The recent regulatory changes enacted by the Centers for Medicare and Medicaid Services (CMS) have identified hospital readmission rates as a critical healthcare quality metric. This research focuses on the utilization of pay-for-performance (P4P) mechanisms to cost effectively reduce hospital readmission rates and meet the regulatory standards set by CMS. Using the experimental economics laboratory we find that both of the P4P mechanisms researched, bonus and bundled payments, costeffectively meet the performance criteria set forth by CMS. The bundled payment mechanism generates the largest reduction in patient length of stay (LOS) without altering the probability of readmission. Combined these results indicate that utilizing P4P mechanisms incentivizes cost effective reductions in hospital readmission rates.