By Jane Hyatt Thorpe and Chris Weiser

Background

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.^[1] 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.

Over the last seven years, the Centers for Medicare and Medicaid Services (CMS) has implemented a number of value-based purchasing programs specifically focused on improving the quality of hospital care delivered to Medicare beneficiaries (formerly referred to as pay for performance programs). Congress has authorized these programs through a series of laws designed to augment CMS’ authority to implement value-based purchasing on a broader scale. For example, as authorized under the Medicare Prescription Drug and Modernization Act of 2003 (MMA)^[2] and extended by the Deficit Reduction Act of 2005 (DRA),^[3] CMS provides a full annual payment update to hospitals that report on specific quality measures. Failure to participate in the Reporting Hospital Quality Data Annual Payment Update (RHQDAPU) results in a two percent decrease in the annual payment update. Hospital performance information from this program also is publicly posted on the Medicare Hospital Compare website.^[4] The MMA also authorized the Premier Hospital Quality Incentive Demonstration designed to test whether financial incentives actually encourage the delivery of higher quality health care at lower cost. The Premier demonstration targeted 250 hospitals across the U.S. and provided bonus payments to those that met certain benchmarks across five clinical conditions. This demonstration was twice extended due to the positive results. The DRA also required CMS to develop a plan to implement a value-based purchasing program for hospitals. CMS submitted its proposal to Congress in November 2007, but no action was taken on the plan until it was in included in the Patient Protection and Affordable Care Act of 2010 (ACA).

The original hospital incentive program (RHQDAPU), precursor to the Hospital Value-Based Purchasing Program authorized by ACA, focused on developing hospital-specific quality measures in collaboration with the hospital community and incentivizing hospitals to report specific quality information to CMS. RHQDAPU began with 10 quality measures and hospitals that failed to report the specified information were penalized with a 0.4% decrease in their annual payment update. Today this program (now referred to as the Hospital Inpatient Quality Reporting program or IQR program) has grown to 76 measures (for fiscal year 2015 payment calculation) and, as noted above, failure to participate results in a 2% decrease. While this “pay for reporting” program has been successful in encouraging hospitals to assess the quality of care they are delivering through the reporting mechanisms, it does not take into account individual patient outcomes or population health outcomes (i.e., it does not “pay for performance”).

In addition, as authorized by the DRA, CMS has implemented a related type of payment program that does not pay hospitals the higher rate associated with treatment for specific conditions acquired in the hospital (hospital-acquired conditions or HACs) if they were not present on admission.^[5] However, until recently, CMS was not able to move beyond “pay for reporting” programs or the hospital HAC program because it did not have the necessary authority to vary payments based on actual provider performance.

During Congressional consideration of the ACA, Members of Congress on both sides of the aisle stressed importance of improving the quality of hospital care and reducing costs in federal programs and in private health insurance. As a result, the ACA takes significant strides beyond “reporting” programs and authorizes CMS to directly link payment rates to the actual quality of care delivered by hospitals (as well as other providers), not just the reporting of quality measures. Specifically, the ACA requires the implementation of a Medicare value-based purchasing (VBP) Program for hospitals (other than psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, and certain cancer treatment and research facilities). While this brief focuses solely on the Medicare hospital VBP program, it should be noted that the ACA also authorized implementation of or development of plans for value-based purchasing for other providers (e.g., physicians, skilled nursing facilities, home health agencies, and ambulatory surgery centers)^[6] as well as a payment reduction program for hospitals with high re-admission rates.^[7] Furthermore, many state Medicaid programs and private payers are also developing and implementing similar programs for hospitals and other providers.^[8]

Changes Made by the Affordable Care Act (Pub. L. 111-148 §3001, as modified by P.L. 111-152)

Hospital Value-Based Purchasing Program^[9]

