Special Supplement), 37S–68S.Google Scholar
  21. Conrad, D.A. and L. Perry. 2009. Quality-based financial incentives in health care: Can we improve quality by paying for it? Annual Review of Public Health, 30, 357–371.Google Scholar
  22. Conrad, D.A., A. Sales, S.Y. Liang, A. Chaudhuri, C. Maynard, L. Pieper, L. Weinstein, D. Gans, and N. Piland. 2002. The impact of financial incentives on physician productivity in medical groups. Health Services Research 37(4): 885–906.CrossRefGoogle Scholar
  23. Damberg, C.L., K. Raube, S.S. Teleki, and E. dela Cruz. 2009. Taking stock of pay-for-performance: A candid assessment from the front lines. Health Affairs 28(2): 517–525.CrossRefGoogle Scholar
  24. Davis, K., and S. Guterman. 2007. Rewarding excellence and efficiency in Medicare payments. The Milbank Quarterly 85(3): 449–468.CrossRefGoogle Scholar
  25. de Brantes, F.S., and B.G. D’Andrea. 2009. Physicians respond to pay-for-performance incentives: Larger incentives yield greater participation. American Journal of Managed Care 15(5): 305–310.Google Scholar
  26. de Brantes, F., A. Rastogi, and C.M. Soerensen. 2011. Episode of care analysis reveals sources of variations in costs. American Journal of Managed Care 17(10): e383–e392.Google Scholar
  27. Deci, E.L., and R.M. Ryan. 1985. Intrinsic motivation and self-determination in human behavior. New York: Plenum.CrossRefGoogle Scholar
  28. Deci, E.L., R. Koestner, and R.M. Ryan. 1999. A meta-analytic review of experiments examining the effects of extrinsic rewards on intrinsic motivation. Psychological Bulletin 125(6): 627–668.CrossRefGoogle Scholar
  29. Eggleston, K. 2005. Multitasking and mixed systems for provider payment. Journal of Health Economics 24: 211–223.CrossRefGoogle Scholar
  30. Ellis, R.P., and T.G. McGuire. 1990. Optimal payment systems for health services. Journal of Health Economics 9: 375–396.CrossRefGoogle Scholar
  31. Fendrick, A.M., and M.E. Chernew. 2009. Value-based insurance design: Maintaining a focus on health in an era of cost containment. American Journal of Managed Care 15(6): 338–343.Google Scholar
  32. Frey, B.S. 1997. On the relationship between intrinsic and extrinsic work motivation. International Journal of Industrial Organization 15: 427–439.CrossRefGoogle Scholar
  33. Frolich, A., J.A. Talavera, P. Broadhead, and R.A. Dudley. 2007. A behavioral model of clinician responses to incentives to improve quality. Health Policy 80: 179–193.CrossRefGoogle Scholar
  34. Gaynor, M., and P. Gertler. 1995. Moral hazard and risk-spreading in partnerships. RAND Journal of Economics 26(4): 591–613.CrossRefGoogle Scholar
  35. Gillam, S.J., A.N. Siriwardena, and N. Steel. 2012. Pay-for-performance in the United Kingdom: Impact of the quality and outcomes framework – a systematic review. Annals of Family Medicine 10(5): 461–468.CrossRefGoogle Scholar
  36. Gilmore, A.S., Y.X. Zhao, N. Kang, K.L. Ryskina, A.P. Legorreta, D.A. Taira, and R.S. Chung. 2007. Patient outcomes and evidence-based medicine in a preferred provider organization setting: A six-year evaluation of a physician pay-for-performance program. Health Services Research 42: 2140–2159.CrossRefGoogle Scholar
  37. Ginsburg, P.B. 2012. Fee-for-service will remain a feature of major payment reforms, requiring more changes in Medicare physician payment. Health Affairs 31(9): 1977–1983.CrossRefGoogle Scholar
  38. Ginsburg, P., H.H. Pham, K. McKenzie., and A. Milstein. 2007. Distorted payment system undermines business case for health quality and efficiency gains. Issue Brief No. 112. Center for Studying Health System Change.Google Scholar
  39. Guterman, S., K. Davis, S. Schoenbaum, and A. Shih. 2009. Using Medicare policy to transform the health system: A framework for improving performance. Health Affairs 28(2): w238–w250.CrossRefGoogle Scholar
  40. Hadley, J., J. Reschovsky, C. Corey, and S. Zuckerman. 2009–2010. Medicare fees and the volume of physicians’ services. Inquiry, 46(4): 372–390.Google Scholar
  41. Harris, K.M. 2002. Can high quality overcome consumer resistance to restricted provider access? Evidence from a health plan choice experiment. Health Services Research 37(3): 551–571.CrossRefGoogle Scholar
  42. Hillman, A.L., W.P. Welch, and M.V. Pauly. 1992. Contractual arrangements between HMOs and primary care physicians: Three-tiered HMOs and risk pools. Medical Care 30(2): 136–148.CrossRefGoogle Scholar
