Hospital responses to pay-for-performance incentives

Not-for-profit hospitals are complex organizations and, therefore, may face unique challenges in responding to financial incentives for quality. In this research, we explore the types of behavioural changes made by not-for-profit Michigan hospitals in response to a pay-for-performance system for quality. We also identify factors that motivate or facilitate changes in effort. We apply a conceptual framework based on agency theory to motivate our research questions. Using data derived from structured interviews and surveys administered to 86 hospitals participating in a pay-for-performance system, we compare hospitals reporting and not reporting behavioural changes. Separate analyses are performed for hospitals reporting structure-related changes and hospitals reporting process-related changes. Our findings confirm that hospitals respond to incentive payments; however, our findings also reveal that hospital responses are not universal. Rather, involvement by boards of trustees, willingness to exert leverage with physicians, and financial and competitive motivations are all associated with hospitals' behavioural responses to incentives. Results of this research will help inform payers and hospital managers considering the use of incentives about the nature of hospitals' responses.