Pay-for-Performance: Is Medicare a Good Candidate?

38 Pages Posted: 26 Feb 2006 Last revised: 4 Nov 2007

Date Written: December 14, 2006


Private and public third-party payers - particularly Medicare - are experimenting with financial incentives that reward health care providers for delivering recommended medical care. While "pay for performance" (P4P) has the potential to improve quality in some instances, it can also result in no effect, higher expenditures, inequities between providers, reduced access to care, or even low-quality and inappropriate care for outliers. Despite proponents' desire to have scientific evidence guide clinical practice, scientific evidence on the efficacy of P4P is mixed, while evidence of cost-effective is nonexistent. Medicare faces additional challenges beyond those confronting private thirdparty purchasers. Congress can realize the potential of P4P, while reducing the likelihood of harm, by confining P4P to Medicare Advantage plans. Congress and private purchasers could also experiment with patient-focused financial incentives, which are transparent and allow patients and their doctors to deviate from treatment guidelines when it is in the patient's interest.

Keywords: Medicare, pay for performance, quality based purchasing, health care quality, Medicare Advantage, comorbidity, clinical practice guidelines, evidence-based medicine, health care financing, medical care

JEL Classification: I00, I10, I11, I12, I18, I19

Suggested Citation

Cannon, Michael F., Pay-for-Performance: Is Medicare a Good Candidate? (December 14, 2006). Available at SSRN: or

Michael F. Cannon (Contact Author)

Cato Institute ( email )

1000 Massachusetts Avenue, N.W.
Washington, DC 20001-5403
United States
202-218-4632 (Phone)
202-842-3490 (Fax)


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