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Pay For Performance

As lawmakers consider ways to pay for health reform, use our glossary of potential offsets to get caught up fast.

Updated at 3:30 p.m. on Nov. 24 to reflect continuing legislation.


Hospitals would be rewarded for meeting quality standards and receive bonuses for efficient care. Or, in a second option, physicians could opt to join a "bonus-eligible organization," which would be rewarded for providing low-cost, high-quality care or penalized for not meeting standards.


Executive Summary

Proponents want to build on pilot programs that already reward good hospitals and doctors while changing the rules to encourage quality, not quantity.

Medicare's current fee-for-service payment standard encourages high volumes of sometimes unnecessary tests and services. Experts point to the differences in quality of care across the nation, most recently publicized in a New Yorker article about the high cost of care in one Texas town, as evidence of inefficiency caused by the current payment model.

"The only conclusion I can come to is that value-based purchasing is the only way to bend the curve," said Dr. Denis Cortese, president of the Mayo Clinic. "They cannot bend the curve by price controls."


Medicare has launched several pilot programs that use a performance-based payment model (also known as value-based purchasing). Under the Hospital Quality Incentive Demonstration, for example, hospitals report data to the Centers for Medicare and Medicaid Services, which then calculates a composite quality score. The highest scorers receive bonuses while those that fail to meet baseline measures have their payments reduced. The state of California relies on a similar model for its health care system.

Even though any plan would add new responsibilities in data collection, lawmakers are considering an expansion of the demo or the creation of another pay-for-performance model. Proponents say that the bonuses will push hospitals to provide a higher quality of care. Under the first three years of Medicare's trial program, all participating hospitals improved their quality measures.

A more ambitious expansion of pay-for-performance ideals creates a "bonus-eligible organization" or "accountable care organization," which the Centers for Medicare and Medicaid Services studied in its June 2009 report to Congress. Under this plan, groups of physicians could volunteer to work together to manage a patient's care. These groups would then receive bonuses if they met or exceeded quality standards while also keeping spending low. One CBO option would offer a bonus if an organization kept Medicare expenditures at least 2 percent below the average benchmark for a two-year period. To further encourage efficiency, there could be penalties for failing to meet the benchmark. Participation in the program would be voluntary, so providers with high-risk and high-cost patients would not be obligated to join and face penalties.

Proponents say this plan would encourage cost trimming even under the fee-for-service system. It would also help to place a patient's care under one coordinated system, which is the first step toward a "medical home" model. However, there are concerns about how the system would be managed and quality standards set. And the plan does not account for normal shifts in spending, so some fear bonuses would be paid to providers that don't make any effort to cut costs.


Max Savings

In its December 2008 report, the CBO estimated that expanding the demo would save $1.2 billion by 2014 and $2.9 billion by 2019. Bonus-eligible organizations would save the government $320 million by 2014 and $5.3 billion by 2019. The plan wouldn't go into effect until 2013, hence the low initial savings. Savings decline with the program's age as more organizations meet quality standards and more bonuses must be paid out.


The House bill sets up pilot programs to study accountable care organizations, while the Senate plan would do so only for pediatric accountable care organizations while allowing some providers to organize as ACOs. The Senate would also give the secretary of Health and Human Services the power to explore performance-based bonuses.


Dartmouth Atlas of Health Care study on regional Medicare spending disparities

"The Cost Conundrum," from The New Yorker

CMS release on performance-based pilot programs

CMS information on the Hospital Quality Incentive Demonstration

Information on California's Pay for Performance model from the California Healthcare Foundation

CMS report, including information on Accountable Care Organizations

2008 CBO Budget Options for Health Care (expanding HQID is option 32, allowing the creation of bonus-eligible organizations is option 37).

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