Overview of Hospital Pay for Performance

Expand the Use of Pay for Performance (P4P) for Hospitals

What is it?

Pay for performance (P4P) uses financial incentives to stimulate both improvements in the quality of care and, in some cases, reductions in costs. To achieve these goals, P4P programs use a variety of performance measures, including clinical processes of care and health outcomes, patient safety, patient experience with receiving care, resource use (i.e., efficiency), and structural indicators such as information technology investment and use. For example, if the P4P program sponsor (e.g., health plan, Medicaid agency) creates a P4P program with the goal of improving clinical quality, the participants might report such measures as risk adjusted mortality or complication rates. If the program sponsor seeks improvement in the efficiency of care, the measures may include hospital readmission rates, risk adjusted hospital length of stay, and reduction in measures of hospital overuse. Financial incentives are created by withholding a portion of current payments (or increasing future payments), adding new money to existing payments, or sharing the savings through reductions in expenditures. They may take the form of an increased payment for each service delivered or a bonus. Payments are made based on a hospital having attained relative or absolute performance thresholds, having improved over the prior year's performance, participating in specific initiatives, or participating in some combination thereof.

How would it work?

Currently, much of the P4P activity at the federal level is in the form of demonstration projects or pilots. Under this option, these programs could be scaled up to cover all hospitals that contract with public or private purchasers. For example, Congress and the Centers for Medicare & Medicaid Services (CMS) could implement P4P in Medicare and, together with states, in Medicaid. Private purchasers could expand their current programs to include other metrics, such as those related to the cost of care.

Has it been tried before?

More than half of all private sector health plans in the United States use a P4P program (Rosenthal et al., 2006), and as of October 2006, about 40 programs specifically targeted hospitals (Damberg et al., 2007).

Public purchasers also have begun taking steps toward adopting P4P in the Medicare program. In 2004, CMS initiated a hospital pay-for-reporting program—the CMS Reporting Hospital Quality Data Annual Payment Update (RHQDAPU) program—which is viewed as a precursor of a Medicare hospital P4P program. The RHQDAPU program covers the 3,500 Inpatient Prospective Payment System (IPPS) hospitals in the United States. The program requires these hospitals to submit data on a specified set of quality measures (clinical processes of care and patient experience) and to have these data publicly reported on the CMS Hospital Compare Web site in order to obtain their full annual payment update to the diagnosis related group (DRG) payment. CMS is also conducting a variety of P4P demonstrations (pilot projects). In the hospital setting, the first cycle of the Premier Hospital Quality Incentive Demonstration targeted 250 hospitals across the United States and provided a bonus on top of existing DRG payments to hospitals in the top two deciles of performance across five clinical conditions. Hospitals that did not improve over their baseline level of performance by year three of the demonstration experienced a reduction in payments. The demonstration has been extended for two years and is now in its fourth year. The design of the demonstration was also adjusted for years four and five.

Rather than positive incentives for excellent performance, CMS, under Section 5001(c) of the Deficit Reduction Act of 2005, has taken steps to eliminate payments for poor quality by no longer making a higher DRG payment to hospitals for preventable hospital acquired conditions. On July 31, 2008, in the IPPS fiscal year (FY) 2009 Final Rule, CMS included ten categories of conditions that were selected for the hospital acquired condition payment provision (CMS, 2008). Although many of these conditions are uncommon, the effect of negative incentives is expected to be strong.

Medicare Payment Advisory Commission (MedPAC) (2006) and Institute of Medicine (2006) reports have recommended that CMS implement P4P across all provider settings and work to align payment policy with the provision of high quality care. Given the broad use of P4P programs in the private sector and the successes of the RHQDAPU program and CMS Premier P4P demonstration, it is anticipated that CMS will implement P4P. CMS took a step in this direction in response to a congressional mandate.

As part of the 2005 Deficit Reduction Act, Congress required the Secretary of the U.S. Department of Health & Human Services to develop a plan for implementing value based purchasing (which is similar to P4P) for Medicare hospital services starting in FY 2009. Between September 2006 and July 2007, CMS developed the plan in consultation with affected stakeholders, and the plan was submitted to Congress in November 2007 (CMS, 2007). Congress has not yet acted on this proposal.