Health Policy

1h e a lt h p o l i c y b r i e f w w w. h e a lt h a f fa i r s . o r g

Health Policy Brief o c t o b e r 1 1 , 2 0 1 2

©2012 Project HOPE– The People-to-People Health Foundation Inc. 10.1377/hpb2012.19

Pay-for-Performance. New payment systems reward doctors and hospitals for improving the quality of care, but studies to date show mixed results. what’s the issue?

“Pay-for-performance” is an umbrella term for initiatives aimed at improving the quality, efficiency, and overall value of health care. These arrangements provide financial incen- tives to hospitals, physicians, and other health care providers to carry out such improvements and achieve optimal outcomes for patients.

Pay-for-performance has become popular among policy makers and private and public payers, including Medicare and Medicaid. The Affordable Care Act expands the use of pay- for-performance approaches in Medicare in particular and encourages experimentation to identify designs and programs that are most effective.

This policy brief reviews the background and current state of public and private pay- for-performance initiatives. In theory, paying providers for achieving better outcomes for patients should improve those outcomes, but in actuality, studies of these programs have yielded mixed results. This brief also discuss- es proposals for making these programs more effective in the future.

what’s the background? For decades, policy makers have been con- cerned with the incentive structure built into the US health care system. The predominant fee-for-service system under which providers are paid leads to increased costs by rewarding

providers for the volume and complexity of services they provide. Higher intensity of care does not necessarily result in higher-quality care, and can even be harmful.

managed care: During the 1990s payers focused on managed care arrangements to reduce excessive or unnecessary care, for ex- ample, by paying providers by capitation, or a lump sum per patient to cover a given set of services. However, concerns about poten- tially compromised quality and constraints on patients having access to providers of their choice led to a backlash from both providers and consumers.

Also, by the early 2000s, serious deficien- cies in the quality of US health care had been highlighted in two major reports by the Insti- tute of Medicine, among other studies. In this context, pay-for-performance emerged as a way for payers to focus on quality, with the ex- pectation that doing so will also reduce costs.

The typical pay-for-performance program provides a bonus to health care providers if they meet or exceed agreed-upon quality or performance measures, for example, reduc- tions in hemoglobin A1c in diabetic patients. The programs may also reward improvement in performance over time, such as year-to- year decreases in the rate of avoidable hospital readmissions.

Pay-for-performance programs can also impose financial penalties on providers that

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fail to achieve specified goals or cost savings. For example, the Medicare program no longer pays hospitals to treat patients who acquire certain preventable conditions during their hospital stay, such as pressure sores or uri- nary tract infections associated with use of catheters.

The quality measures used in pay-for- performance generally fall into the four cat- egories described below.

• Process measures assess the performance of activities that have been demonstrated to contribute to positive health outcomes for patients. Examples include whether or not aspirin was given to heart attack patients or whether patients were counseled to quit smoking.

• Outcome measures refer to the effects that care had on patients, for example, wheth- er or not a patient’s diabetes is under control based on laboratory tests. Use of outcome measures is particularly controversial in pay- for-performance because outcomes are often affected by social and clinical factors unre- lated to the treatment provided and beyond the provider’s control. For example, provid- ers may follow practice guidelines regarding monitoring blood sugar levels and counsel- ing diabetic patients regarding their diet, but ultimately, the patients’ eating and exercise behaviors will determine control of their dia- betes. Increasingly, outcome measures also include cost savings.

• Patient experience measures assess pa- tients’ perception of the quality of care they have received and their satisfaction with the care experience. In the inpatient setting, ex- amples include how patients perceived the quality of communication with their doctors and nurses and whether their rooms were clean and quiet.

• Structure measures relate to the facilities, personnel, and equipment used in treatment. For example, many pay-for-performance pro- grams offer incentives to providers to adopt health information technology.

private-sector initiatives: More than 40 private-sector pay-for-performance pro- grams currently exist. One of the largest and longest-running private-sector pay-for- performance programs is the California Pay for Performance Program, which is managed by the Integrated Health Association, a non- profit, multistakeholder group that promotes

quality improvement, accountability, and af- fordability in health care. Founded in 2001, the California Pay for Performance Program is the largest physician incentive program in the United States. It has focused on measures related to improving quality performance by physician groups and is transitioning to in- clude value-based cost measures starting in 2014.