• Creation and Funding:^[10] The Secretary of HHS is directed to establish a hospital value-based purchasing program for discharges occurring on or after October 1, 2012. Funding will be made available by reducing the base operating DRG payments for all hospitals to create an incentive pool from which payments will be made to qualifying hospitals. For fiscal year 2013, base operating DRG payments will be lowered 1%, with a gradual increase of a quarter percent a year for the next four years, until the decrease is capped at 2% in 2017.
• Quality Measures:^[11] The quality measures must be selected from those currently used in the Hospital IQR Program and included on the Hospital Compare website for at least one year. Selected measures also must include consumer satisfaction (from the Hospital Consumer Assessment of Healthcare Providers and Systems Survey (HCAHPS)), and at least cover acute myocardial infarctions, heart failure, pneumonia, surgeries as measured by the Surgical Care Improvement Project, and healthcare-associated infections. For fiscal year 2014 or a subsequent fiscal year, the Secretary must also include efficiency measures, including measures of Medicare spending per beneficiary adjusted for age, sex, race, and severity of illness.
  • In the final regulation implementing the hospital VBP program, CMS followed the ACA closely designating 13 different quality measures for use in 2013. These measures are classified into two categories, with 12 measures reflecting clinical processes of care, and the final measure representing the patient experience of care from HCAHPS. The clinical processes of care from the Hospital IQR program consist of: 1) the percent of heart attack patients given fibrinolytic medication within 30 minutes of arrival; 2) the percent of heart attack patients given PCI within 90 minutes of arrival; 3) the percent of heart failure patients given discharge instructions; 4) the percent of pneumonia patients whose initial emergency room blood culture was performed prior to the administration of the first hospital dose of antibiotics; 5) the initial antibiotic selection for CAP in immunocompetent patient; 6) whether a prophylactic antibiotic is received within one hour prior to surgical incision; 7) the prophylactic antibiotic selection for surgical patients; 8) whether prophylactic antibiotics are discontinued within 24 hours after surgery end time; 9) cardiac surgery patients with controlled 6AM postoperative serum glucose; 10) surgery patients on a beta blocker prior to arrival that received a beta blocker during the perioperative period; 11) surgery patients with recommended venous thromboembolism prophylaxis ordered; and 12) surgery patients who received appropriate venous thromboembolism prophylaxis within 24 hours prior to surgery to 24 hours after surgery. In addition, for 2014, CMS will add an additional category of measures, “patient outcomes.” Additionally, CMS will add a fourth category in 2014 labeled as “efficiency.”
• Performance Standards:^[12] The Secretary must establish performance standards with respect to each measure that will include levels of achievement and improvement, taking into account appropriate factors such as practical experience with the measures, historical performance standards, improvement rates and the opportunity for continued improvement. Performance standards will be announced no later than 60 days prior to the beginning of the performance period for which they will apply.
• Eligible Hospitals:^[13] The program will apply to all hospitals other than psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, and certain cancer treatment and research facilities. Furthermore, the ACA allows for certain additional exclusions, including hospitals for which the Secretary has cited deficiencies that pose immediate jeopardy to the health or safety of patients, hospitals for which there are an insufficient number of measures to apply (or number of cases for the measures to apply) in a performance period, and hospitals that are already subject to a payment reduction for failing to submit data on selected measures.
• Calculation of Incentive Payments:^[14] Using the performance standards established for each measure, the Secretary will assess each participating hospital and assign it an appropriate performance score. Using each hospital’s performance score, the Secretary will then specify a value-based incentive payment percentage for each hospital, which will be multiplied by the hospital’s base operating DRG payment amount for the fiscal year to determine the value-based incentive payment amount. The Secretary must ensure that the developed methodology results in appropriate distribution of value-based incentive payments among hospitals achieving different levels of hospital performance scores, with hospitals achieving the highest scores receiving the largest value-based incentive payments. Each hospital will be informed of the adjustments to its payments at least 60 days prior to the fiscal year involved. Any payment reductions made will apply only to that fiscal year, and will not be taken into account for payment reduction decisions in subsequent years.
  • In the final regulation implementing the program, CMS indicated that it will determine a national benchmark level and a minimum threshold level. The highest levels of achievement will be reflected by the benchmark, while the minimum levels of achievement will be represented by the threshold. These two levels will be used to compare a hospital’s performance on the quality measures and to calculate the hospital’s achievement and improvement scores, both of which will be taken into account when determining a hospital’s overall program score. A hospital can earn up to 10 achievement points and up to 9 improvement points for each measure, with the hospital’s final score for each measure equating to the higher of the two scores. Finally, CMS will combine each measure score to determine the hospital’s program score; clinical process measures will be weighted as 70% of the score, while the patient experience measure will be weighted as 30%.
• Public Reporting of Hospital Performance:^[15] Specific hospital performance information from the VBP program will be made available online through the Hospital Compare website, as well as aggregate information related to the program. Every hospital will have the opportunity to review, and submit corrections for, the information to be made public.

