C H A P T E R 1 2

STRATEGIC PLANNING AND PAY FOR PERFORMANCE

KEY TERMS AND CONCEPTS

➤ Intensivists

➤ Leapfrog Group

➤ Pay-for-performance (P4P) programs

Knowing is not enough; we must apply. Wil l ing is not enough; we must do.

—Johann Wolfgang von Goethe

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INTRODUCTION According to The Commonwealth Fund (see Highlight 12.1), waste and medical errors add $100 billion to U.S. healthcare expenses and may cost 150,000 lives annually. To encourage quality improvement and more efficient delivery of healthcare services, the government, insur- ance companies, and other groups implement pay-for-performance (P4P) programs, which offer financial incentives to physicians, hospitals, and other healthcare providers in exchange for meeting certain performance targets. P4P initiatives can also reduce the payments providers receive if they commit medical errors, have poor quality outcomes, or incur excessive costs.

An awareness of P4P offerings is important in strategic planning. To maximize an organization’s income and improve quality and efficiency in the delivery of care, strategic planners incorporate objectives into the strategic plan that are geared toward achieving P4P performance targets.

MEDICARE PAY-FOR-PERFORMANCE INITIATIVES As part of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, Con- gress directed the Institute of Medicine to identify ways to better align healthcare performance

Pay-for-performance

(P4P) programs

initiatives implemented

by the government,

insurance companies,

and other groups to

reward providers for

meeting certain perfor-

mance targets in the

delivery of healthcare

services

HIGHLIGHT 12.1 The Commonwealth Fund

The Commonwealth Fund is a private institution whose goal is to improve access to care,

quality of care, and efficiency of care in the United States. The Commonwealth Fund is

especially interested in helping vulnerable people receive better care: the low-income

population, the uninsured, minorities, young children, and the elderly.

To achieve these goals, The Commonwealth Fund supports independent research on

how care could be improved. For example, The Commonwealth Fund has published re-

ports on such topics as asthma outcomes in minority children and reasons for patient

readmission to hospitals after discharge. It also publishes reports to inform the public,

such as its analysis of the different healthcare reform bills proposed by the U.S. House

of Representatives and Senate in late 2009. Many of its publications provide information

and statistics about the current state of healthcare in the United States.

Financed by individuals and organizations that support its mission, The Common-

wealth Fund grants money to tax-exempt organizations and public agencies to improve

the provision of healthcare and to study and recommend policy changes that will improve

the healthcare system. For example, some of its grants support programs that study the

future of Medicare and the care of frail elderly adults.

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HIGHLIGHT 12.2 Diagnosis-Related Groups

Diagnosis-related groups (DRGs) are a patient classification scheme used by hospitals

to identify the diseases they treat. Each disease is grouped with similar diseases and as-

signed a code so that physicians, billing departments, and payers (particularly Medicare)

can easily identify the diagnosis. Assigned to each code is an amount of money the payer

will reimburse a provider for treatment of that diagnosis. The amount of reimbursement

is based on the average cost of providing care for that illness and includes the cost of in-

hospital nursing care, room and board, diagnostic treatments, and any other treatments

that might be necessary (routine) for that illness while a patient is in the hospital. The

payment does not include the physician’s fees.

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(continued)

with the Medicare payment system. The act required that performance measures be identified, that the Medicare payment system be used to reward performance, and that data and informa- tion technology requirements be addressed. It proposed P4P as a long-term incentive Medicare could use to improve the quality of the U.S. healthcare system.

Historically, Medicare (CMS) has supported initiatives to improve healthcare qual- ity of care in physicians’ offices, ambulatory surgery centers, hospitals, nursing homes, and home health care agencies. The basis of CMS’s recent P4P initiatives is collaboration with providers to ensure that valid measures are used to achieve improved quality. CMS has explored P4P initiatives in nursing home care, home health care, dialysis, and coordina- tion of care for patients with chronic illnesses (CMS 2005). Some of these initiatives are described in the sections that follow.

