The Cost‐effectiveness of Using Financial Incentives to Improve Provider Quality: A Framework and Application

Despite growing adoption of pay-for-performance (P4P) programmes in health care, there is remarkably little evidence on the cost-effectiveness of such schemes. We review the limited number of previous studies and critique the frameworks adopted and the narrow range of costs and outcomes considered, before proposing a new more comprehensive framework, which we apply to the first P4P scheme introduced for hospitals in England. We emphasise that evaluations of cost-effectiveness need to consider who the residual claimant is on any cost savings, the possibility of positive and negative spillovers, and whether performance improvement is a transitory or investment activity. Our application to the Advancing Quality initiative demonstrates that the incentive payments represented less than half of the £ 13 m total programme costs. By generating approximately 5200 quality-adjusted life years and £ 4.4 m of savings in reduced length of stay, we find that the programme was a cost-effective use of resources in its first 18 months.