OBJECTIVES: Industrialized countries are increasingly adopting pay-for-performance (P4P) mechanisms for quality improvement. The purpose of this work is to present a decision program that is able to estimate the cost-effectiveness, budget impact, and health benefits of P4P programs. METHODS: The decision program builds upon previously published decision models on the cost-effectiveness of implementation programs. The model analyzes the three possible benchmarks for rewarding performance - absolute performance, improved performance, and relative performance. RESULTS: The model shows that when P4P programs do not lead to a substitution of other health care programs their incremental cost-effectiveness ratio (ICER) is deterministically determined and ranges from treatment ICER to infinity. This holds regardless of the reward mechanism. In case of a budget constraint a P4P program will be adopted only if it substitutes other programs with lower financial incentive to providers. Budget impact and health benefits are calculated as the difference in costs and health benefits between the P4P program and the programs that are replaced. A P4P program is cost saving when the programs to be substituted have higher per patient costs despite a lower financial incentive. CONCLUSIONS: The proposed decision program is able to deterministically model the cost-effectiveness and budget impact of P4P programs under different reward mechanism and in the presence or absence of a budget constraint.