Setting Pay For Performance Targets: Do Poor Performers Give Up?

We examine the effect of a health plan's pay for performance incentives on the percentage of outpatient drug prescriptions that are filled with generic rather than brand‐name drugs in physicians' practices in an established physician network – the generic prescription rate (GPR). The financial reward was based on the performance of the entire network, but the network implemented rewards at the practice level. Practice‐level rewards were awarded on an all‐or‐nothing basis if the GPR met or exceeded specialty‐specific targets that increased each year. Although that design gave the practices a strong incentive to meet the target, practices performing far below the target might ‘give up’, costing the network its reward. Using a partial adjustment model, we estimate that in the absence of pay for performance, the average equilibrium value of GPR was 58.3%. We estimate that GPR would be maximized if the target were set at 77%. The GPR‐maximizing target would induce an improvement in average GPR from 58.3% to 65.8% or 7.5 percentage points. When the target is set above 80%, practices with equilibrium GPR below 58.3% will ‘give up’ in the sense that they will not improve relative to their equilibrium value. Copyright © 2012 John Wiley & Sons, Ltd.