Solution: Performance Contracting (taking the cue from education)

While nearly all American institutions are in a state of flux, two are worth highlighting: public education is failing and health care is floundering.  It could be said that one suffers from too little money, while the other suffers from too much.  Striking then are the similarities between the two’s troubles.  How to define quality?  How to define performance?  How to improve (everyone has an opinion)?  How to attract the best and brightest?  How to combat shortages?  Caretaker or improver?  Penalize poor performance or provide more assistance to difficult situations?  More government involvement or less?

Performance contracting is one proposed solution.

Michelle Rhee has been getting a lot of press lately.  Deservedly so, accounts of her story have been remarkably positive.  Rhee has taken over the failing Washington D.C. public school system with every intention of turning it around.  A big part Rhee’s plan is hiring the best teachers.  But how to do that?

The New York Times Magazine released its Year in Ideas issue, Rhee’s two-tier teacher contract was highlighted:

The basic deal: surrender some job security in exchange for the potential to earn a much higher salary. Under the proposed contract, each Washington teacher would choose between two alternatives. The red tier, the more cautious option, would require teachers to give up a few seniority protections in exchange for a considerable pay increase. Teachers choosing the riskier green tier would lose even more tenure and seniority rights. They would spend the first year of the new contract on probation, at the end of which they could be fired. But if they were good enough to survive, they would receive huge raises, before long earning as much as $131,000 a year in salary and performance bonuses, more than twice the average salary for an American public-school teacher.

But the application of pay for performance isn’t just for individuals within the organization, it can be applied to the organization as well.  Take this example from Ohio’s tertiary educational institutions (provided through the Columbus Dispatch):

State colleges would need to prove that their undergraduate students are getting ahead to receive full state funding under a new proposal making its way through the Ohio Board of Regents.

Now, state funding is based on a college’s size. But within four years, more than 30 percent of the money for four-year schools could be based on their performance. For community colleges, a 30-70 split would happen in 2015.

“We’re moving from rewarding schools for the number of students in their seats to the number of students completing courses, degrees and walking out the door to get jobs,” said Bruce Johnson, president of the Inter-University Council, which represents the four-year schools.

It makes sense.  Paying physicians and hospitals strictly upon the number of procedures performed is an archaic approach.  Some measure of performance needs to be added (and rating the complication of a case isn’t one).  Medicare, ever our favorite payer (a mover and shaker, nonetheless), is moving in that direction.  As value-based purchasing (pdf) gains traction with government bureaucrats (and corporate America) it would behoove the health care delivery sector to intensively explore performance contracting.  Hospitals will go first, physician payment is sure to follow.

Health care is not going to escape the era of pay for performance.  It’s really not too foreign of a thought: get paid according to how well one performs.  But debates of what exactly constitutes high quality holds the discussion from moving ahead.  The discussion then, in earnest, needs to begin.

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