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BRIEF ARTICLE

What Is Pay for Performance in Healthcare?

Pay for Performance P P ties reimbursement to metric-driven outcomes,
best practices, and patient satisfaction. Find information on P P models, CMS
programs, pros/cons, and more.

By NEJM Catalyst

March ,

This article appeared in NEJM Catalyst prior to the launch of the NEJM Catalyst
Innovations in Care Delivery journal. Learn more.

Pay for Performance in healthcare P P , also known as value-based payment,

comprises payment models that attach financial incentives/disincentives to provider
performance. P P 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 P P 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
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.

Figure . 

Hospital Value-Based Purchasing Program

Created by the ACA in , 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 . These funds are then
redistributed to the hospitals as determined by their performance on measures that are
divided into four quality domains: safety, clinical care, efficiency and cost
reduction, and 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 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 .

Hospital-Acquired Condition Reduction Program (HACRP)

Also established under the ACA and implemented , the Hospital-Acquired
Condition Reduction Program HACRP reduces payments by 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
million per year. It is based on six measures of patient safety and healthcare-acquired
infections. Patient safety is measured by the AHRQ PS 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 /- to
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 , Forbes reported that
almost of insurer’s reimbursements were in the form of value-based care models
and Anthem’s payments were close to . “Aggregate spend regarding value-based
contracts tally up to about 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 PCSK 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 pharmaceutical companies will further
discount the cost of the drugs.”

Another example of a commercially created P P 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. P P 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, -day
hospital readmission rates have been falling since 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 P P 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 P P models creates a confusing collection of
measures and requirements with which providers must contend. Moreover, clinicians
may skew their treatment schemes excessively toward P P 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.

Figure . 

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 P P programs that promote quality, positive outcomes, and more satisfied
patients all while reducing costs.
NEJM Catalyst

Topics

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Payers
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