Is pay for performance ethical?

Pay for performance is purposely established to create inequity in pay between two individuals or groups working in the same area of an organization.

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Is that ethical?

Surely not, because whatever happened to equal pay and economic justice?

Furthermore, tying Medicare payment to the performance of doctors and hospitals is surely especially unethical, isn't it?

The devil, as usual, is in the details.

In a pay-for-performance compensation system, there are two payment schedules. One is guaranteed basic pay given to everyone who dependably, but minimally, accomplishes a set of defined tasks.

The other pay schedule is incentive pay. This extra money is given only to those who satisfy criteria presumed to identify performance that is in some way better than minimal.

For example, performance-pay criteria might relate to assuming responsibility for extra tasks, achieving better than routine results, or working efficiently. There is nothing new about the idea of monetarily rewarding those who perform at the highest levels.

In hospitals, rewarding better-than-average performance with higher pay takes many forms. As director of one of the first newborn intensive care units (NICU), I urged performance-based pay for nurses. All newborn nursery nurses received basic pay. Nurses who chose to develop intensive newborn care skills made more money.

Health care executives are well acquainted with incentive pay, since many executive contracts tie pay to performance. In some clinics, physician pay might be tied to the number of patients seen each day.

But acceptance of pay for performance is often slow. Those who do not receive the higher pay complain. The complaints would be justified if the pay-for-performance plan did not duly consider the interests of those who might not achieve compliance with the plan's criteria. If the avowed idea is to reward exceptional performance, then the actual impact must not be to penalize average performance.

For example, in the NICU scenario, some nurses complained because common sense told them that all nursery nurses should receive equal pay. They were only satisfied after seeing that the pay differential was not arbitrary. Rather, it was based on carefully defined criteria including a special training period prerequisite.

Other nurses felt that the differential pay system was a form of pressure, an attempt to recruit nurses to work in newborn intensive care. When those nurses saw that this was not the case--any qualified nurse could seek the extra status and pay and nurses who did not would not be penalized--most of these nurses were also satisfied. Nurses who remained upset about the differential pay system left to go to work at the other hospital in town.

The point is that while there is nothing new about the concept of pay for performance, each new application of this concept must be carefully examined to be sure that the concept is applied with adequate attention to ethical principles including distributive economic justice and individual autonomy.

Currently, pay for performance is a hot topic because of trial balloons floated by federal officials suggesting that pay for performance might become part of third-party payer policies for paying doctors and hospitals.

Can doctors and hospitals be made to accept a pay-for-performance program related to Medicare payments? Here are some thoughts intended to help you include ethical aspects of this issue in your thoughts and discussions.

Equality and economic justice are not synonyms

The key ethical principle at play here is economic justice, a.k.a distributive justice. Does pay have to be equal in order to be just and fair? No.

Two contemporary American ethicists, John Rawls (1921-2002) and Robert Nozick (1938-2002), created classic constructs of economic justice.

Rawls sees justice as fairness. Rawls asks us to assume, for the sake of argument, that an imaginary group of men and women are establishing laws and rules for a brand new society. Rawls adds that it would be best if this original position group acted behind a veil of ignorance. That is, no member of the group would know his or her place in the new society. The idea is that justice might best be served if, for example, each rulemaker had to wonder whether he would be a tenant or a landlord.

What characteristics of justice would such a group decide to adopt? Rawls suggests two.

The first is equality in the assignment of basic rights and duties. Thus, the Rawlsian concept of justice is egalitarian in nature. However, it is not pure political socialism because of the second principle.

In some circumstances, inequities would be just as long as all levels of the society benefit from the inequity.

So, if we view the hospital as a society, inequities in pay are just as long as everyone connected with the hospital is well served. Everyone would be well served if the inequities produce better hospital services, resulting in pleased patients, community support, a black bottom line, secure employees and physicians who are able to practice according to the professional ethic.

Robert Nozick disagrees with Rawls, seeing justice as entitlement. Instead of fairness as a basis of justice, he suggests a justice of holdings with two parts: justice in acquisition and justice in transfer.

That is, it is just for a person to hold those things he acquires and those things that are freely given to him. Nozick argues that this entitlement, not equality, is the basis of economic justice, although he does introduce a note of fairness by pointing out that stealing and fraud are not permissible modes of acquisition and transfer.

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Consider Wilt Chamberlain, the great basketball player, Nozick argues. Imagine that Wilt (the Stilt) signs a contract that allows him to take home 25 cents for every game ticket sold. The season starts and people flock to the games. Wilt Chamberlain is the main attraction. Imagine that one million people pay for tickets. Wilt winds up with $250,000, a much larger-than-average income. The team is able to stay in business, providing jobs for many people and the fans are happy.

Is Wilt not entitled to this income? Is this distribution unjust? If so, why? Each of these people chose to buy tickets and the team chose to give 25 cents per ticket to Wilt. If the other players were as skilled and thus were also great attractions, they would be offered the same deal. Can anyone complain on grounds of justice?

Nozick says no. (Note that Aristotelian moderation may be in order here. Nozick's justice as entitlement carried to the extreme is social Darwinism, which is less justice than egoist ethic).

An action is not ethical just because it is based on sound ethical theories. Implementation methods can render a theoretically ethical action unethical. Here are some examples, focusing on the notion of linking Medicare payments to performance:

The true purposes of pay for performance are not honestly stated.

For whatever reasons, achieving good patient results is perceived as a nobler goal than profit-taking or staying within budget. So, efforts to achieve efficiency are sometimes disguised as efforts to improve quality for public relations purposes. If the avowed purpose of pay for performance is quality but the true purpose is efficiency, that is unethical. A variation on this point is that bonuses must be given on the basis of proven performance. Pay for performance must not be favoritism in disguise.

Pay for performance is not equally available to all.

If doctors and hospitals are not offered an equal opportunity to earn pay for performance level compensation, that would be an example of an unjust inequity.

Rewarded results are not actually due to performance of the rewarded individual.

Analysis of data must include identification and separation of physician performance factors, hospital performance factors, and other factors that contribute to observed results.

Goods or services are rendered less dependable by the nature of specific incentives.

Pay-for-performance plans are suspect if criteria include less utilization of certain medical services and treatments.

Criteria are set at an unreachable level.

It would be unethical to motivate good performance by dangling the carrot of incentive pay, then keep the carrot always just out of reach.

The dollar difference between basic pay and incentive pay is too great.

Basic payment in a pay-for-performance plan must not be less than it would be otherwise. The idea is to reward exceptional performance, not to penalize average performance.

Pay for performance is actually a bribe.

Does the federal government really want to reward effective performance that improves quality care? Or does the government want to use pay for performance as a bribe, a control tool, where payers can micromanage both patients and hospitals?

So, is tying Medicare payment to hospital and physician performance ethical? In theory, yes it is. But in practice? The final answer depends on implementation details chosen by the federal government.

Richard E. Thompson, MD, is author of Think Before You Believe: Modern Day Myths, Questionable Claims and Uncommon Sense, Xlibris, Philadelphia, 2004. He teaches ethics at Missouri State University.

Springfield, Mo. and can be reached at [e-mail]

By Richard E. Thompson, MD