Mounting cost pressures and substantial deficits in the quality of care within the U.S. health care system have led policy makers to consider various reform options. Pay for performance (P4P) has emerged as a leading reform strategy, in an effort to stimulate improvements in the quality, safety, and efficiency of delivered health care (IOM, 2006). In 2005, Congress passed the Deficit Reduction Act (DRA, Public Law 109-171, Section 5001(b)), which mandated that the Secretary of the Department of Health and Human Services (DHHS) develop a plan for value-based purchasing (VBP) for Medicare hospital services that would commence in Fiscal Year (FY) 2009. VBP, which is being applied by payers in both the public and private sectors, includes the use of both financial (e.g., P4P) and non-financial (e.g., transparency of performance scores) incentives to change the behavior of providers and the systems within which they work.
The use of incentives—by paying differentially for performance—and measuring and making quality information transparent are key components of building a value-driven health care system, as called for by the DHHS Secretary Leavitt’s Four Cornerstones Initiative. In support of this initiative, CMS has taken a number of steps toward using incentives and making quality information transparent, by funding pay-for-performance demonstrations in the hospital, physician, and home health settings, and by implementing pay for reporting (P4R) for hospitals, through the Reporting Hospital Quality Data for Annual Payment Update (RHQDAPU) program, and for physicians through the Physician Quality Reporting Initiative (PQRI).
An Environmental Scan of Hospital Pay for Performance
The DRA required the Secretary of the DHHS to consider the following design elements when developing the VBP plan: (1) the process for developing, selecting, and modifying measures of quality and efficiency; (2) the reporting, collection, and validation of quality data; (3) the structure, size, and source of value-based payment adjustments; and (4) the disclosure of information on hospital performance. The CMS Hospital VBP Workgroup was delegated the task of developing the VBP plan for Medicare hospital services.
To inform the development of the VBP plan the Assistant Secretary for Planning and Evaluation (ASPE) and CMS issued a contract to the RAND Corporation to conduct an environmental scan of the hospital P4P landscape. The environmental scan, conducted between August of 2006 and June of 2007, included:
- A review of the literature to assess what is known about the impact of P4P and how various design features influence the effectiveness of these interventions. The review examined the hospital inpatient and outpatient P4P empirical literature as well as theoretical literature drawn from the economics and management disciplines regarding the use of incentives and behavioral responses;
- Discussions with key informants to provide a picture of the current state-of-the-art in hospital pay for performance program design and to draw upon the experiences and lessons learned from existing P4P and P4R initiatives; and.
- A synthesis of the findings from the environmental scan to inform the discussions and design considerations of the CMS VBP Workgroup.
To take advantage of the experimentation going on nationally with respect to P4P program design and implementation, discussions were held with 27 program sponsors, 28 hospitals, 7 hospital associations, 5 data support vendors, and a number of individuals with expertise in rural hospital issues. The discussions were necessary because this type of descriptive information and this level of detail about program design are not typically contained in peer-reviewed journal articles that summarize the results of P4P interventions. Additionally, many of the demonstration experiments are still in their infancy, and little has been formally documented about the related experiences. This report summarizes the findings from the environmental scan.