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What Is Pay for Performance in Healthcare?

Article · March 1, 2018

Pay for Performance in healthcare (P4P), also known as value-based payment, comprises payment models that attach financial incentives/disincentives to provider performance. P4P is part of the overall national strategy to transition healthcare to value-based medicine. While it still utilizes the fee-for-service system, it nudges providers toward value-based care because it ties reimbursement to metric-driven outcomes, proven best practices, and patient satisfaction, thus aligning payment with value and quality.

How Does Pay for Performance Affect Hospital Reimbursement?

Although traditional FFS reimbursement is still a large percentage of income for hospitals, the shift towards payment for value-based healthcare programs is accelerating rapidly. In P4P programs, hospitals are required to pay attention to a broad array of factors they aren’t incentivized to address in traditional FFS systems.

There are two basic types of Pay for Performance designs being deployed for hospitals. With the first, payers lower global FFS payments and use the funds to reward hospitals based on how well they perform across process, quality, and efficiency measures. In the second, hospitals are penalized financially for sub-par performance, and the penalties are either translated into direct cost savings for payers or are used to generate an incentive pool.

Pay for Performance in Healthcare Programs

While private payers are also experimenting with and deploying pay for performance programs, the Centers for Medicare and Medicaid Services (CMS), spurred by the ACA, is leading the way in value-based care with a variety of payment models including several Pay for Performance systems. As the largest funder of healthcare at almost 40% of overall spending, CMS has developed various Pay for Performance models including three programs that impact hospital reimbursement through Medicare: The Hospital Value-Based Purchasing Program (VBP), the Hospital Readmissions Reduction Program (HRRP), and the Hospital-Acquired Condition (HAC) Reduction Program.

P4P-Healthcare Funding: Medicare/Medicaid 37%, private insurance 34%, other 11%, out-of-pocket 10%, 3rd-party payers 8%.

Pay for Performance: Sources of National Healthcare Funding. Click To Enlarge.

Hospital Value-Based Purchasing Program

Created by the ACA in 2010, CMS’s Hospital Value-Based Purchasing Program was designed to improve healthcare quality and patient experience by leveraging financial carrots and sticks to encourage hospitals to follow established best clinical practices and improve patient satisfaction scores via HCAHPS (the Hospital Consumer Assessment of Healthcare Providers and Systems Survey). A “value pool” of funds is generated by reducing all Medicare payments to acute-care hospitals by 2%. These funds are then redistributed to the hospitals as determined by their performance on measures that are divided into four quality domains: (1) safety, (2) clinical care, (3) efficiency and cost reduction, and (4) patient and caregiver-centered experience. Hospitals are scored on the various measures based on “improvement” and “achievement” where improvement compares them to their own scores during a baseline period, and achievement compares them to the scores of other hospitals. CMS uses the higher of the two scores to determine financial awards.

Hospital Readmissions Reduction Program (HRRP)

Since rates of readmissions for specific care events vary significantly by hospital, Medicare began penalizing hospitals with higher rates of readmissions relative to all other acute-care hospitals under the Hospital Readmissions Reduction Program (HRRP). The program was established by the ACA and applies to specific episodes of care such as heart attack, heart failure, pneumonia, COPD, hip or knee replacement, or coronary bypass surgery. Currently, hospitals with poor performance in relation to other hospitals must accept up to a 3% reduction of their Medicare payments. Originally, risk adjustments were made based solely on demographics such as age. But regardless of these adjustments, hospitals with higher proportions of low-income patients have been penalized the most. For this reason, Congress recently passed legislation that will divide hospitals into peer groups based on the socioeconomic statuses of their patient populations starting in 2019.

Hospital-Acquired Condition Reduction Program (HACRP)

Also established under the ACA and implemented 2015, the Hospital-Acquired Condition Reduction Program (HACRP) reduces payments by 1% to hospitals in the bottom quartile of performance based on risk-adjusted measures of hospital-acquired conditions such as surgical site infections, hip fractures resulting from falls, or pressure sores. This reduction in payments to hospitals saves Medicare approximately $350 million per year. It is based on six measures of patient safety and healthcare-acquired infections. Patient safety is measured by the AHRQ PS 90 Composite Measure and hospital-acquired conditions are measured by the CDC measures of Central Line-Associated Bloodstream Infections (CLABSI), Catheter-Associated Urinary Tract Infections (CAUTI), Surgical Site Infections (SSI), Methicillin-Resistant Staphylococcus Aureus (MRSA), and Clostridium Difficile (C. diff).

