It Pays to Practice: A Look at Pay for Performance

Lani M. Dornfeld and Jenny Carroll For decades, healthcare spending has risen faster than our national economy has grown.₁ Fixing our healthcare system has garnered considerable attention in the last several years, and has become a strongly debated political topic. Developing a roadmap to overhaul the current framework of the American healthcare system has been a task of regulators and on the minds of many Americans, particularly baby boomers, the first of whom will become eligible for the already-strained Medicare program within the next several years.

In an attempt to quell the pressure placed upon policymakers to reduce Medicare spending, the Centers for Medicare and Medicaid Services (CMS) has launched several pay-for-performance (P4P) initiatives that are designed to improve the quality of care provided to Medicare patients while reducing total expenditures. Private payors also have joined in these efforts.₃

What is P4P?
In an attempt to improve care and control costs, P4P has evolved as a strategy that aligns payment methods for medical services with quality of care. P4P uses an incentive-based formula for determining payments to healthcare professionals that promotes quality, efficiency and utilization of resources. This marks a fundamental break from the traditional way healthcare providers are paid for services.

The traditional healthcare payment system operates on a process-driven basis, whereby, e.g., a healthcare provider examines a patient and orders various tests or x-rays, submits a claim to an insurance company (be it a private insurer or a federally subsidized program such as Medicare) and is paid for each individual service rendered or a bundle of services. As the healthcare provider stands to reap more money if more services are provided to the patient, issues arise concerning the medical necessity and effectiveness of the doctor’s orders.₄ That is, quantity of services rendered, rather than quality, provide the basis for calculating payment to a healthcare provider in a traditional payment system.₅

The goal of P4P is to fix a flawed healthcare delivery system and improve quality of care through the use of financial incentives to reward improved quality of care and patient outcomes.₆ P4P programs offer financial rewards to participating healthcare providers who give patients superior treatment as determined by pre-set standards and measures that are intended to gauge quality of care and cost effectiveness.₇

Thus, P4P offers healthcare providers a financial incentive to improve the quality of care rendered, thereby shifting the focus of healthcare away from what is done to the patient toward what is done for the patient.₈ The idea behind P4P is that by aligning the financial incentives of physicians, payors and patients, everyone will benefit—providers will benefit from the financial rewards and the increased visibility due to excellent performance; payors will benefit from the reduced direct costs due to better outcomes; patients will benefit from better choices and access to higher quality care; and the overall economy will benefit, including employers who will realize increased productivity and less absenteeism due to the better health of employees.₉

Approaching an Incentive-based Health System
So why the focus on quality of care? A 2001 publication by the Institute of Medicine (IOM), titled Crossing the Quality Chasm: A New Health System for the 21st Century, highlighted the shortcomings in the quality of American healthcare. In the book, the Committee on Quality of Healthcare in America commented on several reports, including ones by the IOM and the Advisory Commission on Consumer Protection and Quality, both of which indicated that the quality of American healthcare suffered from under-utilization of services, over-utilization of services, and human error or misuse.₁₀ The committee attributed these flaws to:

1. the growth and complexity of medical science;
2. the increase in the number of Americans suffering from chronic conditions;
3. a poorly designed delivery system; and
4. the failure of the healthcare industry to incorporate new information technologies into practice.₁₁

The committee opined that exponential growth in the medical science industry yielded a plethora of new knowledge that no unaided human being could read, recall and act effectively upon.₁₂

For example, over the past three decades the number of clinical trials has increased 100 fold—from 100 to nearly 10,000—with approximately half of the medical literature during the period published within the most recent five years.

Also, Americans are living longer, and as a result are suffering from more chronic diseases.₁₃ In 1990 alone, $425 billion dollars was spent on direct medical costs for individuals with chronic conditions. That number was approximately 70 percent of all money spent on personal healthcare that year. Furthermore, the current healthcare delivery model is decentralized, complicated, and bureaucratic, resulting in patients finding the system extremely difficult to navigate.₁₄

Finally, the committee concluded that the healthcare industry is failing to adequately utilize the Internet and other new information technologies.₅ While privacy and confidentiality concerns are certainly stifling the healthcare Internet revolution, other technology applications, such as video conferencing and electronic incident reporting, are possible at a low price, but are not being used because of a lack of public funding and shortages in trained personnel.₆

