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As rising healthcare costs continue to garner national attention, pay-for-performance has been one strategy put forth to counteract the increasing costs and to improve the quality and effectiveness of healthcare. One of the concerns that has accompanied the rise of pay-for-performance in the healthcare context is that it could incentivize physicians to avoid the sickest, most complicated patients. Controlling for other measurable variables that affect patient-health outcomes, this thesis examined whether or not pay-for-performance affected physicians’ treatment of patients. There was no comprehensive data set addressing physician participation in pay-for-performance, but the best available data set that I found was the 2007 National Ambulatory Medical Care Survey, which I used to examine the effect of physicians’ participation in pay-for-performance on their referrals of patients to other physicians. Controlling for patient age, tobacco use, and chronic illness, the regressions actually showed that physicians participating in pay-for-performance programs were less likely to refer their patients to other physicians than were physicians not participating in pay-for-performance programs. This unexpected result may be due to the lack of granular data on pay-for-performance program