Abstract: This article describes the structure, implementation, and early results of a performance-based hospital incentive program designed by a large nonprofit health plan. The Hospital Quality Service and Recognition program, developed by the Hawaii Medical Service Association, was launched in 2001 to reward high-quality medical care at the hospital level. This pay-for-performance program used administrative claims data, survey data, and hospital-reported information to assess hospital performance in risk-adjusted complications and risk-adjusted length of stay (LOS), patient satisfaction, and hospital processes of care measures. Financial incentives were provided to participating hospitals based on their performance on these measures. Preliminary outcomes of the program evaluated over a 4-year period after implementation revealed improvements in aggregated rates of risk-adjusted surgical complications and efficiency of care as evidenced by a substantial decrease in risk-adjusted average LOS for several surgical procedures. Quality improvement was demonstrated in several other program components including emergency department satisfaction. This quality incentive program offers an innovative approach for encouraging delivery of high-quality and service-oriented care in a statewide network of participating hospitals.