Since the publication of Crossing the Quality Chasm, institutes such as the Agency for Healthcare Research and Quality and the Joint Commission on Accreditation of Healthcare Organizations have supported and implemented studies based upon standardized measures of performance. The studies showed that quality of service improved upon the reporting of an entity’s data with respect to the standardized measures.₁₇ Going one step further, the P4P concept emerged by implementing a system by which the data collected could be used to provide a financial incentive to entities that perform well under the standardized measures.₈

CMS P4P Initiatives
Following the publication of Crossing the Quality Chasm, Congress passed the 2003 Medicare Modernization Act, which grants CMS the power to explore several P4P initiatives in an attempt to improve quality of care in all healthcare settings.₉ Many of the P4P initiatives address the four reasons identified in Crossing the Quality Chasm as the source of inadequate healthcare in America. The CMS P4P initiatives create incentives for healthcare providers to upgrade their information technology systems, to integrate their healthcare delivery systems and to better manage the care of patients with chronic diseases.₂₀

The first CMS P4P plan was announced in July 2003, and is often referred to as the Premier hospital quality incentive demonstration.₂₁ The Premier demonstration is a collaborative effort between CMS and Premier, Inc., a nationwide organization of nonprofit hospitals that also tracks the quality of care of many of its members through a data tracking system.₂₂ In the Premier demonstration, any hospital in the Premier system as of March 31, 2003, was permitted to voluntarily submit data on₃₄quality measures relating to five clinical conditions: heart attack, heart failure, pneumonia, coronary artery bypass graft, and hip and knee replacements.₂₃ Each participating hospital’s performance was publicly reported on the CMS website, and hospitals that scored in the top 10 percent of the demonstration received a two percent bonus in their Medicare payments, while those in the top 20 percent received a one percent bonus.₂₄

The results of the first year of the demonstration were posted on Nov. 14, 2005.₂₅ Medicare reported in its press release on that date that “quality of care has improved significantly in hospitals participating in the Premier hospital quality incentive demonstration, a groundbreaking Medicare pay-for-performance demonstration project,” and that “[q]uality of care improved in all of the five clinical areas for which quality was measured.”₂₆

Pursuant to the Benefits Improvement Protection Act, CMS also is targeting physician groups with P4P demonstrations that involve large, medium, and small practices, providing an incentive to these physicians to upgrade their office technology systems. The first CMS P4P demonstration targeted at physicians, called the physician group practice demonstration, rewards physicians in 10 large practice groups (200 physicians or more) for improving quality of care and efficiency for services rendered to Medicare fee-for-service beneficiaries. The demonstration seeks to encourage coordination of Medicare Part A and Part B services, and also encourages efficiency through investment in administrative structure and process.₂₇

Another project, the Medicare care management performance demonstration, is a three-year physician P4P demonstration that is being developed to promote the adoption and use of health information technology to improve the quality of care for chronically ill Medicare patients. In contrast to the physician group practice demonstration, this P4P program targets small to medium-sized physician practice groups.₂₈

Another test project, the chronic care improvement program, targets improvement of care for people with chronic diseases. This program applies a population-based model of disease management where participating organizations from various parts of the country are paid a monthly per-beneficiary fee for managing a population of chronically ill patients with advanced congestive heart failure and/or complex diabetes. The participating organizations must guaranty CMS a savings of at least five percent plus the cost of the monthly fees, compared to a similar population of beneficiaries and providers. The end-stage renal disease (ESRD) management demonstration, commencing this year, is a three-year demonstration designed to test a mixed case adjusted payment system for an expanded bundle of end-stage renal disease services. A portion of the payments made to providers will be linked to ESRD quality measures. The disease management demonstration for severely chronically ill Medicare beneficiaries is an attempt to apply disease management and prescription drug coverage in a fee-for-service environment to see if it can improve outcomes and reduce costs. Medicare beneficiaries with illnesses such as congestive heart failure, diabetes, or coronary artery disease will be the subject of this demonstration, and participating providers will receive a monthly payment for every beneficiary they enroll, conditioned upon the provider guaranteeing a net reduction in Medicare expenditures as a result of the provider’s services. Additionally, in the disease management demonstration for chronically ill dual-eligible beneficiaries, a Florida disease management company is being paid a fixed monthly amount per beneficiary who is dually eligible for Medicare and Medicaid, and who suffers from advanced-stage congestive heart failure, diabetes, or coronary heart disease.

