Pay-for-Performance
One of the reimbursement models aimed at improving the quality, efficiency, and overall value of healthcare is known as pay-for-performance. This payment arrangement provides financial incentives to hospitals, physicians, and other healthcare providers to carry out particular improvements and achieve optimal outcomes for patients. With a particular emphasis on quality, this model directly responds to concerns about the increasing high costs of medicine attributed to other reimbursement methods, such as FFS and capitation.
In a pay-for-performance system, physicians are given bonuses for meeting particular clinical goals, such as smoking cessation and diabetes management, and penalized for not meeting certain standards. Hospitals are similarly rewarded for how well they perform on a set of quality measures, as well as how much their performance improves relative to a baseline. The better a hospital does on its quality measures, the greater the reward it receives.
Hospitals also can be penalized for poor performance. One common benchmark is reducing the rate of avoidable hospital readmissions. Starting October 1, 2012, the ACA established the Hospital Readmissions Reduction Program, requiring the Centers for Medicare & Medicaid (CMS) to reduce payments by 1% to hospitals with a high rate of avoidable readmissions for Medicare patients ages 65 and older who experience heart attacks, heart failure, or pneumonia (CMS, 2013d). This program expanded in 2014 to include elective hip/knee replacement and congestive constructive pulmonary disease (James, 2013), and in 2015 to include patients admitted for coronary artery bypass graft (CABG) surgery. In 2016, the original performance measure for pneumonia was updated to include patients with sepsis related to their pneumonia diagnosis and those patients diagnosed with aspiration pneumonia (CMS, 2016b). In these cases, a hospital’s payments will be reduced if it does not have a minimum of 25 discharges for each of these conditions without readmission (James, 2013). Medicare will no longer pay hospitals for a preventable hospital condition, such as urinary tract infections associated with the use of catheters. By penalizing the hospital for these types of outcomes, healthcare professionals are expected to provide a higher quality of care and be more accountable for their services.
This system of rewards and penalties has been used successfully in the British healthcare system to reduce costs. In addition, more than forty pay-for-performance programs exist in the private sector (James, 2012). One of the most well-known test cases of this system was the Premier Hospital Quality Incentive Demonstration project. CMS partnered with Premier, a nationwide nonprofit hospital system, to see whether a pay-for-performance model would in fact improve the quality of care given to Medicare patients. They selected patients with certain medical conditions to test the efficacy of this approach. The outcomes of this project were mixed. Initially, quality did improve, but over time there were no significant differences in performance between those hospitals participating in the program and those who did not. However, this model still remains a popular one among policymakers and is currently under revision for improvements, such as increasing the value of penalties and rewards (James, 2012).
CMS has established four quality measures to assess the performance of a healthcare provider or hospital:
1. Process measures. These measures gauge whether healthcare professionals follow the established standards of care. It is expected, for instance, that primary care physicians should counsel overweight patients to lose weight and provide them with the necessary resources.
2. Outcome measures, or the effects of the treatment. Although these are easier to measure, they are also not entirely in the health professional’s control. A provider might properly counsel diabetic patients about the importance of monitoring blood sugar levels, but whether patients modify their lifestyles accordingly is beyond the scope of the clinician. Yet a provider is still responsible for this outcome measure in terms of receiving either rewards or penalties from Medicare.
3. Patient measures. A relatively new way to measure performance, this category assesses patients’ experiences and their perceptions of quality of care. A patient’s input is garnered on a range of issues from patient–doctor communication to whether the treatment room was clean. Patients are surveyed about their experiences, and their responses are used to reward or penalize medical providers. The power dynamic is shifted from provider to patient (i.e., consumer).
4. Structure measures. These relate to facilities, personnel, and equipment used in patient care. In 2014, the ACA gives financial incentives for hospitals and providers to adopt health technology that aims to reduce costs and improve quality. One example, discussed in detail in Chapter 10, is electronic health records (EHRs). By making patient records electronic, it is believed that medical errors will be reduced while efficiency is improved. By adopting EHRs, medical providers are rewarded for investing their time and money into this structure.
The ACA established Accountable Care Organizations (ACOs) to assess these four categories of quality measures. ACOs are groups of doctors and hospitals working together to provide high-quality healthcare to Medicare patients. If they are successful collectively in achieving their goals, they share in the financial benefits.
Another assessment program established by the ACA is the Medicare Physician Quality Reporting System. This system originally was established to provide financial incentives to doctors reporting on the quality measure categories. Since 2015, instead of a financial reward for reporting, there is a penalty for not reporting; physicians who do not report have their Medicare payments reduced. On December 31, 2016, the Medicare Physician Quality Reporting System became part of the Merit-based Incentive Payment System.

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