By Jane Hyatt Thorpe and Chris Weiser

Background

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)^[1] and extended by the Deficit Reduction Act of 2005 (DRA),^[2] 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)^[3] and extended by the Medicare Medicaid and SCHIP Extension Act of 2007 (MMSEA)^[4] and Medicare Improvements for Patients and Providers Act of 2008 (MIPPA),^[5] CMS provides a bonus payment to physicians that report on specific quality measures.

These voluntary programs have focused on developing provider-specific quality measures and incentivizing providers to report specific quality information. Typically, the programs have begun with providers collecting and reporting information to CMS and then transitioned to linking incentive payments to the reporting. While these “pay for reporting” programs have been successful in encouraging providers to assess the quality of care they are delivering through the reporting mechanisms, they do not take into account individual patient outcomes or population health outcomes (i.e., they do not “pay for performance”). As authorized by MIPAA, CMS is currently in the process of implementing an End State Renal Disease (ESRD) facility Quality Incentive Program (QIP) that will reduce payments to facilities that do not meet or exceed certain performance benchmarks.^[6] 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.^[7] 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 Affordable Care Act (ACA), Members of Congress on both sides of the aisle stressed the importance of improving the quality of 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 for a broader range of providers, not just the reporting of quality measures. Specifically, the ACA requires the implementation of Medicare value-based purchasing programs for hospitals (other than psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, and certain cancer treatment and research facilities), physicians (through a payment modifier) and the development of plans to implement value-based purchasing programs for skilled nursing facilities, home health agencies, and ambulatory surgical centers. While this Implementation Brief focuses solely on Medicare value-based purchasing programs, it should be noted that many state Medicaid programs and private payers are also developing and implementing similar programs.^[8]

Changes Made by Health Reform (Pub. L. 111-148 §§ 3001, 3006, 3007, 3008, 3025, and 10301, as modified by P.L. 111-152)

The ACA authorizes a number of programs that link payment rates directly to the quality of care delivered by Medicare providers. These newly authorized programs require the Medicare program to financially reward and penalize providers (or develop plans to do so) based on their performance on specified quality measures and other indicators such as rates of re-admission and hospital acquired conditions.

Hospital Value-Based Purchasing Program (Section 3001)^[9]

• Creation and Funding: The Secretary of Health and Human Services (HHS) is directed to establish a hospital value-based purchasing program under which value-based incentive payments are made for discharges occurring on or after October 1, 2012 (FY 2013). Funding will be made available by reducing the base operating DRG payments for all hospitals, such that the total amount of funds available for value-based incentives for all hospitals will equal the total amount of reduced DRG payments to all hospitals. For FY 2013, base operating DRG payments will be lowered by 1%, with a gradual increase of a quarter percent a year for the next four years, until the DRG decrease is capped at 2% in FY 2017.
• Measures and Performance Standards: The Secretary is required to select quality measures for the program from those that are currently used in the Hospital Inpatient Quality Reporting Program. More specifically, the ACA requires that the selected measures include patient experience measures (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 FY 2014 and beyond, the Secretary must also include efficiency measures, including measures of Medicare spending per beneficiary adjusted for age, sex, race, and severity of illness. Finally, the Secretary must establish performance standards with respect to each measure that will include levels of both 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.
• Eligible Hospitals: 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: Using the performance standards established for each measure, the Secretary will assess each participating hospital and assign it an appropriate performance score. CMS is proposing to calculate the total performance score by weighting the clinical process score by 70% and the patient experience score by 30%.^[10] Using each hospital’s total 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.
• Public Reporting of Hospital Performance: Information regarding the performance of individual hospitals under the program will be made available online through the Hospital Compare website, as well as aggregate information on the program.
• Demonstration Program for Critical Access and Excluded Hospitals: In order to test methods for improving quality in hospitals excluded from the original program, the Secretary will be responsible for establishing value-based demonstration programs for critical access hospitals, as well as hospitals excluded from the program as a result of insufficient numbers of measures and cases, no later than two years following enactment. The demonstration programs shall last three years and be budget neutral.
• Government Accountability Office (GAO) and HHS Studies: The GAO and HHS must each conduct a study to determine the program’s impact on such areas as the quality of care furnished, program expenditures, and possible program improvements.

Value Based Purchasing for Physicians and Physician Practice Groups (Section 3007)^[11]

