Improving the quality of care delivery and reducing explosive growth in healthcare costs is a cornerstone of The Patient Protection and Affordable Care Act (ACA). It reflects the shared understanding that the current silo-based approaches to care delivery that focus on settings of care (e.g., physician office, hospital) rather than care delivery across multiple providers and setting (e.g., episodic) are not working. Costs are increasing at an unsustainable pace, and evidence from leading researchers collectively points to serious deficiencies in health care quality and the disconnect between high spending and health care quality. To foster the development of more collaborative and...

Hospitals in the United States readmit an average of 20% of Medicare patients within thirty days of their initial discharge. These readmissions cost the Medicare program an estimated 12 billion dollars each year and may be an indicator of poor quality of care where the readmission was potentially preventable. In its June 2007 Report to Congress, the Medicare Payment Advisory Commission (MedPAC) classified many hospital readmissions as potentially preventable. Based on these recommendations, Congress included the Hospital Readmissions Reduction Program (HRRP or Program) in the Affordable Care Act. CMS issued the final rule implementing the HRRP on August 18, 2011, although CMS will continue to clarify additional details of the program through future rulemaking.

Historically, the Medicare program has passively purchased health care services for Medicare beneficiaries. Hospitals and other providers delivered services to Medicare beneficiaries and the Medicare program paid for the services without any indication of the quality or value of the care delivered. However, as costs have continued to escalate at an explosive pace without discernible improvements in the quality of care delivered, Congress and Medicare administrators have re-evaluated this passive payment methodology. Premised on the belief that the Medicare program must transition to be an active purchaser of high quality, cost-effective care, value-based purchasing uses financial incentives to both incentivize improved quality of care delivery and reduction of costs.

To improve the quality of health care delivered to Medicare beneficiaries, the Centers for Medicare and Medicaid Services (CMS) has historically used its demonstration authority to test new delivery and payment models that incentivize providers to improve the quality of care they deliver. Congress has bolstered these initiatives through a series of laws designed to augment CMS’ authority to implement these programs on a broader scale. For example, as authorized under the Medicare Prescription Drug and Modernization Act of 2003 (MMA) and extended by the Deficit Reduction Act of 2005 (DRA), CMS provides a full annual payment update to hospitals that report on specific quality measures. Failure to participate results in a two percent decrease in the annual payment update. Similarly, as authorized by the Tax Relief and Health Care Act of 2006 (TRHCA) and extended by the Medicare Medicaid and SCHIP Extension Act of 2007 (MMSEA) and Medicare Improvements for Patients and Providers Act of 2008 (MIPPA), CMS provides a bonus payment to physicians that report on specific quality measures.

Health care quality represents a constantly recurring theme in U.S. health policy. Traditionally, the Medicare program has paid for health care services on a fee-for-service basis with the exception of inpatient hospital services, which are paid based on Diagnosis Related Groups (DRGs) under the prospective payment system (PPS), and the Medicare Advantage and Prescription Drug plans, which are paid on a capitated basis. All payment systems tend to incentivize something; in the case of fee-for-service, it is indiscriminant increases in volume of services provided, while in case-based or capitation systems it is indiscriminant reductions in volume. The challenge is to promote both quality and value while also apportioning financial risk appropriately. Because Medicare has relied principally on a fee-for-service approach to payment for physician and other services (and even while hospital payments are case-based under the PPS, it does not discourage multiple admissions and readmissions), the program has experienced incredible growth in the volume of services. At the same time, Medicare lacks a program-wide and deliberate approach to promoting quality and value.