HOSPITAL QUALITY INITIATIVE

The Hospital Quality Initiative (HQI) was launched nationally in November 2002 for nurs- ing homes and then expanded in 2003 to home health care agencies and hospitals. In 2004, it was further expanded to include kidney dialysis facilities that provide services for patients with end-stage renal disease. The HQI focused on a set of ten hospital quality measures. To benefit from this initiative, a hospital had to measure its level of quality in these ten areas and report these data to CMS. Hospitals that submitted the required data received full Medicare DRG payments. (See Highlight 12.2 for a discussion of diagnosis-related groups [DRGs].)

While the HQI has concluded, CMS currently has more than 375 measures in place to assess healthcare quality. These measures are designed to benchmark quality in

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the following healthcare settings: inpatient hospitals, physicians, nursing homes, home health, end stage renal disease, pharmaceuticals, and Medicare Advantage (CMS 2010b).

Linking the reporting of hospital quality data with P4P is an effective strategy for improving the U.S. healthcare system. Such a program will provide financial incentives to organizations that invest in quality improvement. A 2007 study found that hospitals scoring in the bottom quintile on quality performance measures improved by 16.1 per- cent after participating in the Hospital Quality Initiative (Lindenauer et al. 2007), clearly documenting the positive association between P4P and improved hospital quality. Fur- thermore, research shows that by increasing P4P payments to make them compose 15 percent of total compensation, providers would have greater incentive to invest in health information technology and other activities to improve quality so that they receive that full 15 percent (Damberg et al. 2009).

Premier Hospital Quality Incentive

In 2003, CMS announced a demonstration project called the Premier Hospital Qual- ity Incentive, which paid bonuses to hospitals on the basis of their quality performance in five clinical areas: heart attack, heart failure, pneumonia, coronary artery bypass graft surgery, and hip or knee replacements. Hospitals that ranked in the top 10 percent for a specific condition received a 2 percent bonus on its medical payments, and hospitals in the next 10 percent received a bonus of 1 percent. The project lasted four years. In the final year of the demonstration project, hospitals with poor quality outcomes were financially penalized. Bonuses averaged $71,960 per hospital annually but were offset by financial

HIGHLIGHT 12.2 Diagnosis-Related Groups

The amount a hospital receives in reimbursement is also influenced by such factors

as the hospital’s location (urban or rural), the number of low-income patients it treats,

staff compensation (wage index), and the types of diseases it treats in a year (case mix).

Reimbursement is greater if the hospital is a training site for medical school students.

The DRG system was developed in the 1980s to control costs and motivate hospitals

to provide care more efficiently. The hospital is paid a predetermined rate, so it will try

not to spend more than that rate in treating the patient. DRGs, of which there are about

500, are updated yearly by CMS.

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penalties for the hospitals in the bottom 20 percent (Premier 2010). The offset equaled the total amount by which the reimbursement for hospitals in the bottom 20 percent was decreased. This amount was divided up and paid to the hospitals with the highest quality, in addition to their bonuses.

Final results of the initiative found that participating hospitals improved their qual- ity by an average of 17.2 percent over the four-year study period. The study estimated that the improvements saved the lives of an estimated 4,700 heart attack patients (Premier 2010). In total, CMS awarded over $36.5 million in P4P payments during the demon- stration. Of this amount, $12 million was awarded during the last year of the project. An analysis of the study results found that if all U.S. hospitals were able to achieve the cost and quality improvements experienced in this project, 70,000 lives would be saved annually and hospital costs would be reduced by over $4.5 billion per year (DeVore et al. 2010).

More recent CMS initiatives to improve the quality of inpatient care require col- lecting data on 34 quality measures relating to five clinical conditions: heart attack, heart failure, pneumonia, surgical care, and asthma care. These quality measures were developed jointly by private healthcare organizations and government institutions. Hospital-specific performance is publicly reported on CMS’s Hospital Compare website.