The idea driving the Florida demonstration is to combine the state’s Medicaid pharmacy benefits with a Medicare-funded disease management activity in order to coordinate the services of both programs. The Florida disease management company is at risk for all of its fees should it not meet the expected performance, but any savings that result from the demonstration are equally split between the company and CMS.₂₉

PacifiCare Health Systems Sheds Light on the Private Payor Sector
Applying the P4P concept to the healthcare setting is not an idea unique to CMS. Indeed, private insurers have been utilizing the concept since at least 2002. The PacifiCare P4P program that is used in California is just one example. PacifiCare contracts with approximately 300 large multi-specialty physician practices that each treat about 10,000 PacifiCare enrollees. Since 1993, PacifiCare of California has measured the quality of performance of its affiliated medical groups on several clinical and patient-reported measures, and it has been reporting these measures as report cards to medical group leaders and the public since 1998. The identical set of performance measures also has been tracked and reported back to another set of medical groups in PacifiCare’s network in the Pacific Northwest.₃₀ In 2002, PacifiCare announced that it was incorporating a new quality incentive program (QIP), i.e. a P4P plan, into its California group contracts. Effective in 2003, PacifiCare began paying its California medical groups bonuses according to whether or not they met or exceeded certain clinical and service targets. This new QIP targeted 10 quality indicators, and performance measures were obtained from data reported clinically and by patients. Additionally, the QIP monitored whether physicians referred their patients to high-quality hospitals. Beginning in July 2003, participants in the California plan received monthly bonuses of about $0.23 per member per quality indicator if performance, as determined by the quality measures, exceeded a pre-set threshold. Thus, a physician group with 10,000 enrolled plan members could earn $6,900 per month, in addition to standard rates of reimbursement for services provided to PacifiCare members, for reaching each performance target, or approximately $27,600 per year ($0.23 x 10,000 = $2,300; $2,300 x 12 = $27,600).

The overall potential earnings for a group of 10,000 enrollees could be as high as $276,000 for all 10 of the quality of care indicators. Members in the PacifiCare Northwest network did not participate in the QIP.₃₁

A study was conducted to analyze the success of the P4P QIP in California. The study focused on three of the quality of care measures for which there was complete data in both California and the Pacific Northwest, with the Pacific Northwest functioning as the control group. The quality measures analyzed in the study were: rates of occurrence of cervical cancer screening, mammography and diabetic hemoglobin testing. The results of the study showed that there was, in fact, improvement in both California and the Pacific Northwest, though those in California improved slightly more with respect to cervical cancer screening.

In the first year of the QIP, $3.4 million was paid out of a potential $12.9 million, with only three quarters of eligible participants receiving funds and only a few participants reaching a majority of the targets. Physician groups with initial low performance improved the most, while initial high performers improved less. However, unlike improvement in quality, the physicians who improved the least, i.e. those who initially were high performers, received the most money.₂

The results of the study give rise to a number of implications. Since initially high-performing groups improved the least but received the most bonus payments, it suggests that these groups understood that all they needed to do was maintain their current level of performance. Conversely, the increase in quality of performance for initially low performing groups suggests that maybe they viewed the QIP as a signal of changes to come, perhaps hoping that bonuses would eventually be paid in proportion to improvement.

The QIP also might have failed to produce dramatic results because the bonuses were too low. Participants, at most, received approximately five percent of their professional capitation amount per enrollee, and PacifiCare generally only accounts for 15 percent of a group’s average revenues. Since the study only examined five quarters, or 15 months, of the program, perhaps improvement in quality of care just takes more time.

It also should be noted that the study had several limitations, including the assumption that absent the QIP in California, improvement in California and the Pacific Northwest would be the same. While this assumption finds support in the pre-QIP reporting data that PacifiCare had been tracking for over 10 years, it is not definitive.₃₃

Bandage or Cure?
The question remains, will any of the CMS P4P demonstrations actually work and save the Medicare program? Will money actually be saved through improved quality of care, which could then be shared with physicians in an incentive-based manner? Are incentives overshadowed by the administrative burden of tracking and reporting data needed for such a system? Not to mention the ethical concerns involved with self-reporting data that will directly impact income. Many have their doubts that P4P will rise to the level of a complete overhaul of our current healthcare delivery system, but it is probably too soon to tell. While 50 percent of healthcare executives do not believe incentives will work for managed care plans, 46 percent believe they will.

