You Get What You Pay For: Result-Based Compensation for Health Care

By Hyman, David A.; Silver, Charles | Washington and Lee Law Review, Fall 2001 | Go to article overview

You Get What You Pay For: Result-Based Compensation for Health Care


Hyman, David A., Silver, Charles, Washington and Lee Law Review


Methods of payment are [a] critical environmental force that must be aligned with the objective of improving quality. Current payment methods do not adequately encourage or support the provision of quality health care, and in some instances, they may actually impede local innovations and efforts to improve quality.1

I. Introduction

In market-based economies, the customer is king.2 Sellers of goods and services routinely condition their right to payment on customer satisfaction or offer money-back guarantees or warranties. Manufacturers and retail outlets willingly replace defective items and allow unhappy buyers to return purchases with "no questions asked." Providers of sophisticated commodities and services pledge to meet deadlines, quality standards, and other performance criteria, and they tie their right to compensation to these commitments. When goods or services fall short of purchasers' expectations, providers suffer financially.

This link between payment and performance, the hallmark of a result-based compensation arrangement (RBCA), encourages providers to perform well.

RBCAs prevail throughout the economy. Many lawyers of diverse types work on contingency, as do accountants who represent taxpayers before the Internal Revenue Service and local taxing authorities. Investment bankers, stockbrokers, real estate agents, auctioneers, department store clerks, insurance agents, advertising agencies, political consultants, and telemarketers work on commission, as do corporate officers, directors, and executives who receive stock options, partners who share in a firm's profits, employees who receive bonuses, and service personnel who receive tips. Salaried employees participate in RBCAs when their pension plans hold their employers' stock.

RBCAs are common because they effectively solve a variety of agency problems. From a principal's perspective, an RBCA reduces the need to monitor an agent's performance by aligning the interests of principal and agent as they have jointly defined them. From an agent's perspective, an RBCA means there will be less arguing over whether the agent accurately perceived the principal's objectives and acted accordingly. For both parties, an RBCA will result in an appropriate amount of effort by the agent at an appropriate cost to the principal. By encouraging agents to produce outcomes that principals want, RBCAs help such relationships work smoothly.

Given the prevalence of RBCAs throughout the economy, their rarity in the health care sector is striking. Health care providers almost never offer guarantees or tie their compensation to the quality of their work. As former Assistant Secretary of Health and Human Services Dr. Philip Lee observed, providers "get paid for what [they] do, not what [they] accomplish."3 The enormity of the health care sector makes the absence of RBCAs particularly significant: Americans spend approximately $1.2 trillion annually on health care services, almost none of which are warranted to meet measurable standards of quality.4

The rarity of RBCAs would be unproblematic if purchasers invariably received value for their health care dollars. Unfortunately, the quality of American medicine varies widely. Many Americans receive high quality services, but many do not. Some services are over-utilized; others are under-utilized; utilization rates vary from place to place in unexplained ways; and few providers consistently deliver "evidence-based medicine."5 Americans also spend

tens of billions of dollars annually on medical services whose value is questionable or nonexistent. …

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