Financing the System

States or other payers must consider two key elements when implementing a pay-for-performance system:

  1. How will the system be paid for?
  2. What types of incentives will be implemented?

Payment mechanisms to consider include:

  • Grant funds. States may use grant funding to initiate a pay for performance system but will need to consider the long term sustainability when this funding ends.
  • Hold backs. States may hold back a certain percentage of funds to pay for the incentives. Often in such systems, the state pays at a certain percentage of total dollars (e.g., 95 percent) and uses the remainder to pay for the incentives.

In the STAR-SI program, states that have implemented pay-for-performance systems have incorporated one of two types of incentives into the contracts.