A more recent initiative is the Alternative Quality Contract, which was implemented in 2009 between Blue Cross Blue Shield of Mas- sachusetts and seven provider groups (since increased to 11). Under the program, the pro- viders receive a budget to take care of their patients rather than payments for separate services. The budget includes pay-for-perfor- mance bonuses if certain quality targets are met. In the first year of the program, a study by Harvard Medical School researchers found re- duced medical spending and improved quality of patient care relative to a comparable group of providers paid through the traditional fee- for-service approach.

public-sector initiatives: In the public sector, the Centers for Medicare and Medicaid Services (CMS) has established a Value-Based Purchasing Program to provide incentives for physicians and providers to improve the quality and efficiency of care (Exhibit 1). CMS has also been involved in a number of pay-for- performance demonstration projects testing a variety of approaches among different catego- ries of providers.

The largest and most notable of these has been the Premier Hospital Quality Incentive Demonstration project. From 2003 to 2009, CMS and Premier, a nationwide hospital system, tested the extent to which financial bonuses would improve the quality of care provided to Medicare patients with certain conditions, including acute myocardial in- farction, heart failure, and pneumonia.

Another major CMS demonstration was the Physician Group Practice Demonstration, a program in which group practices could share cost savings with Medicare as long as they met targets for quality of care. Results of these ini- tiatives are discussed below.

Many states have also experimented with pay-for-performance in their Medicaid and Children’s Health Insurance Program ini- tiatives. One of the largest of these has been the Massachusetts Medicaid’s hospital-based pay-for-performance program, which was ini-

40+ Private-sector programs More than 40 private- sector pay-for-performance programs currently exist.

“The typical pay- for-performance program provides a bonus to health care providers if they meet or exceed agreed- upon quality or performance measures.”

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tiated in 2008. Under this program, hospitals received incentive payments based on their scores for a set of quality indicators related to care for pneumonia (for example, providing antibiotics within six hours of arrival) and surgical infection prevention (for example, giving prophylactic antibiotics within one hour of surgical incision).

Most early pay-for-performance experi- ments narrowly focused on “quality” with very little, if any, consideration of cost. However, the field has been evolving and many pro- grams now address overall value by incorpo- rating both quality and cost as major design elements. The Affordable Care Act, in fact, explicitly pushes CMS in this direction, as ex- plained below.

what’s in the law? The Affordable Care Act includes a number of provisions designed to encourage improve- ments in the quality of care. Some are not, strictly speaking, pay-for-performance pro- grams. For example, Medicare’s Hospital Re- admissions Reduction Program, which took effect on October 1, 2012, can reduce pay- ments by 1 percent to hospitals that have ex- cessively high rates of avoidable readmissions for patients experiencing heart attacks, heart failure, or pneumonia.

Perhaps the best known of the programs under the law that will pay for performance are accountable care organizations (ACOs)—

groups of providers that agree to coordinate care and to be held accountable for the qual- ity and costs of the services they provide. (See the Health Policy Brief published on January 31, 2012, for more information on Medicare ACO demonstration projects.) Three other programs are described below.

• Value-based purchasing. The Afford- able Care Act also expands pay-for-perfor- mance efforts in hospitals by establishing a Hospital Value-Based Purchasing Program. Starting October 1, 2012, hospitals will be re- warded for how well they perform on a set of quality measures as well as on how much they improve in performance relative to a baseline. The better a hospital does on its quality mea- sures, the greater the reward it will receive. The law also requires CMS to develop value- based purchasing programs for home health agencies; skilled nursing facilities; ambula- tory surgical centers; specialty hospitals, such as long-term care facilities; and hospice programs.

• Physician quality reporting. The health care law also extends through 2014 the Medicare Physician Quality Reporting System that provides financial incentives to physicians for reporting quality data to CMS. Beginning in 2015 the incentive payments will be eliminated, and physicians who do not satisfactorily report quality data will see their payments from Medicare reduced. (See the Health Policy Brief published on March 8, 2012, for more information on public report- ing of quality and costs.)

• Medicare Advantage plan bonuses. The Affordable Care Act also provides for bonus payments to Medicare Advantage plans that achieve at least a four-star rating on a five-star quality rating scale, beginning in 2012. In November 2010 CMS announced that it would replace this provision with a demonstration project in which bonus payments would be awarded to Medicare Advantage plans that have at least an average of three stars and would increase the size of bonuses for plans with four or more stars.

what are the concerns? Studies on the effects of pay-for-performance have found mixed results. For example, a study of the Premier Hospital Quality Incen- tive Demonstration project mentioned ear- lier, led by Rachel M. Werner at the University of Pennsylvania, found that hospitals in the

<1% Change in payments Medicare’s Hospital Value- Based Purchasing Program will alter payments to almost two- thirds of acute care hospitals by only a fraction of 1 percent.

