Measuring the effect of pay-for-performance financial incentives on hospital efficiency in the military health system

The U.S. military health system implemented a pay-for-performance financial incentive program in 2007 in an effort to stimulate patient quality, access, and satisfaction improvements. This study measures the effect of the monetary incentive model on hospital efficiency and outcomes. Using a retrospective, quasi-experimental design, the empirical analysis incorporates data envelopment analysis with time windows and difference-in-differences estimation. Hospitals are evaluated in the U.S. Army, Air Force, and Navy during the period of 2001–2012. The results indicate a statistically significant reduction in technical efficiency for the hospitals that received pay-for-performance financial incentives. The healthcare policy implications of this study are applicable in light of the national healthcare debate and may assist healthcare policy makers in determining the efficacy and associated trade-offs of pay-for-performance financing models.