• Establishment: The Secretary must establish a payment modifier that provides differential payments to physicians and physician practice groups under the fee schedule based on the quality of care furnished compared to cost. The payment modifier must be implemented in a manner that is budget neutral, promotes systems-based care, and takes into consideration the special circumstances of physicians and practice groups in rural areas and other underserved communities. (See the Medicare Quality Measurement and Reporting Programs Implementation Brief here for additional information on the precursor Physician Quality Reporting Initiative (PQRI).)
• Development of Quality and Cost Measures: ACA Section 3007 requires the Secretary to develop measures of both quality and cost of care. The measures of quality must be based on a composite of indicators of the quality of care furnished, such as measures that reflect health outcomes, and must be risk-adjusted. Costs, too, shall be evaluated based on a composite of appropriate measures established by the Secretary that eliminate the effect of geographic adjustments. In determining costs, the Secretary must take into account risk factors such as socioeconomic and demographic characteristics, ethnicity, and the health status of individuals. The evaluations of quality of care and cost, as well as the establishment of the value-based payment modifier, are precluded from administrative or judicial review (e.g., not subject to challenge through administrative proceedings or the courts) in order to avoid implementation delays due to such proceedings.
• Implementation: The measures of quality of care and costs, and the dates for implementation of the payment modifier must be published no later than January 1, 2012 (CY 2012). However, the implementation of the payment modifier will be addressed during the CY 2013 rulemaking process for the physician fee schedule. Final application of the payment modifier shall begin on January 1, 2015 for specific physicians and group practices as determined by the Secretary, with general application of the payment modifier beginning no later than January 1, 2017 for all physicians.

Value Based Purchasing for Skilled Nursing Facilities (Section 3006(a)),^[12] Home Health Agencies (Section 3006(b),^[13] and Ambulatory Surgical Centers (Section 10301)^[14]

• The Secretary is required to develop plans to implement value-based purchasing programs for skilled nursing facilities, home health agencies, and ambulatory surgical centers. In developing the plans, the Secretary is instructed to consider the ongoing development, selection, and modification process for measures to the extent feasible and practicable. Additionally, the Secretary also must consider the structure of value-based payment adjustments, including the determination of thresholds or improvements in quality that would substantiate a payment adjustment, the sources of funding for the payments, and methods for the public disclosure of information on the performance of the skilled nursing facilities and home health agencies. Finally, the Secretary is instructed to consult with relevant stakeholders. The ACA requires the plan for ambulatory surgical centers be submitted to Congress no later than January 1, 2011, while plans for skilled nursing facilities and home health agencies are due no later than October 1, 2011.

Medicare Payment Adjustments for Conditions Acquired in Hospitals (Section 3008)^[15]

• Reduction in Reimbursement Percentage for Hospital-Acquired Conditions: Beginning in FY 2015, hospitals that are within the top quartile of all hospitals (other than psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, and certain cancer treatment and research facilities) for their rate of hospital-acquired conditions (relative to the national average) will have Medicare reimbursements for all discharges reduced by one percent (1%). The Secretary must establish and apply an appropriate risk-adjustment methodology prior to applying the reduction. The selected conditions will include those already in use by CMS for the hospital-acquired conditions payment policy (e.g., air embolism, certain infections, pressure ulcers) and other conditions deemed appropriate by the Secretary.
• Reporting of Hospital Specific Information: Information regarding rates of hospital-acquired conditions for each hospital will be made available on the Hospital Compare website. Prior to FY 2015, the Secretary must provide hospitals with confidential reports regarding each hospital’s status with regard to rates of acquired conditions.
• Exemption for Section 1814(b)(3) Hospitals: The payment adjustment is applicable to all hospitals (other than psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, and certain cancer treatment and research facilities). However, for a hospital with a reimbursement system approved as a demonstration project under SSA 1814(b)(3) (i.e., the waiver that allows Maryland to set all-payer rates for its hospitals), the hospital may be exempt from the payment adjustment so long as the state submits an annual report describing how a similar program in the state for a participating hospital achieves or surpasses the measured results in terms of patient health outcomes and cost savings.
• Study and Report on HAC Expansion: The Secretary of the Department of Health and Human Services (HHS) is required to conduct a study on expanding HAC policy to payments made to other facilities, including inpatient rehabilitation hospitals, long-term care hospitals, hospital outpatient departments, skilled nursing facilities, ambulatory surgical centers, and health clinics. HHS must submit a report on its findings and recommendations to Congress no later than January 1, 2012.

Payment Adjustments for Excessive Hospital Readmissions (Section 3025)^[16]

• Reduction in Reimbursement Percentage for Excess Hospital Readmissions: For discharges beginning on October 1, 2012 (FY 2013), the Secretary must reduce the payments to hospitals with excessive rates of inpatient readmissions for certain conditions. Where a hospital has an excess of readmissions, the hospital’s DRG payments will be lowered by the greater of 1) a floor adjustment factor; or 2) an excess readmissions ratio. The floor adjustment percentage is 1% for FY 2013, 2% for FY 2014, and 3% for each subsequent year. The excess readmissions ratio is a comparison of the hospital’s risk adjusted readmissions based on actual readmissions to the risk adjusted expected readmissions for the same hospital, as determined by the Secretary. The reduced payments will apply for all inpatient discharges, not just reimbursements for those conditions.
• Applicable Conditions: Initial conditions subject to readmission measurement are those currently endorsed by the National Quality Forum, which include heart attacks, heart failure, and pneumonia. However, the Secretary is required to expand the list of conditions in the future, particularly to include the additional four conditions identified by the Medicare Payment Advisory Commission (MedPAC) in June 2007 – chronic obstructive pulmonary disease, coronary artery bypass graft, percutaneous transluminal coronary angioplasty, and other vascular conditions.
• Exemptions for Section 1814(b)(3) demonstration, Medicare-Dependent Rural, and Sole Community Hospitals: The program applies to all hospitals (other than psychiatric hospitals, rehabilitation hospitals, children’s hospitals, long-term care hospitals, and certain cancer treatment and research facilities). Hospitals with a reimbursement system approved as a demonstration project under SSA 1814(b)(3) (i.e, Maryland’s waiver) may be exempted if the state in which the hospital is located submits an annual report describing how a similar program in the state for a participating hospital achieves or surpasses the measured results in terms of patient health outcomes and cost savings under this section. Special payment rules may be applied to Medicare-dependent, small rural hospitals and sole community hospitals.
• Public Reporting of Hospital Specific Information: The Secretary shall publish information on all patient readmission rates for each hospital on the Hospital Compare website.
• Quality Improvement Program for Hospitals with a High Adjusted Readmission Rate:^[17] Beginning two years after enactment, the Secretary must make available a program for hospitals with a high rate of risk adjusted readmissions to improve their readmission rates through the use of patient safety organizations.