exhibit 1

Overall Goals of Value-Based Purchasing in Medicare

Financial viability The financial viability of the traditional Medicare fee-  for-service program is protected for beneficiaries and  taxpayers

Payment incentives Medicare payments are linked to the value (quality and  efficiency) of care

Joint accountability Providers have joint clinical and financial accountability  for health care in their communities

Effectiveness Care is evidence based and outcomes driven to better  manage diseases

Ensuring access Restructured fee-for-service system provides ensured  access to high-quality, affordable care

Safety, transparency Beneficiaries receive information on the quality, cost, and  safety of their care

Smooth transitions Payment systems support well-coordinated care across  providers and settings

Improved technology Electronic health records help providers deliver high- quality, efficient, and coordinated care

source Centers for Medicare and Medicaid Services.

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demonstration initially showed promising improvements in quality compared to a con- trol group. However, the effects were short lived, and after the fifth year of the demon- stration, there were no significant differences in performance scores between participating hospitals and a comparison group of hospitals not in the project (Exhibit 2). A possible ex- planation is that performance was improving broadly across all hospitals, as discussed more fully below.

A separate study of the Medicare Premier Hospital Quality Incentive demonstration program, led by Ashish Jha of the Harvard School of Public Health, analyzed 30-day mor- tality rates for patients with acute myocardial infarction, congestive heart failure, pneumo- nia, or coronary artery bypass graft surgery between 2004 and 2009. The results showed no difference in mortality rates between hos- pitals in the Premier demonstration and a con- trol group of nonparticipating hospitals.

As noted, one possible explanation for the lack of difference between participating hospi- tals and comparison groups was due to anoth- er CMS policy intervention—namely, public reporting of hospital performance—which may have motivated hospitals broadly to im- prove their performance. While the Premier demonstration was under way, the Depart- ment of Health and Human Services rolled out its Hospital Compare website, which publicly

reports quality-of-care measures at more than 4,000 Medicare-certified hospitals.

Many hospitals reportedly worried about being publicly “shamed” if they displayed poor performance, and so they endeavored to close the quality gap. Many hospital administrators surveyed by researchers at the RAND Corpora- tion also said they began to “shadow” the Pre- mier demo and make improvements on their own, anticipating that CMS would implement pay-for-performance across all hospitals.

challenges in design: In another study assessing the likely effects of Medicare’s Hospital Value-Based Purchasing Program, Werner and coauthors calculated that pay- ments to almost two-thirds of acute care hos- pitals will be altered by only a fraction of 1 percent. This low of an incentive, she and col- leagues wrote, raises questions about whether the program will substantially alter the qual- ity of hospital care.

Similarly, Andrew M. Ryan at Cornell Uni- versity and colleagues studied the first years of the Massachusetts Medicaid hospital pay- for-performance program, which offered financial incentives for improving care for pneumonia and prevention of surgical infec- tions, and found no improvement in quality. Another study led by Steven D. Pearson of Mas- sachusetts General Hospital compared quality performance among Massachusetts’ physician group practices during 2001–03 and found improvement in quality measures across all of the medical groups, regardless of whether or not pay-for-performance incentives were in place. The amount of improvement was con- sistent with what occurred nationally during the same time period.

Suzanne Felt-Lisk of Mathematica Pol- icy Research conducted a study of seven Medicaid-focused health plans in California from 2002 to 2005, and found that paying fi- nancial bonuses to physicians for improving well-child care did not produce significant effects in the majority of participating health plans. The lack of success was attributed to particular characteristics of the Medicaid pro- gram, such as enrollees’ lack of transportation and limited staff capacity to do outreach.

Showing greater success, researchers at Dartmouth College and the National Bureau for Economic Research recently analyzed re- sults of the Medicare Physician Group Practice Demonstration, a pilot project that ran from 2005 to 2010. In the demonstration, doctors

15% Dual-eligible beneficiaries Cost reductions in the Medicare Physician Group Practice Demonstration were greatest for the 15 percent of beneficiaries who were eligible for both Medicaid and Medicare.

exhibit 2

Average Overall Performance in Pay-for-Performance and Control Hospitals, Fiscal Years 2004–08

source Rachel M. Werner, Jonathan T. Kolstad, Elizabeth A. Stuart, and Daniel Polsky, “The Effect of Pay-for-Performance in Hospitals: Lessons for Quality Improvement,” Health Affairs 30, no. 4 (2011): 690–8. Data from Hospital Compare: survey of patients’ hospital experiences [internet], Department of Health and Human Services. notes Performance is averaged across the three conditions: acute myocardial infarction, heart failure, and pneumonia. The values shown are average composite performance scores.