Why are Pay for Performance Plans Increasing in Popularity?

Part 1 –Why are Pay for Performance Plans Increasing in Popularity?

The simple answer is that health insurers (including the US Government, which is the largest health insurer in the United States) are looking for ways to decrease their total costs.

The upward pressure on costs is largely the result of people living longer and the growth of preventable chronic diseases such as diabetes and heart disease.   Everyone knows these diseases are nearing epidemic levels but most don’t realize the total costs or the likely savings with prevention and better treatment.


According to a study conducted by Avalere Health, over ½ of Americans over age 65 have pre-diabetes.

The American Diabetes Association finds that the cost of treating diabetes has increased 41% over the last 5 years and that people with diabetes have health care costs 2.3 times higher than those without diabetes.  Furthermore, inpatient hospital care accounts for 46% of the cost for treating the illness.

Heart Disease:

According to the CDC, 31% of Americans have high blood pressure and another 1/3rd have pre-hypertension and only 47% of Americans with hypertension have their condition under control.

Per the CDC’s annual report (table 97) Heart Disease, Hypertension and Stroke account for over 22% of all hospitalizations for Americans ages 65-74.  The next closest disease accounting for hospitalization among this group is osteoarthritis, which only accounts for 6% of hospitalizations.    While the length of most hospital stays is in steady decline, stays for Heart Disease remain rather flat, still averaging nearly 5 days.

Where the Money is Spent:

See the attached chart (link to attached PDF) for a breakdown of Medicare payments.  With over 26% going to inpatient hospital care, CMS has a big incentive to pay providers more if they provide care that results in fewer hospital admissions.

This is why CMS and other insurers are currently targeting extra reimbursement to providers that follow programs, such as PCMH and ACO’s which they believe will reduce hospital admissions and other additional costs.  In our next two parts we will examine these programs in greater detail including some of the currently available additional incentives.