Other CMS Pay for Performance Programs

CMS has created other value-based payment programs including the End-Stage Renal Disease (ESRD) Quality Initiative Program, the Skilled Nursing Facility Value-Based Program (SNFVBP), the Home Health Value-Based Program (HHVBP), and the Value Modifier (VM) or Value-Based Modifier Program. The VM program is aimed at Medicare Part B providers who receive “high, average, or low” ratings based on quality and cost measurements as compared to their peers. Payment adjustments of +/- 2 to 4% (depending on group size) are applied on a claim-by-claim basis and are tied to providers’ TIN or tax identification numbers. The penalties on low-performing providers essentially subsidize the rewards for high-performing providers.

Commercial Payers Create Pay for Performance Programs

Although many programs originate from CMS, commercial insurers are just as committed to performance-based payment models. In 2017, Forbes reported that almost 50% of insurer’s reimbursements were in the form of value-based care models and Anthem’s payments were close to 60%. “Aggregate spend regarding value-based contracts tally up to about 58% of our total medical spend across all lines of business.”

Cigna announced it was the first payer to take a value-based approach to cost control in the pharmaceutical arena by reaching Pay-for-Performance Deals for PCSK9 Inhibitors. “If Cigna’s customers aren’t able to reduce their LDL-cholesterol levels at least as well as what was experienced in clinical trials, the 2 pharmaceutical companies will further discount the cost of the drugs.”

Another example of a commercially created P4P program is the Value-Based Compensation Initiative (VBCI) from Arkansas BCBS. This program discounts payments on fee-for-service claims to eliminate profitability from unit-based services and redistribute the savings to fund a “value pool” for rewarding “high-value outcomes.”

Pay for Performance Pros and Cons

Proponents of Pay for Performance share several benefits. P4P in healthcare stresses quality over quantity of care and allows healthcare payers to redirect funds to encourage best clinical practices and promote positive health outcomes. It focuses on transparency by using metrics that are publicly reported thus providing the added incentive for organizations to protect and strengthen their reputations and it encourages accountability as well as competition through consumer-informed choice. It utilizes existing FFS payment systems thus allowing an incremental transition to value-based care, giving providers time to develop the broader value-based systems, policies, and mindsets. What’s more, Pay for Performance in healthcare is reducing costs as illustrated by the previously-mentioned Medicare savings from HACRP. It is also proving effective in some areas at decreasing bad outcomes. For example, 30-day hospital readmission rates have been falling since 2012 signifying that system-wide changes from HRRP and HACRP are having an impact.

There are numerous criticisms and challenges when it comes to Pay for Performance models in healthcare. Studies and actual cases have indicated that they harm and reduce access for socioeconomically disadvantaged populations because, despite risk adjustments, providers who treat a larger share of low-income patients will not perform as well on P4P measures and therefore are incentivized to avoid treating them. Poorer patients struggle to pay for medications, follow-up care, and transportation and often engage in behaviors or unhealthy coping mechanisms that are detrimental to their health.

Pay for Performance systems also reduce job satisfaction and intrinsic motivation for clinicians and cause doctors and administrators to game the system. Additionally, costly administrative systems must be deployed to gather and verify the necessary metrics data and the patchwork of P4P models creates a confusing collection of measures and requirements with which providers must contend. Moreover, clinicians may skew their treatment schemes excessively toward P4P processes and practices, and away from care optimized to meet individual patient needs. Lastly, but not all-inclusively, it is challenging to accurately attribute performance outcomes given that patients attain care from multiple providers.

The Future of Pay for Performance in Healthcare

As indicated by these challenges, for healthcare Pay for Performance models to be successful, many factors need to be in play. First, an iterative approach needs to be adopted. Hospitals and other healthcare organizations must work with CMS and other payers to standardize metrics, gather and share data, evaluate for successes and failures, and then adjust accordingly. Additionally, in developing and adapting programs, healthcare leaders can leverage Pay for Performance guiding principles from both the AMA and the AAFP. These guiding principles stress the importance of the physician/patient relationship, evidence-based best practices and performance measures, voluntary participation, and fair and equitable program incentives.

Pay for performance program development process: 1) Develop, 2) Implement, 3) Evaluate, 4) Adjust, 5) Redeploy.

Pay for performance in healthcare program development process. Click To Enlarge.

When developing and iterating reward/penalty programs, healthcare leaders must strongly emphasize strategies that address the social determinants of health and they must introduce health equity measures to produce fair provider comparisons. Furthermore, they need to reward clinicians and hospitals who perform well among socioeconomically disadvantaged patient populations to offset the additional financial risk associated with caring for these groups.

By taking the long view, deploying an iterative approach, applying guiding principles, and accommodating social equity factors, healthcare leaders and payers can potentially create P4P programs that promote quality, positive outcomes, and more satisfied patients all while reducing costs.

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