Pay for Performance a Factor in Medicare Reform

As a lame duck Congress moves toward the end of 2006, the future of Medicare is one of several issues left dangling by the tail feathers for the 110th Congress to take up in January 2007. In addition to a new Democratic majority in the Legislature, the new year also will mark the start of what promises to be a long presidential election campaign.

Health care in general and Medicare’s future in particular could become key campaign issues.

While political jockeying is under way to adjust how much doctors and hospitals get paid for treating Medicare patients next year and in the years to come, there seems little question about how they’ll be paid.

Pay-for-performance systems, fairly commonplace now in the private sector, appear to be firmly in the cards for Medicare’s future. Last month the Government Accountability Office urged the new Congress to overhaul Medicare and Medicaid using pay-for-performance principles.

“Absent reform, Medicare’s and Medicaid’s long-term fiscal sustainability for supporting health care for elderly, disabled and low-income Americans is in jeopardy,” David Walker, GAO comptroller general, wrote in the letter to Congress. He urged Congress to use Medicare reimbursements to reward quality and efficiency. With 42 million beneficiaries and $330 billion in spending in 2005, Medicare’s “size and complexity make it vulnerable to improper payments and inefficient payment systems,” Walker wrote.

Walker, in his letter, used what many health care and political players predict will be a key word in the coming Medicare debate — “sustainability.”

The Premier Example

“There’s a lot of momentum building toward taking action that will create sustainable systems, and value-based pay-for-performance systems do that,” said Hunter Kome, vice president of Premier, the country’s largest private health care purchasing network.

Premier last month won the 2006 Malcolm Baldridge National Quality Award, in part for its work developing a Medicare pay-for-performance program. The three-year pilot project at more than 250 hospitals nationwide will serve as part of the framework for the federal government’s plans to shift Medicare reimbursements into pay-for-performance programs.

Headquartered in San Diego, Premier says the results of its three-year project not only show pay-for-performance systems can keep efficiency high and costs low, they also can improve quality of health care.

According to Premier’s pilot project data, if all pneumonia, heart bypass, heart attack (acute myocardial infarction), and hip and knee replacement patients nationally received most or all of a set of widely accepted care processes in 2004, it could have resulted in about:

  • 5,700 fewer deaths;
  • 8,100 fewer complications;
  • 10,000 fewer readmissions; and
  • 750,000 fewer days in the hospital.

In addition, hospital costs could have been as much as $1.35 billion lower.

In 2003, CMS approved the three-year pay-for-performance experiment in which Premier collected 33 clinical quality indicators from more than 250 hospitals. Hospitals with the highest scores received bonus payments from Medicare at the end of each year of the project.

Congress has directed Medicare to expand the program nationwide based on the pilot’s results.

Implications for Providers

Health care providers are watching all this closely. Medicare, the largest purchaser of health care in the country, plays a major role in the fiscal existence of many hospitals and physician practices.

Main arguments against pay-for-performance plans are that they are driven by cost motivations and can adversely affect overall quality.

Albert Einstein was once quoted as once saying, “Not everything that counts can be measured and not everything that can be measured, counts.”

That sentiment leads some health care providers to predict that pay-for-performance environments will cause physicians and hospitals to pay closer attention to the clinical areas being monitored but less attention to other areas, potentially compromising overall quality as a result. Critics say it would be impossible to monitor everything that goes on in a hospital or put a price tag on the physician-patient relationship.

HMOs, California Leading the Way

Although not everyone is willingly jumping on, the pay-for-performance bandwagon appears to be rolling inexorably along.

More than half of the country’s HMOs responding to a national survey said they routinely incorporated pay for performance in 2005 physician contracts.

According to a study released last month by the Harvard School of Public Health, 52.1% of health plans representing 81.3% of people enrolled in HMOs used pay-for-performance programs last year. In California, the rate was much higher: More than 75% of California HMOs used pay-for-performance programs.

California hospitals in general also are further along on the pay-for-performance curve than hospitals in other parts of the country.

“California has been at the forefront in many facets of health care’s evolution,” Kome says. “Until now, this whole push for pay-for-performance health care has been more of a state issue. States have been putting pressure on CMS to catch up.”

Driving Force in Health Care Reform

The Harvard study, reported in the New England Journal of Medicine, concluded the private sector is well ahead of the federal government in adopting pay-for-performance principles.

Two big pushes in the effort to reform Medicare came from reports by the Institute of Medicine. A 1999 report, “To Err Is Human: Building a Safer Health System,” clearly showed that health care in the U.S. was not as safe as it should be.

The second, “Crossing the Quality Chasm: A New Health System for the 21st Century” released in 2001, recommended a fundamental redesign of the American health care system. The report called for alignment of payment and accountability by establishing an incentive system, promotion of evidence-based medicine and development of clinical information systems.

Although neither IOM report dwelled on money, many health care stake holders predict the overhaul of Medicare — and eventually Medicaid — will have more to do with money than any other factor.

“We have an election year coming up, and I think we’re going to see fiscal responsibility develop as a big issue,” Kome said.

“We’re seeing three possible scenarios developing with this Medicare overhaul. You could see across-the-board cuts throughout the system. You could see an emphasis on eliminating — or at least not reimbursing for — preventable health care errors, or you could see widespread use of pay-for-performance programs.”

“We think we’ll see a combination of the second two scenarios.” Kome says. “We think there will be a major emphasis on sustainability for Medicare. Although they’re relatively new and haven’t established a long track record, we believe pay-for-performance models are sustainable.”

Related Topics

Health Care Costs Health Industry Insight Medi-Cal Medicare Public Health