PHYSICIAN GROUP PRACTICE INITIATIVE

The Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000 mandated the first Medicare P4P initiative for physicians. This program, called the Physician Group Practice Demonstration, began in April 2005 and was designed to assess the impact of P4P on large medical groups. Specifically, it rewarded physicians for improving the quality and efficiency of healthcare services delivered to Medicare fee-for- service beneficiaries (patients). It encouraged coordination of Medicare Part A and Part B services, promoted efficiency in high-performance work processes, and paid physicians for improving clinical outcomes (CMS 2005). Originally intended to be a three-year dem- onstration, this project was extended to five years and continued until the end of March 2010 (CMS 2010a).

Ten large group practices of more than 200 physicians each participated in this demonstration. Together, these ten groups represented 5,000 physicians and a diverse group of over 220,000 Medicare patients. The physician group practices were eligible to earn performance-based payments after achieving savings greater than those achieved by a control group while maintaining quality scores (CMS 2005). The study found that these savings were generated by reducing unnecessary hospital admissions, preventing readmis- sions, and minimizing emergency room visits. The P4P bonuses were linked to 32 ambu- latory care quality measures previously validated by the National Committee for Quality Assurance as part of HEDIS (see Chapter 13, Highlight 13.2). The demonstration project found that effective strategies for quality improvement included provider feedback from

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individual profile reports, increased use of clinical protocols, and redesigned workflow processes that incorporate electronic medical records (CMS 2006).

CARE MANAGEMENT INITIATIVE

CMS’s Care Management Performance Demonstration was a three-year physician P4P project designed to promote the use of health information technology to improve the quality of care for chronically ill Medicare patients. Initiated in July 2007, this project paid bonuses to physicians who exceeded CMS performance standards in clinical delivery systems and patient outcomes. In contrast to the Physician Group Practice Demonstra- tion described earlier, this demonstration focused on small and medium-sized physician practices located in Arkansas, California, Massachusetts, and Utah (CMS 2009a).

CHRONIC CARE INITIATIVE (MEDICARE HEALTH SUPPORT PROGRAM)

CMS’s Chronic Care Initiative used a disease management model to manage chronically ill patients with congestive heart failure or complex diabetes. Participating organizations had to guarantee CMS a certain amount of savings. Reimbursement by CMS was contingent upon meeting quality measures and patient satisfaction scores. Participating organizations included Humana in South and Central Florida; XLHealth in Tennessee; Aetna in Illinois; LifeMasters in Oklahoma; McKesson in Mississippi; CIGNA in Georgia; Health Dia- log in Pennsylvania; American Healthways in Washington, DC, and Maryland; Visiting Nurse Service of New York; and United Healthcare in Queens and Brooklyn, New York.

This program evolved into the Medicare Health Support program. The purpose of the program was to increase the use of evidence-based protocols, reduce unnecessary hospitalization, and minimize costs associated with chronic conditions. The program’s P4P component was driven by quality improvement, Medicare cost savings, and improved patient satisfaction. Phase I of the program included approximately 100,000 chronically ill Medicare patients and officially ended August 31, 2008. CMS is currently evaluating the results and will submit a final report by February 2013 (CMS 2008).

CARE MANAGEMENT FOR HIGH-COST BENEFICIARIES

This demonstration tests models of care management for Medicare patients who are both high cost and high risk. The payment methodology is similar to that implemented in the Chronic Care Improvement Program, in that participating providers are required to meet relevant clinical quality standards as well as guarantee savings to the Medicare program (CMS 2005). In 2009, CMS granted a three-year extension of this program. This initia- tive is important because it demonstrates that managing the care of high-cost Medicare beneficiaries can result in cost savings as well as improved quality (CMS 2009b).

