Understanding Value-Based Incentive Models and Using Performance as a Strategic Advantage

Abstract

The Centers for Medicare & Medicaid Services (CMS) implemented hospital quality incentive and penalty programs as part of the Affordable Care Act, and they are the starting points for transitioning to value-based payment. Not only do the programs affect hospitals' bottom line, but they also could affect their market position because of the transparency of results. Thus, creating an effective strategy to succeed under these programs is important.The authors address some important questions about the CMS incentive and penalty programs.What upside benefits and downside penalties do the CMS incentive and penalty models offer hospitals?The CMS quality- and value-based incentive and penalty models will collectively put up to 6% of hospitals' Medicare payments at risk by 2017 (Rau, 2015). The three CMS programs are the Value-Based Purchasing (VBP) program, the Hospital Readmissions Reduction Program (HRRP), and the Hospital-Acquired Conditions (HAC) program. As part of healthcare reform, these programs are designed to transition hospitals to more value-based reimbursement by incentivizing or penalizing providers on the basis of their performance on certain quality metrics. These three programs reflect a fundamental change in how Medicare reimburses hospitals for services and in how hospitals manage and monitor quality performance. The VBP program is the only one of the three that has upside benefits in providing a bonus; the HRRP and HAC programs are strictly penalty programs for hospitals that do not perform well under the criteria established by CMS.The VBP program is technically a payment redistribution program in that eligible hospitals contribute a set percentage of base operating payments to a VBP payment pool; the percentage is 1.75% for fiscal year (FY) 2016 and 2% for FY 2017. This VBP payment pool is used to provide a to hospitals for performance on the VBP criteria, which are grouped into the domains of process of care, outcomes, patient experience, and efficiency. Thus, all hospitals pay into the pool, and if they do not perform well, their bonus could be less than the amount of their contribution (i.e., a net penalty). On the other hand, hospitals that perform well receive a payment that is more than the amount they paid in (i.e., a net bonus).HRRP and HAC programs are strictly penalty programs. HRRP issues a penalty of up to 3% for hospitals with excessive avoidable readmissions, and HAC issues a 1% penalty for hospitals whose performance is in the bottom quartile. However, the 1% penalty under HAC is not limited to the hospital base operating payment, but is also applied to add-on payments, such as those for outliers, disproportionate share hospitals, uncompensated care, and indirect medical education, making its impact more pronounced. On the basis of CMS data (2015a), we estimated the average penalty for FY 2015 to be $520,000 per penalized hospital under the HAC program, whereas the average readmissions penalty was projected to be $165,000.Is the magnitude of the benefits and penalties substantial enough to warrant being proactive?For FY 2016, only 799 of 3,414 eligible hospitals (23%) avoided a penalty for excessive avoidable readmissions, meaning that 77% of eligible hospitals are being penalized under HRRP (CMS, 2015b). (Readmissions data are based on a rolling 3-year assessment period; for FY 2016, the data are from July 1, 2011, to June 30, 2014.) However, the penalty for the majority of hospitals was in the range of 0.01% to 0.5%, and both the number of hospitals penalized and the average penalty fell from the levels in FY 2015. Since enactment of the readmissions penalties in 2013, readmissions have dropped, but approximately one in five patients admitted to the hospital is still readmitted within 30 days of discharge. In FY 2017, a new condition-coronary artery bypass graft-will be added to the list of measured conditions for HRRP. Historically, CMS has added a new condition every other year, and hospitals typically struggle when new conditions are added. …