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In the Nation's Interest

Top Healthcare Stories for 2016: Pay-for-Performance

by Courtney Baird March 08, 2016

On February 16 the Centers for Medicare & Medicaid Services (CMS) and America’s Health Insurance Plans (AHIP) released their first set of clinical quality measures as part of their Core Quality Measures Collaborative – an initiative that aims to reach consensus among public health plans, commercial insurers, physician groups and other stakeholders on major quality measurements. The collaborative supports the recent shift toward value-based care, which stems from America’s predicament of high costs and subpar quality in health care.

American Healthcare: Higher Cost and Lower Quality

It is widely recognized that the United States spends far more on health care than other developed nations. According to the latest OECD health statistics, the United States spends 16.4 percent of GDP on healthcare -- almost twice the OECD average of 8.9 percent.  In per capita health spending, the United States fares even worse, spending $8,713 per capita, or more than 2.5 times the OECD average. If this extra spending improved quality and health outcomes, it could certainly be justified. Unfortunately this does not appear to be the case.

The United States consistently performs worse relative to other developed countries in international evaluations of healthcare systems.  Since 2004, the Commonwealth Fund has released five reports on how the US healthcare system compares internationally. The report evaluates five dimensions of performance: quality, access, efficiency, equity and health outcomes. Each year, the US has ranked last relative to 10 other developed nations (Australia, Canada, France, Germany, the Netherlands, New Zealand, Norway, Sweden, Switzerland, and the United Kingdom). Another report, commissioned by the National Research Council and Institute of Medicine, examined the United States’ health relative to 16 other developed countries. At all stages of life – from infancy to old age – the researchers discovered consistently poorer health in the US for every measure. Some of the more remarkable findings include:

• The highest rate of women dying due to complications of pregnancy and childbirth;
• The highest chance that a child will die before age 5;
• The second-highest rate of death by coronary heart disease;
• The second-highest rate of death by lung disease;
• Some of the worst rates of heart disease, lung disease, obesity and diabetes.

A plethora of other reports by groups such as the World Health Organization and the OECD reach similar conclusions.

It is likely that there are measurement inconsistencies across countries. (For example, with respect to infant mortality, what is a “live birth?”) It is also easy to blame the health system for behavioral problems, from violence to smoking. And there are parts of the US health care system that are demonstrable exemplary. Still, it appears that, at the end of the health care system pipeline, the US is not getting full value for its health care dollar. This juxtaposition of high spending and low quality has generated a sense of urgency for restructuring our system and has led to a wave of innovation in provider reimbursement models.

Is Reimbursement Reform the Answer?

The standard payment structure in the US health care system is the fee-for-service model (FFS), which pays providers based on the quantity and complexity of services provided. This model does not hold providers accountable for quality or efficiency, and (in most cases) delivering additional services increases provider profits. In other words, the financial incentive is for health care providers to deliver as many services as possible, regardless of costs or health outcomes. This is not to accuse individual providers of improper motives. But recognizing this perverse incentive structure, health policy makers have been experimenting with an array of alternative payment models that aim to incentivize higher quality and lower costs. 

In fact, the Health Care Transformation Task Force, a newly formed coalition of private insurers and provider organizations, recently announced that its members are committing to move 75 percent of their contracts into alternative payment models by 2020. The task force, which includes Aetna and Blue Cross, aims to reach an accord on the most effective payment models for hospitals, private insurance companies, and public payers to accelerate change in health care delivery. On the private side, insurers are making headway in implementing new payment models: 11 percent of commercial payments were value-oriented in 2013. Simultaneously on the public side, the Centers for Medicare and Medicaid Services (CMS) have also pushed aggressively towards what has been called “value-based or quality-based reimbursement.” In January 2015, CMS announced that by the end of 2016, 30 percent of fee-for-service Medicare payments would become value-based payments, through alternative models like Accountable Care Organizations (ACOs) and bundling. Additionally, CMS plans to have 55 percent of fee-for-service Medicare payments shift to quality-based payments by the end of 2016 through pay-for-performance (P4P) programs. Naturally, hospitals, physicians, and other healthcare providers are scurrying to ensure that they are ready for this transition phase. This year, the bulk of the shift will be to pay-for-performance models.

Source: Centers for Medicare and Medicaid Services

The Pay-for-Performance (P4P) Model

The pay-for-performance model offers financial incentives to providers (physicians, hospitals, medical groups, etc.) to improve quality and efficiency. Typically, incentives are paid on top of the standard fee-for-service compensation if the provider meets or exceeds certain pre-established metrics of performance. Additionally, some models penalize providers when they do not meet the predetermined performance standards, or for specific situations like medical errors and hospital readmissions. The payer (i.e., the insurance company, Medicare or Medicaid) typically uses administrative or claims data to evaluate provider performance on the following four metrics: (1) Process: activities that have been demonstrated to improve patient outcomes (e.g., counseling patients to quit smoking); (2) Outcome: the effects that provider care had on patient health (e.g., lower blood pressure in a stroke patient); (3) Patient Satisfaction: patient’s opinion about the quality and delivery of care (e.g., wait times and communication from staff);  (4) Structure: the facilities, personnel and equipment used during care (e.g., electronic medical records).