Implementation

Agency

CMS is responsible for implementing the required value-based purchasing programs for hospitals and physicians and developing plans for value-based purchasing programs for skilled nursing facilities, home health agencies, and ambulatory surgery centers.

Key Dates

• The Hospital Value Based Purchasing Program will begin incentive payments for discharges on or after October 1, 2012 (FY 2012), with DRG penalties rising gradually from FY 2013 through FY 2017.
• For value based purchasing under the physician fee schedule, the Secretary must publish the quality of care measures and dates for implementation of the payment modifier by January 1, 2012 (CY 2012). The payment modifier will be implemented through the CY 2013 rulemaking process for the physician fee schedule, and final application of the payment modifier will begin on January 1, 2015 for specific physicians and group practices. General application of the payment modifier will begin by January 1, 2017.
• The plans to implement value-based purchasing programs are required to be completed by January 1, 2011 for ambulatory surgery centers (although not released as of the date of this Brief) and October 1, 2011 for skilled nursing facilities and home health services.
• Payment reductions for hospitals with excessive hospital acquired conditions will begin in FY 2015.
• Payment adjustments for excessive hospital readmissions will begin on October 1, 2012 (CY 2013).

Process

CMS is and will continue to address value-based purchasing programs and payment adjustments for hospitals with higher than average rates of hospital-acquired conditions and excessive readmissions through the Agency’s notice and comment rule-making process.

Key Issues

• Monitoring and Evaluation: It will be crucial for CMS to monitor and evaluate the effects (intended as well as unintended) of these programs 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 and other providers 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.
• Selecting the Right Measures: These programs will only be as strong as the measures selected. CMS will need to carefully select measures that focus on priorities for improvement, allow the incentives and rewards to work, assess intended and unintended consequences, keep the burden of data collection less than the benefits, and include composite measures for an overall assessment of value (quality and cost). Selecting cost measures in particular will be a challenge because there currently is not a robust set of endorsed cost measures available.
• Methodological Issues: There are a number of methodological issues raised by these programs ranging from risk adjustment, attribution, benchmarking for valid comparison, and small numbers and data sources among others. For example, researchers and policymakers have yet to agree on risk-adjustment methodologies that equitably capture differences in patient populations. It is important to take into account the level of illness or other factors of a particular provider’s population to ensure that any performance results reflect the level of difficulty associated with the patient population. Appropriate risk-adjustment as well as accurate attribution is particularly important when information is publicly reported and payments are adjusted based on the results (as required by ACA).
• Coordination with Electronic Health Record (EHR) Incentives and Settings of Care: CMS will need to work closely with providers, particularly hospitals and physicians where incentives are available for meaningful use of EHRs, to ensure where possible information collected and reported is submitted using EHRs. This will range from appropriate and eligible measure selection to systems and processes that support electronic capture and submission of relevant information. Beyond EHRs, CMS also will need to work to encourage coordination and alignment across the value-based purchasing programs and alignment across settings of care (e.g., hospital and physician offices).
• Public Reporting: These programs will create a wealth of actionable information. CMS will need to work with stakeholders to ensure that all information released publicly from these programs is in a format that is accessible, understandable, and actionable to consumers and other stakeholders.
• Sustainability: CMS will need to consider how best to ensure these programs are sustainable and continue 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 these programs.

Recent Agency Action

• Hospital Value-Based Purchasing Program: On January 7, 2011, CMS released a proposed rule to implement the hospital value-based purchasing program.^[18] The rule is in large part based on the 2007 hospital value-based purchasing plan submitted to Congress by CMS as required by section 5001(b) of the Deficit Reduction Act. CMS anticipates publishing a final rule next year.
• ASC Value-Based Purchasing Program: On October 14, 2010, CMS held an open door forum to solicit feedback on value-based purchasing program for ambulatory surgical centers.

Authorized Funding Levels

There is no authorized funding for these programs under the ACA; rather funding will be available through the payment reduction mechanisms included in these programs (e.g. reductions in DRG Payment to fund performance payments).