ADDITIONAL INITIATIVES IN PAY FOR PERFORMANCE

COMMERCIAL PAYER INITIATIVES IN PAY FOR PERFORMANCE

CMS is not the only entity offering P4P incentives. U.S. health plans and other payers are also developing P4P programs to improve the quality of care and minimize future cost increases. As of 2005, there were more than 150 commercial P4P programs in operation (Baker and Carter 2005). Empire BlueCross BlueShield (headquartered in New York City) and Integrated Healthcare Association (headquartered in Oakland, California) are examples of two commercial organizations offering P4P programs.

LEAPFROG GROUP

The Leapfrog Group, founded in 2000, is a coalition of more than 65 employers that purchase care for more than 34 million U.S. employees. The mission of the Leapfrog Group is to use em- ployer purchasing power to improve the quality, efficiency, and affordability of U.S. healthcare. Employer members of the Leapfrog Group expect the healthcare organizations their employees use to meet a certain level of quality and efficiency. If Hospital XYZ, for example, does not perform up to these levels of quality, the Leapfrog Group can inform its employer members not to use Hospital XYZ. As a result, Hospital XYZ loses the business of these members’ employees. As part of this work, Leapfrog provides P4P incentives geared toward improving patient safety and increasing the value consumers receive for their healthcare spending.

Leapfrog’s hospital reporting initiative, implemented in 2001, assesses hospi- tal performance on the basis of quality and safety measures developed by the National Quality Forum (NQF). Hospitals that meet or exceed NQF’s benchmarks have been successful in reducing medical mistakes. Hospitals that participate in the reporting initiative are eligible for the Leapfrog Hospital Recognition Program, which is a hos- pital P4P program that offers financial benefits and public recognition for meeting Leapfrog’s standards. As part of this recognition program, Leapfrog posts participat- ing hospitals’ scores on its website for use by employers and consumers (Leapfrog Group 2010).

Employers that join the Leapfrog Group agree to educate their employees about patient safety and hospital quality. They also agree to encourage their employees to seek care from hospitals that meet Leapfrog’s safety standards; for example, employees who use those hospitals do not have to pay copayments. Such actions have been highly effective in moving patients to healthcare providers that meet Leapfrog’s standards. Everyone benefits; patients are steered to safer hospitals and, as a result, hospitals receive more business. Con- versely, Leapfrog removes hospitals from its register of approved providers if their quality and safety scores decline (Leapfrog Group 2010).

To date, much of Leapfrog’s focus has been on computerized physician order entry (CPOE) and physician staffing in intensive care units. In an evaluation of 1,860 hospitals,

Leapfrog Group

an independent orga-

nization, developed by

major employers, that

uses purchasing power

to improve the quality

and efficiency of U.S.

healthcare services

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Leapfrog found that hospitals using CPOE have higher quality scores and lower mortality than those not using CPOE (Jha et al. 2008).

Leapfrog is also driving significant improvement in patient safety and quality of care through a program that focuses on staffing intensive care units with physician special- ists called intensivists. The intensivists program is saving an estimated 20,000 lives annu- ally. The bonuses Leapfrog provides in this program are funded through savings generated from reduced length of stay and fewer readmissions (Delbanco 2006).

PHYSICIANS’ ATTITUDES REGARDING PAY FOR PERFORMANCE Many physicians express a lack of trust in health plan and government initiatives impos- ing change. However, one of the first national surveys on physicians’ attitudes about P4P, completed in 2005, found that 75 percent of responding physicians supported financial incentives for improved quality when the measures they were required to report were deemed as “accurate” by an authority on those measures. A much smaller percentage of physicians indicated support for public reporting for medical group quality performance. The survey also found that physicians who currently have financial incentives for quality were more likely to support future P4P programs (Casalino et al. 2007).

GROWING DEMAND FOR QUALITY-RELATED DATA There is a growing demand for quantitative data on healthcare quality. P4P programs use these data to recommend quality measures, design financial incentives, and create measure- ment systems. Because chronic conditions account for 75 percent of medical costs, they stress the importance of gathering data on chronic care. They also stress the importance of using existing quality measures based on peer-reviewed national standards of care. The analysis of quality data can take more than a year, leading to delays in reporting on hospital quality and preventing timely P4P bonuses (Young and Conrad 2007).

