With the expected cutbacks in healthcare funding and the increasingly dismal outlook for “new” money in the healthcare pot, “value” has quickly become a key watchword.

In the past decade, we’ve seen many public and private payers implement value-based, pay-for-performance (P4P) programs as a means of spurring healthcare providers to improve the quality of services they provide and, tangentially, reduce the costs associated with substandard care.

This calls for a new type of physician leader — one who is trained to understand and deliver value.

Last year, the health reform law added a new element to the healthcare reimbursement mix – outcomes — hence, my new mantra, “No outcome, No income!”

In that vein, an article in a recent edition of Kaiser Health News caught my eye — a guest opinion piece by John E. McDonough, a professor in Harvard University’s School of Public Health. It is aptly titled “A New Cost Control Idea – Paying for Outcomes.”

I am grateful to Prof. McDonough for telling it like it is, and I will try to recap his main points here.

For starters, he recognizes that innovative ideas in the current Medicare and Medicaid budget proposals – ideas like funding to implement and evaluate medical homes, accountable care organizations, and bundled payments – may not go far enough to significantly bend the cost curve downward.

Those proposals look instead to shift the bill for healthcare to the States and consumers.

State governments in particular are faced with a huge “doughnut hole” of their own — the period between the end of the stimulus package’s enhanced federal matching rate this December and the implementation of the health reform law’s Medicaid expansions in 2014.

The potential ways to address this funding shortfall aren’t pretty — cutting benefits, shrinking provider payments, increasing cost sharing, and tightening up on eligibility requirements.

The proposed spending controls for Medicare aren’t any more appealing.

McDonough came up with the same potential solution that I have been mulling over — instead of paying for performance (P4P), why not change a letter and try paying for outcomes (P4O)?

In a P4O approach, hospitals, physicians, and other provider groups are offered incentives for reducing potentially preventable events (PPEs) — events that both harm patients and raise costs.

In essence, P4O rewards healthcare providers and organizations for delivering high-quality, effective care, and penalizes providers for delivering substandard care.

Beginning in 2012, the health reform law targets hospitals with high rates of PPEs and challenges them to match the quality of care provided by their peers or face financial penalties.

An easily implemented P4O model (developed by Dr. Norbert Goldfield and Richard Averill) has already been applied in public and private sector demonstration projects with impressive predicted short-term savings:

• Up to 3% from reducing preventable readmissions
• Up to 2% from reducing preventable complications
• Up to 8% from preventing unnecessary readmissions
• Up to 2% from preventing unneeded ER visits
• Up to 3% from deterring unnecessary outpatient procedures and ancillary treatments.

One example cited by McDonough is a P4O program initiated by the State of Maryland. One year after implementing payment reforms based on 2009 inpatient complication rates, there was a statewide decline of 11.9% in complication rates, with an estimated $62.5 million in associated costs savings.

It is important to point out that healthcare organizations are not penalized for specific cases under P4O; however, they are held accountable for their overall performance on each transparent, risk-adjusted, uniform measure.

Although no one is claiming that P4O is a panacea, it is a good first step toward improved payment policies that give incentives to providers for improving quality and efficiency.

Before resorting to potentially harmful strategies such as cost shifting and rationing, McDonough advises policymakers, providers, and consumers to ask the question “Shouldn’t we fix quality first?”

If the answer is “no” because “nobody knows how to do that,” McDonough moves that we try paying for outcomes.

I, for one, second that motion!

David B. Nash is Founding Dean of the Jefferson School of Population Health at Thomas Jefferson University and blogs at Nash on Health Policy.

Originally published in MedPage Today. Visit MedPageToday.com for more health policy news.