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A Glimpse at the Future of Pay for Performance

Timothy Ward, for HealthLeaders Media, June 20, 2008

The Center for Medicare and Medicaid Services initiated the concept of Pay for Performance several years ago as a form of reward for providers who met pre-established targets for the delivery of healthcare services. Pay for Performance, in its original configuration, rewarded physicians and hospitals for meeting certain performance measures for quality. Since 2005, CMS has made changes to the incentives they are willing to pay extra for, as well as identified several preventable items for which CMS will not pay.

Moving forward in 2008, we expect to see P4P continue to change, as new standards and regulations are adapted. This article addresses where we believe P4P stands now, where it is likely to go in the near future and where it should focus in the longer term.

Initially, there was a short list of things for which CMS was willing to pay extra for if they were properly managed. The list of good things or positive steps for which CMS is willing to pay more (such as diabetic patients whose cholesterol is under control and who are getting appropriate foot and eye exams, the percentage of congestive heart failure and coronary artery disease patients receiving appropriate medication therapy, and the percentage of high risk patients with chronic diseases getting appropriate ambulatory care2) is likely to grow and create additional incentives.

More recently, however, CMS has focused on the flip side of the equation by designating missteps or actions that should not occur or are fairly easy to prevent, but which result in increased medical care resource consumption and higher costs. Last fall, CMS announced that it would no longer pay for the additional costs associated with some missteps.

The first list of negative items for which CMS is unwilling to pay for includes: hospital-acquired bed sores and infections, leaving objects inside surgery patients, and in-hospital patient falls. CMS has recently released an updated list of no-pay instances. The new list adds 21 items to the original list. 3CMS has also proposed to decrease payments to "poorly performing hospitals" 1 by a small percentage and to then redistribute these funds to the hospitals that are performing well and achieving a modest number of quality-related benchmarks.

It is now clear that CMS has moved away from being a fairly disinterested payer of health insurance claims to positioning itself as an active purchaser of healthcare services. As such, CMS will expect greater value for its expenditures. The list of extra payment items is likely to continue to grow slowly, a few items per year. However, the projected financial impact to hospitals from the no-payment list already greatly exceeds the extra payment potential from the positive action list. The list of negative items that will not be reimbursed by CMS is likely to grow much more rapidly in the future. And, the no-payment items are likely to grow in several new directions, such as:

Protocols. The medical literature suggests that when a "best practice" protocol has been identified for a certain patient type, hospitals and doctors only follow this protocol about 1/3 of the time.4 Following established treatment protocols is likely to be added to the list, with CMS paying more when hospitals take a proven path and penalizing them when the protocol is not followed.

Timeliness. Should CMS make the same payment to a hospital for an emergency department visit when the patient is seen right away versus a 2-, 4-, or 6-hour wait before the patient is seen? What is an acceptable wait time for a hospital bed upon request by the emergency department, and should CMS pay for this wait time too? Even when moving a patient out of a facility, issues arise. If someone needs follow-up care at a skilled nursing or rehab facility, where the additional care was anticipated well in advance of the patient’s discharge, should CMS pay for a longer hospital stay while the patient is awaiting transfer to the referral facility? In the not-too-distant future, CMS is likely to add timeliness criteria to the P4P and no-payment lists.

What does this mean for hospitals? For most facilities, dollars from Medicare and Medicaid represent a large portion of their overall income. And private insurers generally follow the lead of CMS and implement similar payment policies in short order. Therefore, hospitals must continue to pay careful attention to these CMS initiatives.

The initial response to CMS payment policies is likely to be defensive in nature. For example, CMS will not pay more for infections that it determines are hospital-acquired. Therefore, upon admission, hospitals must screen all patients for Methicillin-Resistant Staphylococcus Aureus (MRSA) to document that an infection was present prior to the patient entering their facility. Similarly, CMS will not pay for hospital-acquired bedsores, so upon admission, all patients must now be screened head-to-toe to identify and document any bedsores that may exist beforehand.

Hospitals are likely to fight back when CMS refuses to pay. They may also raise an issue with the difficulty, or even the impossibility, of eliminating some occurrences altogether. Hospital acquired infections and patient falls, for example, the argument will be that a "zero" occurrence rate is unrealistic and unachievable, and that as long as the hospital is at or better than the "norm," CMS should pay the bill. Eventually, though, hospitals will lose this argument.

There is a fundamental flaw in the CMS approach that will limit its effectiveness and slow performance improvement. These new regulations assume that physicians and hospital managers know the "right thing" to do and that all they need is a little financial encouragement or penalty to implement necessary changes. But neither physicians nor hospital managers deliberately choose the wrong course of action; rather, they make the best decision at the time with the situation and patient in front of them. Then they do it again for the next patient. The doctor-patient interaction is an individualized approach and, as of yet, there are few ways to look at the system-wide implications of these distinct actions. This is the definition of a cottage industry – one at a time, made by hand. It is a slow process with highly variable quality and excessive operating costs. For the most part, this is the state-of-the-art in the healthcare system today.

CMS wields a particularly big stick and it is sure to get results from the P4P and no-payment incentives. However, financial incentives alone are insufficient to drive sustained hospital performance improvement. Hospitals and healthcare providers need tools and know-how to determine what they must do differently to improve performance. To be successful, CMS must provide these tools and partner with hospitals to improve hospital quality, access, and operating costs.


Timothy Ward is a healthcare partner with Tefen USA, subsidiary of Tefen Ltd., that works with hospitals and health organizations to make improvements in the areas of business strategy, operations, project management and organizational development by applying LEAN, Six-Sigma, and related operations strategies to improve the cost, quality, and access performance of healthcare organizations.
1. "MEDICARE PAY-FOR-PERFORMANCE DEMONSTRATION SHOWS SIGNIFICANT QUALITY OF CARE IMPROVEMENT AT PARTICIPATING HOSPITALS". CMS press release. 3 May 05

2. "MEDICARE ADDS PERFORMANCE-BASED PAYMENTS FOR PHYSICIANS". CMS press release. 31 October 08 3.

3. "INCORPORATING SELECTED NATIONAL QUALITY FORUM AND NEVER EVENTS INTO MEDICARES LIST OF HOSPITAL-ACQUIRED CONDITIONS". CMS press release. 14 April 08 4.

4. "The Awareness-to-Adherence Model of the Steps to Clinical Guideline Compliance: The Case of Pediatric Vaccine Recommendations". Medical Care. 34(9):873-889. September 1996.

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