Implementation

Agency

CMS is responsible for developing and implementing the Hospital VBP Program.

Key Dates

• The Hospital VBP Program will begin incentive payments for discharges on or after October 1, 2012, with DRG penalties rising gradually from 2013 through 2017.
• The performance period for calculating a hospital’s 2013 reimbursement begins on July 1, 2011 and runs through March 31, 2012. Hospital baseline scores for 2013 will be calculated from the period of July 1, 2009 through March 31, 2010.

Process

CMS is and will continue to address the Hospital VBP program through the notice and comment rule-making process.

Key Issues

• Weighting of Measures: CMS will need to pay attention to the possible unintended consequences that may arise from the weight given to each category of quality measures. In its final rule, CMS weighted the 12 measures of clinical process quality as 70% of a hospital’s total value based purchasing score, while assigning the remaining 30% to the single HCAHPS survey of patient satisfaction. There is concern that hospitals may consequently over-emphasize raising a patient’s perceived satisfaction with the hospital, while providing less attention to each of the individual objective quality measures.
• Opting Out of the Program: In the final regulation, CMS expressed concern about the possibility of some hospitals “opting out” of the VBP Program altogether. Hospitals that are subject to a payment reduction under the Hospital IQR program are subsequently excluded from the VBP program for that year. Therefore, hospitals may choose to simply stop reporting quality information to the Hospital IQR program, thereby avoiding both the base operating DRG payment reduction and the possibility to receive a value-based incentive payment. Such hospitals will still be subject to a penalty under the Hospital IQR program, but will not face a second value-based purchasing reduction.
• Coordination with Electronic Health Records (EHR): In its final regulation, CMS expressed its desire to collect quality measure information from certified EHR technology rather than from hard copies of medical records when possible. Additionally, CMS indicated that it will work with Office of the National Coordinator for Health IT on operational issues and challenges while aligning value-based purchasing and the EHR meaningful use program. It will be important for CMS to be able to accept electronic submission of quality data, both to help promote adoption of EHR technology as well as to ensure accurate collection of information. Additionally, while CMS suggested the possibility of developing new policies to protect patient privacy when accessing EHR data, no tangible guidelines or strategies were suggested.
• Monitoring and Evaluation: It will be crucial for CMS to monitor and evaluate the effects of VBP program on access to care and patterns of care delivery to ensure that adverse and unintended effects are minimal particularly for the most vulnerable populations. For example, CMS will need to ensure that hospitals do not steer away patients with the most costly and complex needs in favor of healthier patients that may reflect more positively in their performance scores.
• Sustainability: CMS will need to consider how best to ensure this program is sustainable and continues to capture both achievement and improvement. Selection of increasingly rigorous quality measures, inclusion of additional outcomes-based measures and patient-experience of care measures, retirement of measures that no longer provide any relatively comparable information, and inclusion of measures that capture coordination and integration of care among providers will all be critical to the continued success and impact of this program.

Recent Agency Action

On January 7, 2011, CMS released a proposed rule to implement the hospital value-based purchasing program.^[16] The final rule was published in the Federal Register on May 6, 2011.^[17] CMS included additional technical and measure-specific proposals related to future years of the VBP program in the proposed rule for the Hospital Outpatient Prospective Payment System (OPPS) on July 18, 2011. The final OPPS rule, including the hospital VBP provisions related to inpatient hospital care, will be released later this fall (2011). It is likely that CMS will continue to include changes in proposed and final payment rules other than the Hospital Inpatient Prospective Payment System (IPPS) rule or a stand-alone Hospital VBP rule.

Authorized Funding Levels

No funding is authorized for the program; rather funds will come from an across the board reduction in the base DRG payment for all hospitals.