FUTURE PAY-FOR-PERFORMANCE INITIATIVES: PAYING FOR VALUE Recommendations for future initiatives in P4P include incorporating the concept of “pay- ing for value.” From the patient’s perspective, value includes high-quality healthcare at a reasonable price. High quality means excellent outcomes, patient-centric care, and high levels of patient satisfaction. Future paying-for-value initiatives will need to require physi- cians to limit the number of tests they order that do not improve morbidity or mortality. These initiatives will also need to mandate that physicians provide care based on clinical protocols developed using evidence-based research and approved by a professional associa- tion appropriate to the clinical area in which these protocols are to be used.

Intensivists

physician specialists

who staff intensive

care units

INCORPORATING PAY-FOR-PERFORMANCE INTO A STRATEGIC PLAN Current and past P4P initiatives have focused on improving quality and reducing costs— two key factors in gaining a competitive advantage. Therefore, it is important that hospi- tal planners incorporate P4P initiatives into the strategic plan. Strategic planners should routinely monitor their CMS Hospital Compare quality scores to get them to the level needed to receive CMS’s P4P incentives. If their scores are already at that level, they should focus on driving them up further to maximize the rewards and reimbursement CMS offers; the higher the quality, the greater the reward. Planners need to allocate money to invest in programs and new technology that will help the hospital increase its quality scores. In areas where quality is poor and unlikely to change, the strategic planner should consider closing the service so patient safety is not jeopardized. As a result, the hospital will be less likely to incur malpractice suits.

Mayo Clinic is an outstanding example of an organization that has incorporated P4P into its strategic planning process. It routinely evaluates new business initiatives that could enhance the quality of care it provides. Demonstrating its ability to prepare for the future well in advance, Mayo even benchmarks its quality and efficiency performance against P4P standards that have been developed but are not scheduled to be implemented until several years from now.

SUMMARY Federal healthcare policymakers and state regulators have legitimate concerns about the negative impact that reduced reimbursement for healthcare services, low hospital occu- pancy, and poor efficiency can have on the quality of healthcare. They also recognize that the aging population and high rate of inflation in healthcare will continue to drive up healthcare costs. By operating in a manner consistent with evolving healthcare policy and the quality standards set forth by P4P programs, hospitals can receive financial and other rewards (e.g., a reputation for excellence), all of which will place them in a stronger competitive position.

1. Evaluate the statement that P4P is the latest fad in healthcare reimbursement and will have little impact on the healthcare industry.

2. What do you see as the future of P4P in the healthcare industry?

REVIEW QUESTIONS

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3. Imagine you are a hospital executive and you want to improve your P4P situation with the Leapfrog Group. What areas do you need to improve?

COASTAL MEDICAL CENTER CASE: EXERCISE 12 Coastal Medical Center has been experiencing declining performance. From your perspec-

tive, are Coastal Medical Center’s problems related to efficiency or quality? What do you

see as the responsibility of the board of directors and CEO to get the organization back on

track? Should P4P be incorporated in Coastal Medical Center’s strategic planning process?

QUESTIONS

1. Outline a process that will allow Coastal Medical Center to take advantage of future P4P initiatives.

2. Who should be involved in P4P planning, and what should their role be?

3. How will you know if Coastal Medical Center’s P4P planning is a success?

4. In Appendix F of the Coastal Medical Center comprehensive case study, Hospital Compare data are provided for Coastal Medical Center and its competitors in the local market. How

does Coastal Medical Center’s quality compare to its competitors? Develop a list of five

areas in which Coastal Medical Center’s quality could be improved.

5. Access the Hospital Compare database for your community (www.hospitalcompare.hhs

.gov) and find the state and national quality standards. On the basis of your analysis, how

does Coastal Medical Center’s quality compare? Should Coastal Medical Center expect to

receive a P4P bonus for its quality scores?