CMS launched its first pay-for-performance pilot program in 2003, the Premier Hospital Quality Incentive program, and since then has participated in many demonstration projects that have tested a range of pay-for-performance methods for different types of providers. The Affordable Care Act (ACA) expanded the use of pay-for-performance programs in Medicare and encourages experimentation to evaluate program effectiveness. The following are some of the most influential programs to date:  

1. Hospital Value-Based Purchasing Program. This program rewards acute care hospitals with incentive payments for the quality of care they give to people with Medicare. It withholds payments to participating hospitals by a specified percentage, and uses those funds for the bonus payments. The rewards are granted based on how well the hospital performs on 20 quality measures. For each measure, the hospital earns a score for achievement and for improvement. The better the hospital’s overall score, the more it receives in bonus payments. Acute care hospitals account for the largest share of Medicare spending, and the program reaches over 3,500 hospitals across the country.
2. Hospital Readmission Reduction Program. This program provides financial incentives to hospitals to reduce unnecessary hospital readmissions (not including planned readmissions) which are costly and usually due to a lack of coordination between providers, inadequate discharge planning and poor follow-up with patients. The program can reduce payments by 1 percent for hospitals that exceed certain readmission rates for patients with acute myocardial infarction (AMI), heart failure, pneumonia, chronic obstructive pulmonary disease (COPD), elective total hip and/or total knee replacement, and coronary artery bypass graft (CABG) surgery.
3. Physician Value Modifier Program. This program rewards physicians with bonus payments when their performance attains specified measures of quality and cost. The adjustments are made on a per claim basis for items and services under the Medicare Physician Fee Schedule. CMS is phasing in the program, beginning with physicians groups with 100 or more eligible professionals in 2015 and extending the value modifier to all physicians and most healthcare practitioners (e.g. physician assistants, nurse specialists, etc.) by 2018.
4. Physician Quality Reporting System. This program incentivizes physicians and group practices to report information to Medicare about the quality of their services. In 2015, the program began applying a negative payment adjustment to physicians and practice groups who did not report data on the quality measures specified in the program.

Potential P4P Challenges

While at first glance P4P may seem like the panacea that will improve quality and affordability, several factors pose threats to the effectiveness of pay-for-performance, including the following are some of the major concerns discussed by policy analysts:

1. Challenges in measuring performance. When it comes to evaluating health outcomes, you’re not always comparing apples to apples. For example, penicillin is a commonly prescribed antibiotic used to treat a range of bacterial infections. While this may be considered the standard course of treatment for many infections, it is estimated that about 10 percent of the population is allergic to this drug. Should a hospital be penalized if a patient is readmitted due to allergy-induced anaphylaxis? It is of the utmost importance for the quality measures to be based on robust evidence and that payment adjustments account for special circumstances, like allergic reactions or patients who do not comply with their recommended follow-up care. Otherwise, physicians will view the financial rewards as based on luck and this will eliminate the incentive to improve performance.  
2. Effect on disadvantaged populations. Piggy-backing on the previous issue, critics fear that pay-for-performance programs will compromise access to care for high-risk patients and disadvantaged populations. Providers may avoid treating patients who have complicated medical problems and lower probability of recovery because they are more likely to lower the providers’ performance scores. Additionally, providers may avoid treating disadvantaged populations for fear that they are less likely to comply with treatment plans, which could also drag down the provider’s performance scores. Exacerbating this issue is the fact that safety-net hospitals and physician groups often have low or zero profit margins, so financial penalties for poor performance could ruin their business, thereby further reducing access to care for these populations.
3. Magnitude of financial incentives. Most of the existing P4P programs provide relatively small financial incentives (e.g., 1 percent for the Hospital Value-Based Purchasing Program) and many analysts think they are not large enough to substantially affect behavior. Furthermore, providers experience additional costs complying with pay-for-performance programs. For instance, many programs require the adoption of specific technology that is needed to collect and report data needed for evaluations. The financial incentives need to be large enough to cover these additional costs and also provide additional profit. On the other hand, if the financial penalties are too large, then providers may face too much risk and this could aggravate the aforementioned avoidance of complicated and disadvantaged patients. 
4. The studies show mixed results. To date, the evidence is mixed on whether pay-for-performance programs improve quality and lower costs. A recent report by RAND reviewed 49 studies that examined the effect of pay-for-performance programs on process and outcome measures. Overall the results of the studies were mixed, and studies with stronger methodologies showed relatively small impacts on health outcomes. However, the RAND analysis also found little or no evidence of negative unintended consequences of the sort described in numbers 1-3 above.

CED’s Perspective

CED has long recognized the perverse incentives of the fee-for-service reimbursement model. In our recent healthcare reports, we explain in detail how the fee-for-service model creates strong incentives for providers to perform more tests and services, regardless of whether they improve patient outcomes. Furthermore, the fee-for-service model does not incentivize important services like patient education or coordination with other healthcare providers, which have been shown to reduce costs and improve health outcomes. CED strongly believes that the fee-for-service system is not sustainable and that little cost-reduction or quality improvement will occur without fundamental reform. The recent shift toward pay-for-performance models is surely a step in the right direction. However, we fear that any cost and quality improvements from this model will only be a few baby steps in the marathon toward value-based care. The pay-for-performance model still leaves the fundamental fee-for-service system intact, and does not address the issue of fragmentation in care delivery. We encourage more experimentation in reimbursement reform and with innovations that stem from private sector initiatives, like the Health Care Transformation Task Force. Ultimately, however, we believe that the greatest improvements in cost and quality can be achieved by a market-driven system based on value-conscious consumer choice, as outlined in our latest report, Adjusting the Prescription.