Among the 50 percent disfavoring the P4P concept, some executives feel incentives only provide a short-term fix for the problems that are wreaking havoc on the Medicare program and in American healthcare generally; a long-term solution requires a total revamping of the entire system. With P4P programs, there is the added administrative cost of reporting the data, which some feel costs more than the amount of the incentive. Others believe the incentive program will not foster a change in physician and provider behavior, and the problem with the healthcare industry is that there is a fundamental non-alignment between the overall interests of the patient and the provider. Then there are the idealists who believe that tying any type of incentive to care shifts the focus from the patient to dollars, and that the best approach is for healthcare providers to structure their practices in a way that improves quality of care without incentives. All in all, quality physicians most likely will continue to provide quality care, benefiting from incentives, while substandard care will remain so, widening the gap of disparity between premium and ineffective care.₃₄

On the other side of the P4P debate, other executives think bonuses and stipends support focused attention on quality and utilization management. For instance, incentives that relate to generic use of drugs, in lieu of name brand drugs, do in fact work, so wouldn’t expanding the use of incentives into the healthcare services arena work as well?

Certainly the healthcare context is not the first forum to tie compensation to performance. It could be said that the more incentives and interests are aligned, the more likely actions and outcomes will be consistent with objectives. Physicians are business people, so there is no reason to suspect that they would not respond well to incentives that are clear and substantial.₃₅

As of the writing of this article, the PacifiCare study, which provides some of the only hard evidence we have on whether or not P4P will work in the healthcare industry, only muddies the waters. It provides some guidance to suggest that quality of care will improve with outcome-based financial incentives, but still leaves many questions unanswered. However, what is certain is that healthcare costs are skyrocketing and serious quality issues remain. Whether P4P offers a solution that will fairly compensate physicians, save Medicare money and improve patient care is a tall order, and remains to be seen.

Endnotes

1. Medicare Payment Advisory Commission, Report to the Congress: Medicare Payment Policy, March 2006.
2. Testimony of Herb Kuhn, Director of the Center for Medicare Management in the Centers for Medicare & Medicaid Services Before the Subcommittee on Health of the House Committee on Ways and Means Hearing on Pay for Performance Initiatives, March 15, 2005.
3. Rosenthal, Meredith B., Ph.D., Frank, Richard G., Ph.D., Li, Zhonghe, M.A., Epstein, Arnold M., M.D., M.A., Early Experience With Pay-for Performance: From Concept to Practice, Journal of the American Medical Association 294 (2005).
4. CMS/ORDI/MDPG, Pay-for-Performance/Quality Incentives, May 24, 2005.
5. Conklin, Jonathan and Weiss, Audrey, Ph.D., Pay-for-Performance: Assembling the Building Blocks of a Sustainable Program, Thompson-Medstat: 2005.
6. Id.
7. The American Geriatric Society’s Pay for Performance Primer, http://www.americangeriatrics.org/ policy/2006p4p_primer.shtml. July 12, 2006.
8. Pay-for-Performance/Quality Incentives.
9. Pay-for-Performance: Assembling the Building Blocks of a Sustainable Program.
10. Committee on Quality of Healthcare in America, Institute of Medicine, Crossing the Quality Chasm: A New Health System for the 21st Century, 24-25 (2001).
11. Id. at 26.
12. Id.
13. Id. at 27.
14. Id. at 28.
15. Id. at 31.
16. Id. at 34.
17. Williams, Scott C., Psy.D., Schmaltz, Stephen P., Ph.D., Morton, David J., M.S., Koss, Richard G., M.A., and Loeb, Jerod M., Ph.D., Quality of Care in US Hospitals as Reflected by Standardized Measures, 2002-2004, New England Journal of Medicine 353 (2005): 255-64.
18. Darr, Kurt, The Centers for Medicare and Medicaid Services Proposal to Pay for Performance, Nexus: Ethics, Law and Management, (2003).
19. The Benefits Improvement Protection Act of 2000 also provides statutory authority for some of the CMS P4P plans.
20. CMS, Medicare ‘Pay-for-Performance (P4P)’ Initiatives, Jan. 31, 2005.
21. Id.
22. The Centers for Medicare and Medicaid Services Proposal to Pay for Performance.
23. CMS, Premier Hospital Quality Incentive Demonstration, Nov. 14, 2005.
24. Medicare ‘Pay-for-Performance (P4P)’ Initiatives.
25. Premier Hospital Quality Incentive Demonstration.
26. Medicare News, Medicare Demonstration Shows Hospital Quality of Care Improves With Payments Tied to Quality, Nov. 14, 2005.
27. Medicare ‘Pay-for-Performance (P4P)’ Initiatives.
28. Id.
29. Id.
30. Early Experience With Pay-for-Performance: From Concept to Practice.
31. Id.
32. Id.
33. Id.
34. Russell, John and Fidalgo, Amy, Pay-for-Performance: Incentives, Models, Measures and Perspectives, the Managed Care Information Center, 2006.
35. Id.