An Environmental Scan of Pay for Performance in the Hospital Setting: Final Report. Federal Actions to Reform the System


On August 22, 2006, President Bush issued an Executive Order, “Promoting Quality and Efficient Health Care,” that requires the federal government to: (1) ensure that federal health care programs promote quality and efficient delivery of health care and (2) make readily useable information available to beneficiaries, enrollees, and providers. These actions are designed to drive improvements in the value of federal health care programs.

To support this mandate, Department of Health and Human Services (DHHS) Secretary Michael Leavitt embraced “four cornerstones” for building a value-driven health care system: 

  • Connecting the health system through the use of health information technology (HIT)
  • Measuring and making transparent quality information
  • Measuring and making transparent price information
  • Using incentives to promote high-quality and cost-effective care.

Building on these four cornerstones, CMS has taken steps toward using incentives and making quality information transparent in order to become a value-based purchaser of care. The steps taken include funding a number of demonstrations regarding use of financial incentives across hospital, physician, and home health settings, and implementing pay for reporting (P4R) for hospitals and physicians through the Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) program and the Physician Quality Reporting Initiative (PQRI). In particular, the RHQDAPU program, which was mandated under the Medicare Prescription Drug Improvement and Modernization Act of 2003 (MMA),2 required hospitals to submit data on a defined set of performance measures to receive 0.4 percentage points of their annual payment upda(APU). The performance data from RHQDAPU are made transparent to Medicare beneficiaries and the public through the CMS Hospital Compare website ( ). Section 5001(a) of the 2005 Deficit Reduction Act (DRA) expanded the set of RHQDAPU P4R performance measures and increased the differential payment for reporting from 0.4 to 2 percentage points. 

The 2005 DRA also authorized the DHHS Secretary, under Section 5001(b), to develop a plan for value-based purchasing (VBP) for Medicare hospital services commencing fiscal year (FY) 2009. Congress specified that the VBP plan consider the following design issues:

  • The process for developing, selecting, and modifying measures of quality and efficiency
  • The reporting, collection, and validation of quality data
  • The structure, size, and source of value-based payment adjustments
  • Disclosure of information on hospital performance.

Through implementation of VBP for Medicare hospital services, CMS would provide differential payments to hospitals based on their performance (i.e., P4P). 

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