Economic theory predicts that changing financial rewards will change behaviour. This is valid in terms of service use; higher costs reduce health care use. It should follow that paying more for quality should improve quality; however, the research evidence thus far is equivocal, particularly in terms of better health outcomes. One reason is that "financial incentives" encompass a range of payment types and sizes of reward. The design of financial incentives should take into account the desired change and the context of existing payment structures, as well as other strategies for improving quality; further, financial incentives should be fair in rewarding effort. Financial incentives may have unintended consequences, including rewarding hospitals for selecting patients with lower risks, diverting attention from the overall patient population to specific conditions, gaming, and "crowding out" or displacing intrinsic motivation. Managers and clinicians can only respond to financial incentives if they have the data, tools and skills to effect changes. Australia should not adopt widespread use of financial incentives for improving quality in health care without careful consideration of their design and context, the potential for unintended effects (particularly beyond their immediate targets), and evaluation of outcomes. The relative cost-effectiveness of financial incentives compared with, or in concert with, other strategies should also be considered.