American healthcare is rapidly moving from fee-for-service to pay-for-performance, a concept often tied to accountable care organizations, CMS' value-based purchasing program and outcomes-based contracts with payers. Hospitals are usually on the receiving side of these arrangements — they net rewards or face punishments depending on whether they meet an established set of metrics. But hospitals can also take pay-for-performance concepts into their own hands by enforcing value-based mechanisms elsewhere in their organizations.
First, though, they're going to have to change the way they operate — and that includes addressing a reluctance (compared to other industries) to systemically adopt performance-based contracts. 
"One of the biggest issues in health systems is that their evaluation tools aren't performance-based, and many other agreements aren't performance-based, either," says Quint Studer, founder of Studer Group.
Mr. Studer says hospitals can improve quality and performance while cutting costs if they reexamine contracts with an eye toward incorporating performance-based metrics. After all, no one benefits when hospitals pay employees or vendors that are hurting rather than improving quality and patient satisfaction.
Here, Mr. Studer discussed five tips hospital leaders should keep in mind as they pursue performance-based contracts with hospital employees and vendors.
1. If you don't push for a performance-based contract, don't assume the vendor will. Performance-based contracts between hospitals and vendors are not widely accepted, and hospitals shouldn't expect a vendor to proactively suggest this payment model. When a hospital leader suggests including performance metrics in the contract, he or she may face some pushback. Don't give up if a vendor shows resistance, says Mr. Studer. Introducing the idea is often the most difficult part.
"Once the measures are in place, most people like them," he says.
Healthy competition can make vendors more willing to agree to performance-based contracts. Mr. Studer, a former hospital CEO, recalls the time he interviewed four bidding hospital vendors. He asked one company if it would include performance measures in its contract, to which the vendor initially said no.
"I said, 'Okay, but I just talked to another vendor and they said they would,'" says Mr. Studer. "Soon afterward, all four vendors said they would agree to performance-based contracts."
Hospital leaders may want to be cautious of any vendor that resists the idea of pay-for-performance, adds Mr. Studer.
"If you're dealing with a hospital group or vendor that isn't willing to put risk on the table, it shows a lack of confidence in their own performance," he says.
2. Ensure fairness and attainability. Mr. Studer insists all metrics are measurable. For performance-based contracting, the biggest concern is whether measures are fair and attainable. Fortunately, there are several ways to ensure this.
First, performance should be centered on objective rather than subjective metrics. For employees in registration, an objective measure to include in their contracts might be the percentage of co-pays collected. On the other hand, a subjective metric would be a score for a survey item like, "Treats all patients with respect." Unless the hospital has hard measurements for "respect" and can quantify what that looks like, that metric will be ineffective.
Second, performance-based contracts should establish a baseline in the beginning. Hospital leaders should incorporate monetary incentives or punishments later, once employees are able to gauge their performance.
Reward and recognition is also very important in the beginning of the contract period to gain buy-in. When employees are recognized for meeting goals, performance-based contracts will not be seen only as a mechanism to control or punish bad performance.
Another tricky task is creating the right amount of "stretch," as Mr. Studer calls it. If hospitals base performance metrics on national averages, how much higher or lower should the hospital place its benchmark?
"This is a matter of identifying the stair-step approach of how long it will take people to get there," says Mr. Studer. "It's not necessarily easy, but it is doable."
Above all, leaders must clearly communicate the metrics to employees so they understand exactly what data counts toward their performance review.
"The number one recommendation I make to all organizations today is to ensure that all stakeholders know how they're being measured," says Mr. Studer. "This includes the reporting period and whether employees will be rewarded each month, quarter or year."
Mr. Studer recommends hospitals reevaluate the metrics in their performance-based contracts once a year, at least.
3. Sometimes the incentive should be as simple as keeping a job. One of the biggest mistakes employees or vendors can make is to assume performance metrics are tied to bonuses. The fact is, it's often appropriate to make incentives much simpler.
"For certain tasks, the incentive should just be keeping your job," says Mr. Studer.