  43. Holmstrom, B., and P. Milgrom. 1991. Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design. Journal of Law, Economics, and Organization 7(Special Issue): 24–52.CrossRefGoogle Scholar
  44. Houle, S.K.D., F.A. McAlister, C.A. Jackevicius, A.W. Chuck, and R.T. Tsuyuki. 2012. Does performance-based remuneration for individual health care practitioners affect patient care? A systematic review. Annals of Internal Medicine 157(12): 889–899.CrossRefGoogle Scholar
  45. Hussey, P.S., M.S. Ridgely, and M.B. Rosenthal. 2011. The PROMETHEUS bundled payment experiment: Slow start shows problems in implementing new payment models. Health Affairs 30(11): 2116–2124.CrossRefGoogle Scholar
  46. Jack, W. 2005. Purchasing health care services from providers with unknown altruism. Journal of Health Economics 24: 73–93.CrossRefGoogle Scholar
  47. Kahneman, D., and A. Tversky. 1979. Prospect theory: An analysis of decision under risk. Econometrica 47: 263–292.CrossRefGoogle Scholar
  48. Kahneman, D., J.L. Knetsch, and R.H. Thaler. 1986. Fairness as a constraint in profit seeking: Entitlements in the market. American Economic Review 76(4): 728–741.Google Scholar
  49. Kantarevic, J., B. Kralj, and D. Weinkauf. 2011. Enhanced fee-for-service model and physician productivity: Evidence from family health groups in Ontario. Journal of Health Economics 30: 99–111.CrossRefGoogle Scholar
  50. Kiefe, C.I., J.J. Allison, O.D. Williams, S.D. Person, M.T. Weaver, and N.W. Weissman. 2001. Improving quality improvement using achievable benchmarks for physician feedback: A randomized controlled trial. Journal of the American Medical Association 285(22): 2871–2879.CrossRefGoogle Scholar
  51. Kirschner, K., J. Braspenning, J.E. Annelies Jacobs, and R. Grol. 2012. Design choices made by target users for a pay-for-performance program in primary care: An action research approach. BMC Family Practice 13: 25. Available at: (accessed 20 February 2013).CrossRefGoogle Scholar
  52. Larsen, D.L., W. Cannon, and S. Towner. 2003. Longitudinal assessment of a diabetes care management system in an integrated health network. Journal of Managed Care Pharmacy 9: 552–558.CrossRefGoogle Scholar
  53. Larson, B.K., A.D. Van Citters, S.A. Kreindler, K.L. Carluzzo, J.N. Gbemudu, F.M. Wu, E.C. Nelson, S.M. Shortell, and E.S. Fisher. 2012. Insights from transformations underway at four Brookings-Dartmouth accountable care organization pilot sites. Health Affairs 31(11): 2395–2406.CrossRefGoogle Scholar
  54. Lee, T.H., A. Bothe, and G.D. Steele. 2012. How Geisinger structures its physician compensation to support improvements in quality, efficiency, and volume. Health Affairs 31(9): 2068–2073.CrossRefGoogle Scholar
  55. Levin-Scherz, J, N. DeVita, and J. Timbie. 2006. Impact of pay-for-performance contracts and network registry on diabetes and asthma HEDIS® measures in an integrated delivery network. Medical Care Research and Review, 63(1, Special Supplement), 14S–28S.Google Scholar
  56. McGlynn, E.A. 2007. Intended and unintended consequences: What should we really worry about? Medical Care 45(1): 3–5.CrossRefGoogle Scholar
  57. McGuire, T.G. 2000. Physician agency. In Handbook of health economics, Vol. 1A, eds. A.J. Culyer and J.P. Newhouse, pp. 461–536. Amsterdam: Elsevier.Google Scholar
  58. McNeil, B.J., S.J. Pauker, H.C. Sox Jr., and A. Tversky. 1982. On the elicitation of preferences for alternative therapies. New England Journal of Medicine 306(21): 1259–1262.CrossRefGoogle Scholar
  59. Mehrotra, A., M.E.S. Sorbero, and C.L. Damberg. 2010. Using the lessons of behavioral economics to design more effective pay-for-performance programs. American Journal of Managed Care 16(7): 497–503.Google Scholar
  60. Miller, H.D. 2007. Creating payment systems to accelerate value-driven health care: Issues and options for policy reform. Washington, DC: The Commonwealth Fund.Google Scholar
  61. Mitchell, J.M. 2008. Utilization trends for advanced imaging procedures: Evidence from individuals with private insurance coverage in California. Medical Care 46(5): 460–466.CrossRefGoogle Scholar
  62. Newhouse, J.P. 1998. Risk adjustment: Where are we now? Inquiry 35(2): 122–131.Google Scholar
