<p>How performance pay affects physicians’ medical service provision and the quality of care is relevant for researchers and policy-makers alike. This paper systematically studies how performance pay, complementing either fee-for-service or capitation, affects physicians’ medical service provision and the quality of care for heterogeneous patients. Using a series of controlled behavioral experiments with physicians and students, we test the incentive effect of performance pay at a within-subject level. We consider a performance pay scheme which grants a discrete bonus if a quality threshold is reached, which varies with the patients’ severity of illness. We find that performance pay significantly reduces non-optimal service provision and enhances the quality of care. Effect sizes depend on the patients’ severity of illness and whether performance pay is blended with fee-for-service or capitation. Health policy implications, including a cost benefit analysis of introducing performance pay, are discussed.</p>