For instance, Mr. Studer is familiar with an organization that created a performance-based contract with its food vendor. The agreement was centered on customer satisfaction. Under the agreement, the vendor's contract would remain in place if the average customer satisfaction score did not fall below an eight on a scale of one to 10. If the average score fell below an eight, the vendor had the remainder of the year to raise it or the contract would be terminated with cause.
This agreement solved several problems, including a debate over whether the vendor should be fired with or without cause.
"A performance-based contract actually improved the relationship between the organization and the vendor," says Mr. Studer. "Why? Because the organization had objective data and the vendor knew it wouldn't be fired without cause. Generally, people are much happier with transparent agreements in which everyone knows the terms. Uncertainty only creates anxiety."
4. Don't underestimate the power of peers. Deindividuation, a psychological phenomenon in which people lose their sense of personal identity and just become part of a group, has traditionally been a problem in hospital management. Sometimes you just can't bring every metric down to the individual, and that can make it difficult to evaluate performance. Hospitalists are a good example of this. One solution is to include group goals on their evaluations, feedback systems or contracts. This way, the group ends up putting pressure on each other to deliver — which isn't a bad thing, says Mr. Studer.
For hospitalists, typical overall goals might be based on costs per adjusted discharge, HCAHPS results for physician communication and satisfaction scores from referring physicians, explains Mr. Studer. Strong scores on these three items — costs, happy referrers and happy patients — indicate good overall performance.
"This way, the hospitalists all win or lose together," he says. "That creates the peer pressure and accountability we're looking for. We've seen it happen: people start digging in and looking at group performance, and then they really own it."
5. Remove excuses. When introducing performance-based contracts to employees, it's important for hospital leaders to offer training and development opportunities. For instance, Mr. Studer has found that employees in registration benefit from formal training on the most effective keywords and phrasing to use when asking patients for payment. Tools and training can help align employees' behavior to their performance goals, and can also help remove the "underdeveloped skill set" excuse.
Employees may also project blame on external factors or things out of their control. Leaders must be proactive in these instances. Mr. Studer recommends leaders and managers address any issues employees deem as potential roadblocks to their goals.
"Ask employees what is getting in the way of their success and remove, what are at many times, rationalizations," says Mr. Studer.
For example, say staff in the ED says patient satisfaction is low because the waiting room furniture is dated and uncomfortable. If the problem is not too expensive to remedy, hospital leaders can fix it. If patient satisfaction in the ED remains low — even with new furniture — staff will lose the ability to blame such external factors. They will have to dig to find the real culprit, which may require more work.
One hospital Mr. Studer worked with was experiencing problems with noise on patient floors. Nurses said the largest source of noise was the hospital's overhead paging system, so management stopped using it and began paging staff individually. Still, patients' complaints about noise persisted.
"We started digging deeper and the biggest source of noise was conversation from nursing units," he says. "Quieting conversation among nurses took more work than turning off the paging system, but it resolved the issue of noise and patient complaints."
Conclusion
Continuing to pay for poor performance, especially when it can have noticeable ramifications on a hospital's quality or patient satisfaction, is absurd. As hospitals face shrinking reimbursements and growing costs, they are well positioned to reexamine their contracts and identify areas where performance metrics can be put to use.
Mr. Studer has one last tip for leaders pursuing more widespread use of performance-based contracts in their organizations. He often tells people that high-performers love objective measurements. ("It excites them," he says.)
Middle-performers are a little more nervous about such contracts, but only to a point. They eventually become comfortable with the goals and can gauge their performance. Low-performers are a different story, however.
"Low-performers hate objective measurements," says Mr. Studer. "But once I say that, nobody in the room wants to hate them. Nobody wants to be a low-performer."
More Articles With Quint Studer:
The Hospital CEO's Ultimate Dashboard: What to Check Daily, Quarterly and Yearly
5 Traits of High Reliability Organizations: How to Hardwire Each in Your Organization
Urgency Emergency: 5 Ways CEOs Can Cure Complacent Hospitals