  63. Pearson, S.D., E.C. Schneider, K.P. Kleinman, K.L. Coltin, and J.A. Singer. 2008. The impact of pay-for-performance on health care quality in Massachusetts: 2001–2003. Health Affairs 27(4): 1167–1176.CrossRefGoogle Scholar
  64. Petersen, L.A., L.D. Woodard, T. Urech, C. Daw, and S. Sookanan. 2006. Does pay-for-performance improve the quality of health care? Annals of Internal Medicine 145(4): 265–272.CrossRefGoogle Scholar
  65. Pourat, N., T. Rice, M. Tai-Seale, G. Bolan, and J. Nihalani. 2005. Association between physician compensation methods and delivery of guideline-concordant STD care: Is there a link? American Journal of Managed Care 11(7): 426–432.Google Scholar
  66. Prendergast, C.R. 1999. The provision of incentives in firms. Journal of Economic Literature 37: 7–63.CrossRefGoogle Scholar
  67. Reinhardt, U.E. 2011. The many different prices paid to providers and the flawed theory of cost shifting: Is it time for a more rational all-payer system? Health Affairs 30(11): 2125–2133.CrossRefGoogle Scholar
  68. Robinson, J.C. 2001. Theory and practice in the design of physician payment incentives. Milbank Quarterly 79(2): 149–177.CrossRefGoogle Scholar
  69. Robinson, J.C., S.M. Shortell, D.R. Rittenhouse, S. Fernandes-Taylor, R.R. Gillies, and L.P. Casalino. 2009. Quality-based payment for medical groups and individual physicians. Inquiry 46: 172–181.CrossRefGoogle Scholar
  70. Rosenthal, M.B., and R.A. Dudley. 2007. Pay-for-performance: Will the latest payment trend mprove care? Journal of the American Medical Association 297(7): 740–744.CrossRefGoogle Scholar
  71. Rosenthal, M.B., and R.G. Frank. 2006. What is the empirical basis for paying for quality in health care? Medical Care Research and Review 63(2): 135–157.CrossRefGoogle Scholar
  72. Rosenthal, M.B., R.G. Frank, J.L. Buchanan, and A.M. Epstein. 2002. Transmission of financial incentives to physicians by intermediary organizations in California. Health Affairs 21(4): 197–205.CrossRefGoogle Scholar
  73. Rosenthal, M.B., R.G. Frank, Z. Li, and A.M. Epstein. 2005. Early experience with pay-for-performance: From concept to practice. Journal of the American Medical Association 294(14): 1788–1793.Google Scholar
  74. Rosenthal, M.B., B.E. Landon, K. Howitt, H.R. Song, and A.M. Epstein. 2007. Climbing up the pay-for-performance learning curve: Where are the early adopters now? Health Affairs 26(6): 1674–1682.CrossRefGoogle Scholar
  75. Scott, A., P. Sivey, D. Ait Ouakrim, L. Willenberg, L. Naccarella, J. Furler, and D. Young. 2011. The effect of financial incentives on the quality of health care provided by primary care physicians (Review). Cochrane Database of Systematic Reviews, Issue 9. Article No.: CD008451. doi: 10.1002/14651858.CD008451.pub2.Google Scholar
  76. Sinaiko, A.D. 2011. How do quality information and cost affect patient choice of provider in a tiered network setting? Results from a survey. Health Services Research 46(2): 437–456.CrossRefGoogle Scholar
  77. Song, Z., D.G. Safran, B.E. Landon, M.B. Landrum, Y. He, R.E. Mechanic, M.P. Day, and M.E. Chernew. 2012. The ‘Alternative Quality Contract’, based on a global budget, lowered medical spending and improved quality. Health Affairs 31(8): 1885–1894.CrossRefGoogle Scholar
  78. Sturm, H., A. Austvoll-Dahlgren, M. Aaserud, A.D. Oxman, C. Ramsey, A. Vernby, and J.P. Kosters. 2007. Pharmaceutical policies: Effects of financial incentives for prescribers. Cochrane Database of Systematic Reviews 18(3): CD006731.Google Scholar
  79. Sutton, M., R. Elder, B. Guthrie, and G. Watt. 2010. Record rewards: The effects of targeted quality incentives on the recording of risk factors by primary care providers. Health Economics 1: 1–13.Google Scholar
  80. Swedlow, A., G. Johnson, N. Smithline, and A. Milstein. 1992. Increased costs and rates of use in the California workers’ compensation system as a result of self-referral by physicians. New England Journal of Medicine 327(21): 1502–1506.CrossRefGoogle Scholar
  81. Van Herck, P., D. De Smedt, L. Annemans, R. Remmen, M.B. Rosenthal, and W. Sermeus. 2010. Systematic review: Effects, design choices, and context of pay-for-performance in health care. BMC Health Services Research, 10: 247.Google Scholar

Copyright information

© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • Douglas A. Conrad
    • 1
  1. 1.