The Medicare Physician Group Practice (PGP) demonstration is Medicare's first physician pay-for-performance (P4P) initiative. The demonstration, which is legislatively mandated, establishes incentives for quality improvement (QI) and cost efficiency at the level of the PGP Ten large physician groups are participating in the demonstration, which started on April 1, 2005, and will run for 3 years. In this article the authors provide an overview of the PGP demonstration's key design elements, including the selection process for PGP participants; beneficiary assignment; comparison population; measurement of demonstration savings; performance payments; and quality measurement and reporting. A summary of early case study findings is also provided.