Payments to healthcare providers are increasingly tied to their performance on various measures. We study the introduction of a program aimed at reducing c-section rates in public hospitals in Portugal by penalizing hospitals whose c-section rates are higher than government-set thresholds. Our empirical strategy exploits of the fact that c-section rates are persistent over time and thus hospitals were exposed to different penalty sizes, depending on their historical c-section rates. We find that the introduction of the penalty contributed to reduce c-section rates. Our results also suggest a potential unintended effect of the policy: women exhibiting some pregnancy risk-factors which are indicators for c-section in clinical guidelines experience a reduction in the likelihood of receiving a c-section. We also study spillover effects of the program to private hospitals.